Tax Alert

On February 20, 2018, the NDP government announced a proposed Employer Health Tax (EHT) to take effect starting January 1, 2019. It is accompanied by the proposed elimination of Medical Services Plan (MSP) premiums, effective January 1, 2020. The proposed EHT will impose a payroll tax on employers who meet the payroll threshold and annual payroll tax filing. In advance of detailed legislation to come in the fall, the government recently released additional implementation details.

Employer Health Tax—overview

The EHT will only apply to employers with annual B.C. payroll in excess of $500,000. B.C. payroll includes:

• Any payment to employees who report to work at an employer's permanent establishment in B.C., and
• Any payment to employees who do not report to work at an employer's permanent establishment, but are paid from or through a permanent establishment in B.C.

B.C. payroll does not include any payment to employees who report for work at an employer's permanent establishment that is outside B.C. Employers that have permanent establishments in multiple provinces, but a central payroll in B.C. will only be subject to EHT on the salaries and benefits paid to their employees who report to work in B.C. Complete details to determine if a business has a permanent establishment in B.C. will be provided in the fall of 2018. The legislation will also address the calculation of the payroll base and interplay with related entities, and the treatment of employers with payroll in more than one province.

Income subject to the EHT

Payroll amounts subject to the EHT (referred to as remuneration) includes taxable employment income (including benefits), for example:

• Salary and wages
• Salary and wage advances
• Payments for casual labour
• Bonuses, commissions and other similar payments
• Vacation payments
• Gratuities or tips paid through an employer
• Taxable allowances and benefits
• Directors' fees paid to directors of corporations
• Amounts paid by an employer to top up benefits (e.g. top up for maternity or paternity leave)
• Stock option benefits
• Employer-paid contributions to an employee's Registered Retirement Savings Plan
• Employer-paid group life insurance premiums

However, certain employer-paid items are not subject to the EHT, including:

• Registered pension plan contributions
• Private health services plan contributions
• Supplementary unemployment benefit plan contributions
• Deferred profit sharing plan contributions
• Retirement compensation arrangement contributions

Tax rates

Employers with B.C. payroll:

• Of $500,000 or less will not pay EHT
• Between $500,000.01 and $1,500,000 will pay tax at
  • 2.925% x (Payroll -$500,000)
• Greater than $1,500,000 will pay 1.95% on their total payroll
  • 1.95% x Payroll

B.C. joins Manitoba, Ontario, Quebec and Newfoundland and Labrador in levying a similar payroll tax. Each province varies in the payroll range and tax rates. For 2018, the top tax rates range from 1.95% in Ontario to 4.26% in Quebec.

Charities and nonprofit employers

Special rules apply to charitable and nonprofit organizations. EHT for these organizations is calculated on a by-location basis, rather than total B.C. payroll.

For B.C. payroll:

• Of $1,500,000 or less, the EHT for the location will be zero
• Between $1,500,000.01 and $4,500,000, the EHT for the location will be calculated as
  • 2.925% x (Payroll for the location - $1,500,000)
• Greater than $4,500,000, the EHT will be 1.95% for each location
  • 1.95% x Payroll for the location

Administration

Employers not subject to EHT will not need to file an annual employer EHT return. For those employers who will owe EHT, there will be a requirement to file and pay the EHT online.

Employers with B.C. payroll over $600,000, and charitable/nonprofit organizations with over $1,600,000 at one location will be required to make quarterly instalment payments.

Other considerations

It is common for employers to pay MSP premiums for their employees. Although MSP premiums were reduced in advance of their elimination, for the transition period employers could be liable for both MSP premiums and EHT. Companies may want to quantify the additional cost that could occur in calendar year 2019 when the EHT will come into force.

The EHT is to be levied when amounts are paid to employees. Therefore, bonuses declared in 2018 and paid in 2019 may be subject to EHT in 2019, while the same amount declared in 2018 and paid in 2018 will not be subject to EHT. For owner-managed businesses who have control over payment of remuneration paid to key employees, this may be an important short-term consideration. Where an individual is both an employee and shareholder of a corporation, any salary paid to the individual will be subject to EHT. However, dividend payments will not be liable to EHT. This may factor into planning for individuals in this situation.

The EHT is only levied on employee remuneration, therefore payments made to independent contractors will not be liable to EHT. Several factors determine whether an individual is an employee or independent contractor and it is important to ensure that the employment status is reflected correctly.

Similarly, income received by an individual through sole proprietorship or a partnership is treated as business income not remuneration, and therefore will not be subject to the EHT.

Take action

We understand the additional burden a new payroll tax can create for businesses. Whether the business is a small, medium, or large employer, companies should consider how the new rules impact them. If applicable, they should evaluate how to mitigate the impact on their business.

Although the legislation will not be enacted until this fall and additional details on the payroll tax will not be released until that time, companies should start planning now. This will give companies sufficient time to understand the rules, assess the impact, and avoid unexpected surprises.

BDO can help

Knowledge is the key to preparing your organization for the new rules and making the right decisions for the future. Contact us today for a deeper discussion on the B.C. EHT.