The 2018 British Columbia Budget announced the province’s intention to implement a new Employer Health Tax (“EHT”) starting in 2019.
The British Columbia (“B.C.”) EHT payable by employers will be calculated as a percentage of B.C. payroll, and is intended to replace Medical Services Plan (“MSP”) premiums which are payable by individuals and families to fund public health care. The budget announced that MSP premiums will be eliminated, effective January 1, 2020. For employers who pay their employees’ MSP premiums as an employee benefit, payments for both MSP premiums and EHT may be required for the 2019 calendar year.
The B.C. Ministry of Finance issued the first Employer Health Tax Notice in July. This Notice provides information regarding the proposed EHT that is expected to be enacted in the fall of 2018.
As stated in the Notice, the EHT will be an annual payroll tax that will apply to employers, including partnerships that employ employees. It will be calculated based on payroll (also known as remuneration) that is considered to be income from employment as determined under the Income Tax Act (Canada). (This is the same basis used for health tax purposes by other provinces.) Employment income (as reported on federal T4 information slips) would include taxable benefits, such as stock options, and fees paid to “office” holders, such as corporate directors.
EHT only applies to amounts paid to employees. However, this includes people providing services personally to a business, such as consultants, who are ultimately determined to be employees for EHT purposes based on the facts and common law principles regarding employer-employee relationships.
Employers with an annual B.C. payroll of $500,000 or less will not pay EHT. Employers with B.C. payroll greater than $1,500,000 will pay a rate of 1.95% on their total payroll. Between those two thresholds, a rate of 2.925% will apply. Charity and non-profit employers with B.C. payroll will calculate EHT for each location from which they operate and pay EHT only if the payroll for a location exceeds $1,500,000. Where the payroll for a location is between $1,500,000 and $4,500,000, a rate of 2.925% applies, and for a location with a payroll greater than $4,500,000, EHT will be calculated at 1.95%.
The administration of EHT will start in 2019, with registration beginning on January 7, 2019. Employers with annual B.C. payroll of more than $500,000 and charity and non-profit employers with B.C. payroll over $1,500,000 at one location will be required to make quarterly instalment payments on June 15, September 15 and December 15 each year, with the final payment for a year and the annual return due on March 31 of the following year. If an employer must pay installments in the 2019 calendar year, it must register by May 15, 2019, and pay its first instalment by June 15, 2019.
Only B.C. payroll will be subject to the new EHT; more specifically, only remuneration paid by an employer to employees who “report for work at a permanent establishment” of the employer in B.C. or who are “paid from or through a permanent establishment” of the employer in the province will be subject to B.C. EHT. The term “report for work at a permanent establishment” connects the employee to a work location in B.C. If an employee does not report for work at a permanent establishment in B.C., the connecting factor would be payment to the employee “from or through a permanent establishment” in the province. The Notice includes a list of fixed places of business that would generally be considered “permanent establishments”, such as an office or a warehouse. The legislation will likely also deem permanent establishments to exist under certain conditions, such as the presence of a registered office in B.C., since similar deeming provisions regarding permanent establishments are found in the employer health tax legislation of other provinces.
Employers with payroll in B.C. and other provinces will be interested in the provisions regarding the attribution of payroll to a permanent establishment in B.C.; in particular, with respect to possible double taxation (i.e., by another province which imposes an employer health tax) and tax overpayment (i.e., where an employee works in B.C., but is connected to a permanent establishment in a province that does not impose an employer health tax, such as Alberta).
While employers in B.C. await the enactment of the new EHT legislation, it may be beneficial to consider the situation in other provinces which impose a health tax or levy on employers, such as Ontario and Manitoba, and common issues related to those taxes.
The Ontario Employer Health Tax, which took effect more than twenty years ago, was modelled on the Manitoba Health and Post Secondary Education Tax Levy. Based on the information presented in the Notice, it appears that the B.C. legislation will be similar to the legislation in those two provinces. As a result, the following issues which arise frequently in Ontario and Manitoba will likely impact employers subject to B.C. EHT.
Employment status of a worker
Individuals engaged to provide services as independent contractors may be determined to be employees for EHT purposes, in which case, amounts paid for their services would be subject to EHT. In Ontario, the employment status of IT consultants who operate as unincorporated businesses and provide services exclusively to one company (i.e., where the consultant is economically dependent on one client) has been the subject of significant government audit activity in recent years. In this regard, many Ontario employers have discovered that GST/HST registration by an individual service provider is not determinative with respect to that individual’s employment status for EHT purposes, since a person may register for GST/HST simply by declaring that they are operating a business, without any verification by the Canada Revenue Agency that such a business exists.
An employer entity may have one or more “associated companies”, and the legislation in B.C. will require the payroll of such companies to be considered for EHT purposes. This will eliminate any incentive for employers to allocate their payroll among associated companies to qualify for the exemption for employers with B.C. payroll of $500,000 or less.
To facilitate the administration of the rules regarding associated companies and employer registration, the B.C. legislation may provide for exchange of information agreements with the Canada Revenue Agency and other government agencies, such as WorkSafeBC.
Connection to a permanent establishment
Connection to a permanent establishment is an issue involving the attribution of payroll to a province. It arises where employees do not report for work at a permanent establishment of their employer. For example, employees who work remotely, such as teleworkers who work in geographically distributed project teams, may not report for work at a permanent establishment, but may nevertheless be connected to a permanent establishment through a reporting relationship (i.e., reporting to an employee’s supervisor at a certain location). Disputes regarding the attribution of payroll to a permanent establishment in B.C. may arise where employees work remotely or have cross-border assignments (i.e., work in both B.C. and Alberta).
Another issue regarding connection to a permanent establishment which arises is the interpretation of the phrase “paid from or through a permanent establishment”. “Paid from” has customarily been interpreted by taxing authorities to refer to the location of the employer’s payroll department. However, with the increased use of shared services departments within corporate groups, it is now common for the payroll of a Canadian company to be managed from a location in the United States by a related company acting as a central paymaster. This trend for the location of payroll operations to be someplace outside Canada has resulted in greater attention being paid by provincial taxing authorities to the words “paid…through”, which have been interpreted to mean payment of remuneration to employees through accounts associated with the employer’s business carried on in the province (i.e., payment through a funding (bank) account domiciled in the province, or payment through the financial accounts of the business carried on in the province, as reflected in its operating statements).
Payroll Tax Advisor (affiliated with Ryan)