Associated Employers
Information Bulletin 1-98, February 2003
This publication is provided as a guide only. It is not intended as a substitute for the Employer Health Tax Act and Regulations.
Tax exemption
General information
Eligible employers (generally private-sector employers) are exempt from Employer Health Tax (EHT) on the first $400,000 of remuneration for 1999 and subsequent taxation years. The exemption amount for the year must be shared among associated eligible employers. For more details on the tax exemption, please refer to EHT Information Bulletin 2-98 entitled Tax Exemption.
Associated employers rules
Extension of associated corporations rules
The associated corporations rules under section 256 of the Income Tax Act (Canada) are used to determine whether or not employers are associated, Although these rules refer to corporations, their application is extended under the Employer Health Tax Act to include individuals, partnerships, and trusts.
Individuals, partnerships, and trusts are deemed to be corporations with only one class of issued shares, which have full voting rights under all circumstances. Ownership of those shares is determined by the following rules:
- Individuals
An individual who is an employer is considered to own all of the shares of the corporation. - Partnerships and trusts
Each member of a partnership (or beneficiary of a trust) is considered to own shares of the corporation in the same proportion in which he or she shares the income or loss of the partnership (or trust).
Therefore, in each of the examples following, the term "corporation" includes an individual, a partnership, or a trust that has employees.
Examples (a) and (b)
One of the corporations controls the other.
Example (a)
A parent company controls a subsidiary.
Example (b)
A medical doctor hires a superintendent to manage his rental properties and a secretary in his medical practice. He also owns a company that operates an art gallery. In this situation, the medical doctor and the art gallery are associated employers.
Example (c)
Both of the corporations are controlled by the same person or group of persons.
Example (d)
Each corporation is controlled by a different person and those persons are related. One of those persons owns no less than 25% of any class of shares of each corporation (other than shares of a "specified class").
Example (e)
One corporation is controlled by one person, and that person is related to each member of a group of persons that controls the other corporation. That one person also owns no less than 25% of the shares of the other corporation (other than shares of a "specified class"). Note that it is not necessary that the members of the group be related to each other.
Example (f)
Each corporation is controlled by a related group, and each member of one group is related to all members of the other group. One or more persons who are members of both groups, either alone or together, own no less than 25% of the shares of each corporation (other than shares of a "specified class"). Note that it is not necessary for every member of a group to own shares in the other corporation.
Association rules include indirect ownership
For the purposes of the association rules, share ownership includes both direct beneficial ownership and indirect ownership. Indirect ownership occurs when shares of a corporation are held by an intermediary corporation. For example, a person owns 100% of Company X which in turn owns 50% of Company Y. That person is considered to own 50% of Company Y.
References
For a discussion of the terms "related" as used in examples (d) to (f) or "related group" as used in example (f), please see the section below entitled Relationship.
For the definition of "specified class" as used in examples (c) to (e), or more details on the associated corporation rules under the Income Tax Act (Canada), please refer to the current version of the Canada Revenue Agency's Interpretation Bulletin IT-64R4, Corporations: Association and Control.
Control
Situations in which control can occur
There are three situations in which control can occur for the purposes of the above association rules:
- Control can occur when a person owns a sufficient number of shares so as to give him or her a majority of the votes. The ownership of shares can be either direct or indirect.
- Control can occur when a person has direct or indirect influence that, if exercised, would result in control of the corporation. For example, the ability to cause the corporation to change the board of directors or to make decisions relating to vital actions of the corporation would result in control of the corporation. A potential influence, even if it is not actually exercised, would be sufficient to result in control in fact. Control can occur regardless of share ownership.
- Control can occur when a person owns more than 50% of the fair market value of all shares (regardless of whether or not these shares have voting rights).
Situations in which control does not occur
Control does not occur when a person may have influence over a corporation as a result of a legal arrangement (for example, under a franchise, license, lease, distribution, supply or management agreement) regarding the manner in which the business is to be conducted, and that person and the corporation deal with each other at arm's length.
References
For more information regarding control, please refer to the current version of the Canada Revenue Agency's Interpretation Bulletin IT-64R4, Corporations: Association and Control.
Relationship
Introduction
The term "related" is used in examples (d) to (f) in the association rules, and the term "related group" is used in example (f). There are relationships between individuals, between individuals and corporations, and between corporations.
