Are Company A and Company B associated for the purposes of the Employer Health Tax?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter *(June 2013)

I refer to your letter requesting an interpretation on whether Company A and Company B are associated for purposes of the Employer Health Tax (EHT).

Facts

From the information you provided in your letter and our telephone conversation, I understand the following:

  • Company B is an operating company owned 50/50 by brothers, i.e. BROTHER 1 and BROTHER 2
  • Company B has remuneration exceeding $490,000 and remits EHT .
  • Company A is a family-owned XXXX company. BROTHER 1 and BROTHER 2 each own 15% of Company A. The remaining shareholders are the parents, sisters and sister-in-law.
  • Company A has a small payroll and does not remit EHT . 

Applied Legislation

For the purpose of determining if two or more employers are associated at any time in a year, section 256 of the Income Tax Act (Canada) applies for the purposes of the Employer Health Tax Act.

Paragraph 256(1)(e) of the Income Tax Act (Canada) provides that one corporation is associated with another in a taxation year if, at any time in the year, the following conditions exist:

  • each corporation is controlled, directly or indirectly in any manner whatever, by a related group;
  • each member of one related group is related to all the members of the other related group; and
  • one or more persons who are members of both related groups, either alone or together, own, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock of each corporation.

Conclusion

Company B is controlled by a related group, BROTHER 1 and BROTHER 2. Company A is controlled by a related group of family members. BROTHER 1 and BROTHER 2 are related to all of the shareholders of Company A. BROTHER 1 and BROTHER 2 together, own more than 25% of Company A. As such, Company A and Company B are associated pursuant to Paragraph 256(1)(e) of the Income Tax Act (Canada), and are therefore, associated for EHT purposes.

Are Company A owned by one spouse, and Company C owned by the other spouse associated?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter 07-0024, May 2007

We refer to your letter dated XXXXXX, regarding whether Company A and Company C are associated for Employer Health Tax (EHT) purposes. In particular, whether both companies are eligible for the $400,000 annual exemption.

Facts

According to information provided with your letter, we understand that:

  • Company A is 100% owned by Individual A (president).
  • Company C is 100% owned by Individual C (president).
  • Individual A and C are spouses.
  • Company A rents a building and property from Company C at fair market rates.
  • Both companies operate strictly at arms length.

Applied Legislation

Eligible employers who are associated with each other at any time in a year must share the tax exemption amount. Two or more employers are considered associated for EHT purposes if they are associated under section 256 of the Income Tax Act (Canada) (ITA). The essential test in determining whether a corporation is associated with another relies on the control of the corporation that is exercised ‘directly or indirectly in any manner whatsoever’.

This expression encompasses:

  • de jure control (i.e., control in law), the right to a majority of voting shares in a company
  • de facto control (i.e., control in fact), as determined under subsection 256(5.1).

De facto control may exist even without the ownership of any shares and can take many forms, such as the ability of a person to directly or indirectly terminate the corporation or its business, appropriate profits or property, or change the board of directors. Potential influence, even if it is not actually exercised, is considered to be sufficient evidence for the presence of de facto control.

Federal IT Bulletin IT-64R4 states that control may exist by de facto control where the following circumstances exist:

  • Ownership of a large debt of a corporation (employer) which may become payable on demand.
  • Shareholder agreements including the holding of a casting vote.
  • Commercial or contractual relationships of the corporation (employer), for example, economic dependence on a single supplier or customer.
  • Possession of a unique expertise that is required to operate the business.

The influence that a family member, who is a shareholder, creditor, supplier, etc. of a corporation (employer), may have over another family member who is a shareholder of the corporation. Close family ties (between spouses) especially lend themselves to significant influence. Generally, these persons must demonstrate their economic independence and autonomy before escaping presumptions of fact which apply to related persons.

Conclusion

Based on the available information, Company A is not associated with Company C by virtue of de jure control for EHT purposes. Neither spouse owns shares in the other’s corporation. Therefore, if they are not associated by virtue of de facto control, each company is eligible for the $400,000 annual exemption. However, we are unable to provide you with a definitive response on whether the corporations are associated by virtue of de facto control. Such a determination would involve a complete understanding and analysis of all the facts of a particular situation and is usually determined through an audit.

Individual A owns 51% of Company A and 100% of Company C. Are Company A and Company C associated?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter 08-0039, April 2008

We refer to your letter regarding Company A and Company C in relation to the association rules under the Employer Health Tax (EHT) Act. We have received letters of authorization from both taxpayers.

Facts

From the information you provided, I understand that:

  • Individual A owns 100% of the shares of Company C
  • Individual A owns 51% of the shares of Company A, with Individual B and her husband owning 49% of the shares
  • Individual A insisted on owning 51% of the shares in consideration for allowing Individual B to use the trade name, and to control the future use of it
  • Individual A is not involved with running Company A in any way
  • Individual B makes all decisions regarding Company A
  • There is no economic dependence between Company A and Company C.

Applied Legislation

Subsection 1(5.1) of the EHT Act states that for the purposes of determining if employers are associated, section 256 of the Income Tax Act (Canada) applies for EHT .

Subsection 256(1) provides basic rules for making a determination as to whether corporations are considered associated. Corporations are considered, among other reasons, to be associated if:

  • two corporations are controlled directly or indirectly, by the same person or group of persons.

The essential test in determining association under section 256 is whether or not control is present. Control can be either de facto or de jure. De facto control essentially refers to control in fact or by conduct. De jure is control by legal right, which generally rests with a majority of the votes in the election of the Board of Directors.

Conclusion

Based on the facts of this situation, although Individual A is not involved in the business operation of Company A, he is nevertheless considered to have control of the business by virtue of owning 51% of the shares. The absence of de facto control cannot negate this fact.

It is our opinion that Company A is associated with Company C and any other businesses Individual A controls.