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EHT in practice: remuneration scenarios

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Are stock options granted to XXXX Canada Ltd’s former employees taxable?

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Please be aware that any statute or policy referred to in this letter may have been superseded.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* (April 2017)

We are in receipt of your letter dated XXX, requesting an interpretation on the application of the Employer Health Tax (EHT) to stock options vested for former employees of XXXX Canada Ltd. Our letter is addressed to you, since we have authorization on file to deal with you specifically.

Facts

From your letter we have established the following facts:

Four employees of XXXX Canada Ltd., who were employed in Ontario between 2011 and 2015, joined XXXX U.S.A Ltd. and no longer reported to the permanent establishment of XXXX Canada Ltd. in Ontario. Three of these four employees left in 2014 and the fourth one left in 2015.
The four employees, during their tenure with XXXX Canada Ltd., were granted stock options. These stock options vested in 2016.
The stock options were included in T4s issued in 2016 to the former employees.

Applied legislation

Employers are required to pay EHT on total Ontario remuneration paid to employees and former employees. For EHT purposes, remuneration includes all payments, benefits or allowances which are required under sections 5, 6 or 7 of the Income Tax Act (Canada) (ITA), to be included in the income of the employee from an office or employment, or would be required if the employee were a resident of Canada.

An employee who receives or received options under a stock option agreement while employed in Ontario is deemed by subsection 7(1) of the ITA to receive a taxable benefit that is subject to EHT when:

The employee transfers/sells/disposes of the options to an arm’s length person. The benefit is equal to the amount, if any, by which the value of the consideration for the disposition exceeds the amount paid by the employee, if any, to acquire the options.
The employee chooses to cash out the options instead of acquiring shares (i.e. disposes of them back to the employer). The benefit is equal to the amount, if any, by which the value of the consideration for the disposition exceeds the amount paid by the employee, if any, to acquire the options.
The employee exercises the option(s) to acquire shares. The benefit is equal to the amount, if any, by which the FMV of the shares exceeds the sum of the amount paid for the shares plus any amount paid by the employee to acquire the options. The benefit is taxable when the shares are acquired. If the employer is a Canadian-Controlled Private Corporation (CCPC), subsection 7(1.1) of the ITA defers the income inclusion until the shares are disposed of or exchanged; this deferral applies for EHT purposes also.
A person not dealing at arm’s length with the employee (e.g., a holding company or spouse) transfers, sells, disposes of, cashes out, or exercises options that were previously transferred or bought from the employee. Note that it is the employee who is deemed to receive the taxable benefit. There is no taxable benefit at the time that an employee transfers or sells options to a non-arm’s length person.

Stock option benefits received by former employees in respect of shares of the employer or a connected corporation are included in income by virtue of subsection 7(4) of the ITA and are subject to EHT in the year in which the benefit arises.

They should be included in the employer’s total Ontario remuneration if, before retirement or termination:

the employee reported for work at a permanent establishment of the employer in Ontario or
the employee did not report for work at any permanent establishment of the employer, but was paid from or through a permanent establishment of the employer in Ontario

Any federal deferral of taxation on stock option benefits is not applicable for EHT purposes. Employers are required to pay EHT on stock option benefits in the year that the employee or former employee exercises the stock option.

Conclusion

Please note that the conclusion of a vesting period in 2016 does not trigger any benefit under the ITA, nor under the Employer Health Tax Act.

However, if the former employees have exercised their stock options in 2016, XXXX Canada Ltd. is required to pay EHT on the stock options benefits in 2016, regardless of the fact that that the four individuals are no longer employed by XXXX Canada Ltd.

The value to be used to calculate the EHT liability of XXXX Canada Ltd. is based on the amount of benefit the former employees obtained at the time of exercise of their options through any method (i.e. cash out, acquired shares etc.).

If the stock options were not exercised in 2016, XXXX Canada Ltd. should amend their T4 and subsequently amend their EHT return accordingly.

Are vacation and bonus payments included in severance payments subject to 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.

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 08-0125, November 2008

I refer to your fax letter dated July 10, 2008, but received by us on September 19, 2008, regarding whether certain vacation and bonus payments, included in severance payments made by Company A, are subject to the Employer Health Tax (EHT).

