Ontario EHT Exemption
Private sector employers receive a $1,000,000 EHT exemption (in effect since 2020) that eliminates Employer Health Tax on the first $1 million of Ontario payroll; associated employers must share the exemption.
Definition
The Ontario EHT exemption is a statutory reduction of Ontario remuneration subject to the Employer Health Tax. It was temporarily increased to $1,000,000 in March 2020 as a COVID-19 relief measure and made permanent in the 2020 Ontario Budget. The exemption is available only to eligible private sector employers and allows them to subtract the first $1,000,000 of Ontario payroll from the EHT base before applying the graduated rates (0.98% to 1.95%). Registered charities and public sector entities have different exemption rules.
Key rules
- The exemption is $1,000,000 for 2020 through 2028. It indexes for inflation every five years, with the next adjustment due to take effect January 1, 2029.
- Eligible employers are private sector employers and certain eligible charities. Public sector employers (Crown agencies, school boards, municipalities, universities) are not eligible.
- The exemption phases out for employers with Ontario payroll over $5 million. Private sector employers with total Ontario payroll (including associated employers) exceeding $5 million receive no exemption.
- Associated employers must share the $1 million exemption on an agreed allocation. The associated-employer test follows the same control rules as ITA section 256 used for the federal small business deduction. See .
- Only employers paying Ontario remuneration greater than the exemption threshold ($1 million) need to file an EHT return, unless they have elected to register.
An Ontario employer with $1 million or less of payroll that has no associated employers pays no EHT and, in most cases, does not need to file an EHT return or register. Track payroll closely to catch the moment registration becomes mandatory.
Example
A Hamilton-based software consulting firm has $1,800,000 in 2026 Ontario payroll and no associated employers. It qualifies for the full $1,000,000 exemption. Taxable Ontario payroll is $800,000, below the $400,000 graduated-rate threshold cutoff, so the 1.95% flat rate applies because total payroll exceeds $400,000. EHT is $800,000 × 1.95% = $15,600 for the year. The firm files an annual EHT return by March 15, 2027 and remits in monthly instalments because payroll exceeds $1,200,000.
Common mistakes
- Assuming sole proprietors and partners receive the exemption for their own drawings. The EHT exemption applies only to remuneration paid to employees, not to self-employed owners.
- Ignoring the $5 million phase-out. A growing business crossing $5 million in total Ontario payroll loses the full exemption, not just the portion above $5 million.
- Failing to allocate the exemption among associated employers. Each associated employer must sign Form EHT 2026 (or equivalent) to agree on the split; otherwise, the entire exemption can be lost.
- Forgetting that registered charities have a separate regime: they compute EHT for each qualifying charity campus individually, not as a combined exemption.
Related concepts
Authority
- Employer Health Tax Act (Ontario), RSO 1990, c. E.11, s. 2.1
- Ontario Budget 2020 (permanent increase of exemption to $1,000,000)
- Ontario Ministry of Finance Employer Health Tax bulletins
See also
Related entries
Ontario Employer Health Tax
The Ontario Employer Health Tax (EHT) is an employer-paid payroll tax ranging from 0.98% to 1.95% on total Ontario remuneration, levied under the Employer Health Tax Act to fund the province's health system.
Associated Corporations Rule
Associated corporations under ITA s.256 must share a single $500,000 Small Business Deduction limit and combine their passive income and taxable capital for the SBD grind tests.
Payroll Account (RP)
The RP program account is the CRA identifier a corporation must open before it can remit source deductions for employees.
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.