Determining Remuneration for Employer Health Tax
Remuneration includes all payments, benefits or allowances that must be included in the income of an employee under sections 5, 6, or 7 of the Income Tax Act (Canada).
Generally, when you calculate your employer health tax remuneration you include the same amounts you include when calculating your source deductions under the Income Tax Act (Canada).
When you calculate your remuneration, include the following:
- Salaries and wages
- Bonuses, commissions and other similar payments
- Advances of salaries and wages
- Vacation pay
- Gratuities or tips paid through an employer
- Other taxable allowances and benefits paid to or on behalf of an employee
- Directors’ fees
- Amounts paid by an employer to top up benefits (e.g. maternity or paternity leave)
- Stock option benefits
- Employer-paid contributions to an employee’s Registered Retirement Savings Plan (RRSP)
- Employer-paid group life insurance premiums
- Employer-paid contributions to employee trusts and employee profit sharing plans
When you calculate your remuneration, exclude the following:
- Employer-paid contributions or premiums to
- Registered pension plan
- Private health services plan
- Supplementary unemployment benefit plan
- Deferred profit sharing plan
- Retirement compensation arrangement
- Pensions, annuities or superannuation benefits paid by employers to a retired employee
- Retiring allowances and severances
- Death benefits
- Dividend income
- Contributions by an employer to a plan or trust if the value of the employer’s contribution has already been included as remuneration
- Remuneration paid by employers who are status First Nations individuals carrying on business situated on a reserve
- Remuneration paid to status First Nations individuals working for a business situated on a reserve
- Remuneration received or paid by consular posts and members of the diplomatic and consular corps
Employers may request employees to sign non-compete agreements, restricting an employee or former employee from taking a job with a competitor of the employer’s for a period of time. Employer health tax applies in the calendar year the non-compete payment is paid to the employee.
Whether you pay the employer health tax on a gratuity or tip is based on who facilitates the payment. When the gratuity or tip is paid by the employer to the employee, employer health tax applies in the year the gratuity or tip is paid to the employee.
If the gratuity or tip is paid directly from the customer to the employee, as there is no employment relationship between the customer and the employee, the employer health tax doesn’t apply on the gratuity or tip received by the employee.
The following are examples of gratuities or tips paid by an employer to an employee, which are taxable:
- the employer adds a mandatory service charge to a client's bill to cover tips
- the employer adds a percentage to a client's bill to cover tips
- tips that are allocated to employees using a tip-sharing formula determined by the employer
- tips that an employer includes in his business income, then expenses and redistributes to employees in the form of pay
- tips that the employees turn over to their employer who then distributes them to the employees
- cash tips that are deposited into the employer's bank account and become, or are even commingled with, the property of the employer and then paid out to the employees
The following are examples of gratuities or tips paid by clients/customers, which are not taxable:
- a customer leaves money on the table at the end of the meal and the server keeps the whole amount
- a guest gives a tip directly to a bellhop, door person, car attendant, porter, etc.
- the employees and not the employer decide how the tips are pooled or shared among employees
- a customer includes an amount for a tip when paying the bill by credit or debit card and the employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations the cash tips could be paid out the day after, for example, if there was not enough available cash on hand
Fees paid to a director as a member of a corporation’s board of directors, are considered employment income. Employer health tax applies in the calendar year the fees are paid.
An advance is a payment from an employer to an employee for future salary, wages or commissions without expectation of interest payable and the amount will be deducted from the employee’s future paycheques. Employer health tax applies in the calendar year the advance payment is paid to the employee.
Vacation pay is either paid out as earned, paid out when used by an employee, or paid out when unused according to rules established by the employer. Employer health tax applies in the calendar year the vacation pay is paid to the employee.
If you top up unemployment or workers’ compensation benefits to the employee’s regular salary, (such as maternity leave, temporary or indefinite layoffs etc.) the employer health tax applies in the calendar year the top-up payment is paid to the employee.
If the employee receives a top-up payment from an independent third-party trustee under the terms of a supplementary unemployment benefit plan, the employer health tax doesn’t apply.
Payments or allowances paid to members of religious orders are considered to be an employment relationship. Employer health tax applies in the calendar year the payments or allowances are paid to members of religious orders.
An allowance is a periodic or lump-sum amount that is paid to employees to cover expenses of the employee. Unlike a reimbursement, the employee doesn’t have to provide the employer with receipts; the amount is used as the employee chooses. Employer health tax may apply in the calendar year if the allowance is not reasonable, or if it relates to personal expenses of the employee.
As an employee is expected to repay an employee loan, the employer health tax doesn’t apply to the principal of the loan.
If the employee is required to pay interest on the outstanding principal and the interest rate is less than market interest rate, the employer health tax applies on the difference.
If the employee loan is later forgiven by the employer, the employer health tax applies on the forgiven amount of the loan in the calendar year the loan is forgiven.
If an employee is required to provide the employer with receipts to be reimbursed for employment expenses the employer health tax doesn’t apply because the funds paid by the employer are to repay the employee for the employer’s expense.
Employer health tax applies on the value of any subsidized or free board and lodging, except when the employer provides board and lodging at a special work site or a remote location.
Generally, the employer health tax applies on tuition paid on behalf of an employee (including any reimbursed tuition fees). The employer health tax doesn’t apply when the tuition is for a course taken for the benefit of the employer.
Employer health tax applies on employer-paid premiums or contributions to group sickness or accident insurance plans where the related benefits are paid on a lump sum basis.
Employer health tax applies on employer-paid premiums to non-group sickness or accident insurance plans, disability insurance plans, or income maintenance insurance plans.
Stock option benefits represent a benefit received by the employee due to his or her employment relationship. Employer health tax applies in the calendar year the stock option benefits are paid to the employee.
When a corporation offers stock option benefits to its employees, the employees are generally considered to receive a taxable benefit in the year they acquire the shares. However, the taxable benefit may be deferred under certain conditions. Refer to the following information from the Canada Revenue Agency for more details.
For employer health tax purposes, only the taxable amount of the benefit is subject to the employer health tax.