Applied legislation

Employers are required to pay EHT on total Ontario remuneration paid to both employees and former employees. "Remuneration" for EHT purposes includes payments, benefits and allowances which are required to be included in an individual’s income by reason of section 5, 6 or 7 of the Income Tax Act (Canada) (ITA). Therefore, amounts required to be included in income as a retiring allowance, under subparagraph 56(1)(a)(ii) of the ITA, are not taxable for EHT purposes.

The federal Income Tax Folio S2-F1-C2 Retiring Allowances states that to qualify as a retiring allowance, a payment must be in recognition of long service or in respect of loss of an office or employment. The bulletin specifies that unused vacation pay does not qualify as a retiring allowance.

Conclusion

Similarly, in our opinion, a prorated bonus would be considered income from employment in contrast to a payment in recognition of long service. Therefore, accrued vacation pay and prorated bonuses are considered remuneration which do not qualify as a retiring allowance and are taxable for EHT purposes.

Are fees paid to Company B owners and to certain other people considered self-employment income or taxable employment income?

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.

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 07-0261, March 2008

We refer to your letter regarding Company B and the Employer Health Tax (EHT) Act.

Facts

Based on the information you have provided in your letter, we understand that:

Company B is a passive investment holding company
Company B does not have a place of business, nor regular employees
Company B paid once-a-year fees, based on its income, to its owner and certain other people
Fees were not paid out as dividends/investment income
Company B believed that the payments were self-employment income
Canada Revenue Agency (CRA) has assessed Company B on these payments as employment income for 2003, and required these amounts to be recorded on a T4.

Applied legislation

EHT is payable by all employers who pay remuneration to employees who report for work at a permanent establishment in Ontario or do not report for work at the employer’s permanent establishment but who are paid from a permanent establishment of the employer in Ontario.

Remuneration includes all payments, benefits and allowances received or deemed to be received by an individual that, by reason of section 5, 6, or 7 of the Income Tax Act (ITA) of Canada, are required to be included in the income of the individual. This includes, but is not limited to, salaries, wages, taxable allowances, and commissions. Other payments, such as bonus, directors fees, management fees paid to an employee, are also taxable as employment income.

Conclusion

Because remuneration is based on the ITA, and CRA has assessed Company B payments as being taxable under section 5 of the ITA as employment income, these payments are also subject to EHT . Filing requirements for employers which pay all their remuneration during one month of the year are different from our regular requirements. Company B will need to file its EHT return and pay the EHT by the 15th of the month following the month of payment (i.e., if a payment is made to the owner and certain persons on January 2, the EHT return is due and tax is payable by February 15).

Is EHT required on remuneration paid to employees working on a foreign assignment?

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.

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 09-0075, June 2009

We refer to your letter regarding whether Company C is required to pay Employer Health Tax (EHT) on remuneration paid to employees on a work assignment outside Canada.

Facts

The following is our understanding of facts:

Employees (expatriates) of Company C were sent to the USA to assist in the XXXX disaster relief
The duration of their assignment was from XXXX to XXXX
Company C does not have a permanent establishment in USA
The expatriates reported for work at PEs of foreign affiliates
The expatriates were supervised on a day-to-day basis by the foreign affiliates
The expatriates were paid through a permanent establishment of Company C in Ontario
The expatriates’ earnings were subject to USA taxes and they were required to file USA tax returns
The remuneration of expatriates was excluded from Ontario remuneration in XXXX annual EHT return, which was subsequently assessed by the ministry
The remuneration of expatriates was not subject to federal income tax due to the tax treaty between Canada and the USA.

Applied legislation

Under the EHT Act, employers are required to pay EHT on the total remuneration paid to employees who report for work at a permanent establishment of the employer in Ontario, and to employees who do not report for work at a permanent establishment of the employer, but who are paid from or through a permanent establishment of the employer in Ontario.

Remuneration includes all payments, benefits and allowances received or deemed to be received, that would be included in income by reason of section 5, 6 or 7 of the Income Tax Act (Canada), or would be required if the individual were resident in Canada.

Conclusion

The expatriates are employees of Company B, they did not report for work at a permanent establishment of Company B and they were paid from Ontario. Accordingly, the remuneration paid to the expatriates is subject to EHT .

The federal government of Canada has entered into tax treaties or conventions with other countries to avoid double taxation with respect to income taxes and certain other taxes. However, Ontario is not bound by these international tax treaties or conventions. There are no tax treaty provisions in the EHT Act, nor are there any agreements to exempt Company B from paying EHT .

Updated: January 09, 2024

Published: March 29, 2022