Related individuals
Individuals can be related by blood, marriage, or adoption. For tax purposes, spouses or common-law partners, parents and children, siblings, and grandparents and grandchildren are related. However, uncles, aunts, nieces, nephews and cousins are not considered to be related.
Related group
The term "related group" is defined to mean a group of persons each member of which is related to every other member of the group.
For example:
- three brothers form a related group, but
- a group consisting of a child, mother, father, and brother of the father does not form a related group, because an uncle and a niece or nephew are not considered to be related for tax purposes.
An individual related to a corporation
An individual is related to a corporation if he or she, either individually or as a member of a related group, controls the corporation. In addition, any related person of the controlling individual is also related to the controlled corporation. All persons related to an individual who is related to a corporation are also related to that corporation.
Related corporations
Corporations are related if:
- they are controlled by the same person or group of persons
- each of the corporations is controlled by one person, and the person who controls one of the corporations is related to the person who controls the other corporation
- one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation
- one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation
- any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation
- each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.
Type of control
The type of control that is used to determine "relationship" is described in (1) under the section entitled Control.
References
For more details on relationships, please refer to the current version of the Canada Revenue Agency's Interpretation Bulletin IT-419, Meaning of Arm's Length.
Religious or charitable organizations
Special rules
The association rules, as described, may not apply to religious and charitable organizations that are exempt from income tax under paragraph 149(1)(f) of the Income Tax Act (Canada) as a "Registered Charity."
For EHT exemption purposes, a registered charity that is an eligible employer can treat each of its locations as a separate employer and each location will be eligible to claim the exemption for the year. There must be formalized evidence that the branch, division or parish is separate from the main body of the organization. Any one of the following factors may demonstrate this:
- a location is publicly advertised on the charity's letterhead, on business cards or in telephone directories and there is supporting evidence that the location belongs to the charity (e.g. property tax bill, lease agreement or other third party documentation)
- a branch, division, parish, etc. has its own charitable registration number
- a branch, division, parish, etc. files its own "Registered Charity Information Returns."
References
For more information, please refer to EHT Information Bulletin 3-98 entitled Religious or Charitable Organizations.
Non-share capital and non-profit corporations
The usual associated rules do not apply
In the case of non-share capital or non-profit corporations, the usual association rules dealing with control through share ownership do not apply. It is therefore necessary to rely on the type of control described in (2) under the section entitled Control.
Factors to be considered in the determination of associated status
The Branch will consider the following factors in its determination of "associated employer":
- whether the board, committee (or majority of the members) or person in charge is the same for two or more organizations
- whether the board, committee or person in charge of each organization is reporting to the same body or larger organization
- whether the board, committee or person in charge is appointed (or could be appointed) by another organization
- whether the employer is a member of a larger organization under an agreement/contract (whether verbal or written)
- whether a larger organization has the ability to directly or indirectly terminate the existence of the employer or its business
- whether the larger organization has the ability to make alternative decisions concerning the actions of the employer in the short, medium or long term
- what would happen to the ownership of assets upon dissolution of the employer
- whether there is a third party ownership of a large debt on demand
- who has the responsibility of outstanding debts/liabilities upon dissolution
- whether there is economic dependence on the larger organization.
Associated employers exemption allocation schedule
Filing requirements
All of the employers in an associated group must complete a schedule allocating the exemption for the year. The schedule, which can be found on the reverse side of the Annual Return, must be filed by each of the associated employers with its Annual Return by March 15 of the following year. If any associated employer is not included on the allocation schedule for the year, all of the employers in that associated group will be denied the exemption for the year.
References
For more details on the allocation schedule, please refer to the current Annual Return Guide.
Official interpretations
Official interpretations as to whether an employer is associated can only be obtained by having all of the facts of the situation examined in order to determine the substance of the relationship between the parties. Written interpretations can be obtained by writing to:
Ministry of Revenue
Tax Advisory Services Branch
Employer Health Tax
33 King Street West
Oshawa ON L1H 8H5
Related information bulletins
Other Information Bulletins providing further details on this topic include:
Further information
To obtain the most current version of this publication, or additional information, visit our website at ontario.ca/revenue or contact the Ministry of Revenue at:
- 1 866 ONT-TAXS (1 866 668-8297)
- 1 800 263-7776 teletypewriter (TTY)
© Queen's Printer for Ontario, 1998
ISBN 0-7794-2509-X
