Employer Health Tax in Ontario: Your Rate Is Set Before the Exemption

If you run payroll here, the employer health tax in Ontario is probably the line you think about least and get wrong most. It turns on one piece of arithmetic that catches people, and the mistake runs in both directions: your tax rate is set by your payroll before you subtract the exemption, not after.

There's also a hard date coming: from December 1, 2026, one of the ways employers have long paid this tax stops working. Here's what the rules say, what the arithmetic looks like, and where the quiet mistakes hide.

What is the employer health tax in Ontario, and who pays it?

The employer health tax is an Ontario payroll tax on the remuneration an employer provides to current and former employees, and the employer pays it. Nothing comes off the employee's pay for it, which is worth saying out loud, because that's where the confusion with a different Ontario charge starts.

It applies to employees who report for work at your permanent establishment in Ontario, are attached to one, or are paid from or through one. If your Ontario payroll is more than your allowable exemption, you owe the tax.

How much is the exemption, and who can claim it?

The exemption is currently $1 million, and the province has it scheduled for adjustment for inflation on January 1, 2029. It rose from $490,000 to $1 million for 2020 and that increase was made permanent in 2021, so if your internal notes still say $490,000, they're five years stale.

You can claim it if you're an eligible employer under the Employer Health Tax Act and your Ontario payroll for the year, including any associated employers, is under $5 million, or you're a registered charity. Past $5 million across the group, there's no exemption at all.

How do you calculate your employer health tax?

Find your rate from your total Ontario payroll before deducting any exemption, then subtract the exemption and multiply what's left by that rate. The province is explicit that the tax rate you use is based on the level of your Ontario payroll before you have deducted any exemption, and that sentence is the whole trap.

Rates run from 0.98% on payroll up to $200,000, through eight bands, to 1.95% over $400,000. Most employers claiming the exemption are above $400,000 to begin with, so they sit on the top rate even though the amount they pay tax on is far smaller.

The arithmetic, since derived figures deserve showing. A: $1,150,000 minus the $1,000,000 exemption is $150,000, times 1.95% is $2,925. B is the province's own worked example: $300,000 times 1.95% is $5,850. C has no exemption, so the whole $350,000 is taxable at 1.586%, the band for $320,000.01 to $350,000, giving $5,551.

Look at what that does to C. Tax the $350,000 at 1.95% and you'd owe $6,825, which is $1,274 too much. Reach for 0.98% instead, on the reasonable-sounding grounds that you're a small employer, and you'd remit $3,430, which is $2,121 short. C owes less than B on a payroll a quarter the size, and more than A on a payroll under a third as large. The number that sets your rate and the number you pay tax on are two different numbers, and payroll software will accept whichever one you type.

What counts as payroll for employer health tax?

Remuneration means, broadly, employment income taxable under sections 5, 6 and 7 of the federal Income Tax Act, which the province describes as box 14 of the T4 slip, plus other boxes on the T4 and T4A. The items people forget are the ones that arrive irregularly.

In are bonuses in the year they're paid, vacation pay when it's paid out, directors' fees, flat rate car allowances, group RRSP contributions and stock option benefits. Out are registered pension and private health services plan contributions, reasonable per-kilometre car reimbursements, tips paid straight from a customer to an employee, and commissions to genuine independent contractors.

Then there's the split that catches almost everyone at termination. Termination pay, an amount paid in lieu of notice, is subject to the tax. Severance, treated as a retiring allowance, is not. Most employers write one cheque and call the whole thing severance. If it includes pay in lieu of notice, accumulated overtime or unused vacation credits, those pieces are taxable, and the split has to be visible in your records.

When do you have to pay monthly instalments?

Ontario businesses with payroll over $1,200,000 have to pay monthly instalments. Under that threshold, you file the annual return and pay the whole amount on or before March 15 of the following calendar year, with no instalments.

That threshold rose from $600,000 for the 2021 tax year, so an employer who crossed $600,000 years ago and never revisited the rule may still be remitting monthly without needing to. Registering is also on you: the province is direct that it is your responsibility to register for an EHT account if your payroll exceeds your exemption, or you have none.

What happens when employers are associated?

Associated employers share one exemption and must file a single allocation form for the group. The consequence of getting this wrong is the harshest rule in the tax: if any associated employer is missing from the form, or the form is not submitted, all of the employers in the associated group will be denied the tax exemption.

Not reduced. Denied, for everyone. You're in this territory if you control or are controlled by another employer, hold significant influence over one, or bought or sold an employer during the year. For a group where one company forgets the form, that's $1 million of exemption lost, which at 1.95% is $19,500 of tax that didn't need to exist.

Is the employer health tax the same as the Ontario Health Premium?

No, and the two get mixed up constantly, because both have "health" in the name and both touch payroll. The employer health tax is yours, paid by your business on your Ontario payroll. The Ontario Health Premium is paid by Ontario residents through the personal income tax system and belongs to the employee.

The premium runs from $0 if an employee's taxable income is $20,000 or less to $900 if it's more than $200,600, and it's usually deducted automatically, sitting inside the income taxes line on a pay stub rather than showing separately.

What is changing on December 1, 2026, and what does filing late cost?

Beginning December 1, 2026, financial institutions will no longer accept paper remittance vouchers for in-person bill payments. If walking a voucher into your bank is how you pay, you have until the end of November to switch. Pre-authorised debit, Visa Debit and online banking from a business account all count as paid the same day, while a mailed cheque only counts when it arrives.

Late filing has its own price. The penalty is 5% of the amount owing if that amount is $1,000 or more, plus 1% for each complete month the return is late, to a maximum of twelve. On B's $5,850, a return six months after March 15 costs $292.50 plus $351, so $643.50 on top of the tax, with interest running separately.

The YNL Group Inc. approach

We already hold the payroll data this calculation runs on, so we work out the rate band, the exemption and the instalment position from numbers in hand rather than asking you to find them in March. For clients in an associated group, the allocation form is a diarised task rather than something anybody has to remember.

If your employer health tax has been a once-a-year scramble, or you're still paying by paper voucher, now is the moment to fix both. Talk to us and we'll look at how your last return was calculated and where you stand for this year.

This article is general information about Ontario's employer health tax, not tax or legal advice. For your specific situation, check with the Ontario Ministry of Finance or your CPA.