Employer health tax for associated employers

If you’re associated with one or more employers on December 31, you're considered to be an associated employer for the purposes of the employer health tax. If you are not associated with another employer on December 31, you are not considered associated for that calendar year.

Associated employers are required to share any exemption amount they may qualify for.

Associated employers

Associated employers are a group of employers connected with each other by ownership or by a combination of ownership and relationships between individuals. Learn more about relationships.

The association rules determine whether one or more employers are controlled, directly or indirectly, by the same person, group of persons, related individuals or a related group. Learn more about control.

The employer health tax applies section 256 of the Income Tax Act (Canada) with modifications to determine whether or not employers are associated. In particular, the association rules are extended to include individuals, partnerships and trusts.

The following circumstances describe different employers that are associated with one another:

• One corporation controls the other corporation. See an example
• Two corporations are controlled by the same person, or group of persons. See an example
• Each corporation is controlled by a different person and the persons are related. One of them owns at least 25% of any class of shares of each corporation. See an example
• One corporation is controlled by one person, and that person is related to all members of the group that controls the other corporation. That one person also owns at least 25% of the shares of the other corporation (other than shares of a specified class). It is not necessary that the members of the group be related to each other. See an example
• Each corporation is controlled by a related group, with all members of one group related to all members of the other group. One or more persons who are members of both groups, either alone or together, own at least 25% of the shares of each corporation (other than shares of a specified class). See an example
• Two corporations that are not otherwise associated with each other will be considered associated with each other if they are associated with the same corporation (the third corporation). See an example

Association rules for charitable or non-profit employers

Charitable or non-profit employers are not subject to the association rules and do not have to share the exemption amount. If an employer, other than a charitable or non-profit employer, is associated with a charitable or non-profit employer, those employers are deemed not to be associated.

Although the association rules do not apply to charitable or non-profit employers – where two employers that are not charitable or non-profit employers, and would otherwise not be associated with each other, are each associated with the same charitable or non-profit employer – those two employers can be deemed to be associated with each other. This rule applies under Section 16(3)(a) of the Employer Health Tax Act. See a similar example.

How to apply associated employers rules to individuals, partnerships and trusts

Individuals, partnerships and trusts are considered to be corporations with one class of voting shares. To determine ownership of shares:

• Sole Proprietor: The individual owns all of the shares of the corporation.
• Partnership: Each partner owns shares in the same proportion in which he or she shares the income or loss of the partnership.
• Trust: Each beneficiary of a trust owns shares in the same proportion in which he or she shares the income or loss of the trust.

Note: If you're an employer who is associated with a charitable or non-profit employer, you are not required to share the exemption with the charitable or non-profit employer. 

Exemption amount for associated employers

If you are a member of a group of associated employers, you must decide whether the group is eligible for the exemption based on the group’s combined B.C. remuneration.

If you’re an associated employer on December 31 of a calendar year and the combined B.C. remuneration paid during that calendar year by all the associated employers is:

• $1,000,000 (exemption amount) or less: 
  • You do not pay the employer health tax for the calendar year
• Between $1,000,000.01 and $1,500,000 (threshold amount):
  • The group is eligible for the $1,000,000 exemption amount
  • You must have an agreement to share the $1,000,000 exemption amount to all employers in the group for the calendar year
  • Each employer in the associated group with B.C. remuneration greater than the allocated exemption amount pays the employer health tax at 5.85%
• Greater than $1,500,000:
  • You are not eligible for the exemption amount for the calendar year
  • Each employer in the group pays the employer health tax at 1.95% of the employer’s B.C. remuneration

The $1,000,000 exemption amount and the $1,500,000 threshold are prorated if, for a period in a calendar year, no employer in the group has a permanent establishment in B.C.

Examples - Calculating the employer health tax for an associated group of employers

Prorating exemption and threshold amounts

The $1,000,000 exemption amount and the $1,500,000 threshold amount are prorated if, for a period in a calendar year, no employer in the group has a permanent establishment in B.C.

Sharing the exemption amount

To determine the exemption amount for each employer in an associated group of employers, follow these steps:

1. Calculate the group’s maximum exemption amount
2. Calculate what each employer's maximum exemption amount would be if the employer was not associated. This is the maximum exemption amount each employer can be allocated in the share agreement
3. Choose how you want to allocate the total group exemption amount to each employer, ensuring the group maximum exemption amount and each employer's maximum exemption amount are not exceeded
4. Enter into an allocation agreement outlining each employer's exemption amount

Example - Sharing the exemption amount

Corporation A has a permanent establishment in B.C. from March 1 to December 31.

Corporation B has a permanent establishment in B.C. from May 1 to December 31.

Corporation C has a permanent establishment in B.C. from July 1 to December 31.

Corporations A, B and C are associated employers on December 31.

How to pay

Each employer that is part of an associated group of employers is required to register for the employer health tax, file its own tax return, pay its own employer health tax, and pay any required instalment amounts. 

When filing a tax return, the allocation agreement is not required to be submitted with the annual tax return. However, each of the associated employers should retain a copy of the allocation agreement since it may be requested at any time.   

Modifications to association rules

The association rules only apply to employers that are associated with each other on December 31 of a calendar year.

If Employer A and Employer B are not otherwise associated with each other, but are each associated with Employer C, all three employers are considered to be associated with each other. Unlike the association rules under the Income Tax Act (Canada), the employers cannot elect out of the association rules.

Note: Sections 256(7) to (9) of the Income Tax Act (Canada) do not apply to the association rules under the Employer Health Tax Act.

Anti-avoidance rule

In addition to a general anti-avoidance provision, the Employer Health Tax Act also contains an anti-avoidance provision that specifically deems employers to be associated – where those employers are not otherwise associated under the Employer Health Tax Act.

Section 16(3)(d) of the Employer Health Tax Act provides that employers may be deemed to be associated with each other at the end of a calendar year where it is reasonable in the circumstances to consider that employers have either:

• Separated their existence at the end of a calendar year, or
• Transferred their business or part of a business from one employer to another employer in a calendar year

With the primary purpose of reducing the employer health tax by any one of the employers for the calendar year.