A buyer that takes on the target’s workforce becomes an Ontario employer and owes Employer Health Tax on the remuneration it pays. The $1,000,000 exemption is not the seller’s to hand over: under the Employer Health Tax Act one exemption is shared across an entire associated group, and it falls to nil once that group’s Ontario payroll passes $5 million.
Key takeaways
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The charging provision is one sentence. Section 2(1) of the Employer Health Tax Act, R.S.O. 1990, c. E.11, marginal note Tax: “Every employer shall pay to the Crown in right of Ontario a tax calculated in accordance with this Act.” Liability attaches to a status, which section 1(1) defines broadly: an “employer” is “a person or a government, including the government of a province, a territory or Canada, who pays remuneration to an employee”.
What is taxed is total Ontario remuneration — pay to employees who report for work at, or are paid through, that employer’s permanent establishment in Ontario. The day a buyer starts paying the people it hired, it is an Ontario employer in its own right, with its own registration and return. Treadstone Law’s note on the Ontario EHT threshold makes the operational point: this is paid to Ontario, not remitted to the CRA.
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Two numbers do different jobs. Section 2(2) multiplies the taxable total Ontario remuneration by a rate selected on the total, rising through a seven-band Table to “where the total Ontario remuneration paid by the employer during the year exceeds $400,000, a rate of 1.95 per cent”.
The Ministry of Finance puts it in one line on its EHT page, read 3 September 2026: “The tax rate you use is based on the level of your Ontario payroll before you have deducted any exemption”. The top rate arrives at five or six full-time salaries, so almost every target with staff is already there.
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The figure is in the statute, not in a regulation. Section 2.1(2) computes an eligible employer’s exemption as A × B/C and defines “A” as “$1,000,000 for a year in the nine-year period consisting of 2020 to 2028”.
It is not indexed yet: section 2.1.1 adjusts “A” only “For each five-year period beginning with the period consisting of the years 2029 to 2033”, by the Ontario Consumer Price Index. The Ministry agrees — “The exemption amount is scheduled for adjustment for inflation on January 1, 2029.” For any deal closing before 2029 the figure does not move.
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It is a cliff, not a taper. Section 2.1(5) provides that where an unassociated employer’s total Ontario remuneration exceeds its exemption threshold, “the exemption amount of the employer for the year is nil”. Subsection (7) fixes that threshold at $5,000,000 × D/E, D counting days with an Ontario permanent establishment and eligible-employer status.
An employer one dollar over loses the whole $1,000,000, which at 1.95 per cent is $19,500 of tax that did not exist a dollar earlier. An acquisition pushes a buyer across that line through the associated-group test, not through the target’s own payroll.
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This is what turns a payroll tax into a deal issue. For years beginning after 31 December 2024, section 2.1(4.0.2) lets a group of associated employers allocate one exemption between them, and subsection (4.0.3) then removes it: “If the aggregate of the total Ontario remuneration paid during a year by a group of associated employers is more than the exemption threshold for the group, the exemption amount that the group may allocate is nil.”
Association is not an EHT concept. Section 1(5.1) imports the federal test — “section 256 of the Income Tax Act (Canada) applies for the purposes of this Act” — and widens it, deeming individuals, partnerships and trusts to be corporations so a personally held group is caught. ITA s. 256 is the test Treadstone Law describes for the shared small business limit, a page about the federal deduction, not EHT.
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Section 2.1(14) requires the allocation agreement delivered to the Minister by at least one of the employers by the date the annual return is due, and subsection (4.0.4) makes an employer’s exemption nil where no amount is allocated to it. Nobody gets a default share.
The Ministry states the consequence bluntly on its EHT page: “If any associated employer is missing from this form or if the form is not submitted, all of the employers in the associated group will be denied the tax exemption.” A buyer that acquires a company mid-year and never files the form has forfeited the exemption for every company it owns, not just the one it bought.
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Association is tested at any time in the year, so a target bought on 1 October belongs to its old group and its new one in the same calendar year. From the Ministry’s associated employers page: “Your business becomes associated with the other business for the whole year if they became associated at any time during the year.” Two allocation forms are needed, though “Effective January 1, 2025, the seller group and the buyer group do not need to aggregate their payrolls”.
Do the arithmetic yourself rather than borrow the page’s. Its worked example gives SellCo $2,200,000, BoughtCo $3,000,000 and BuyCo $2,700,000, then says an exemption is available to SellCo and BoughtCo “since the combined payroll for all of the employers in that associated group is below the $5 million exemption threshold for the year” — on its own figures that group totals $5,200,000. A Ministry page is evidence of the Ministry’s position; section 2.1(4.0.3) is the rule.
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Search the consolidated Act for a successor or purchaser provision and there is none: the one occurrence of “successor” is in s. 20(1)(a), the Minister’s successor in office, and “purchaser” never appears. There is no EHT analogue to ESA section 9 continuity of service. Each employer is taxed on what that employer paid, so an asset buyer inherits neither the seller’s pre-closing tax nor its exhausted exemption.
The cost is that a new acquisition company starts its own clock. Under section 2.1(2) the multiplier B counts days with an Ontario permanent establishment and eligible-employer status, and the Ministry’s exemption page agrees an employer that “commenced or ceased operations, amalgamated, or filed for bankruptcy after the beginning of the year must prorate” both figures. On my own parameters — a Newco first paying staff on 1 July of a 365-day year — that is about $504,000. Buy through an existing company the same day and the full exemption survives.
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A buyer that restructures after closing pays EHT on some exit payments and not on others, and the line is not where most people put it. “Remuneration” in section 1(1) is keyed to amounts included in income “by reason of section 5, 6 or 7 of the Income Tax Act (Canada)”, and a retiring allowance is taxed under a different provision of that Act. Section 1(6) pulls in payments to people who have already left, where they relate to the previous employment.
The Ministry draws the line on its remuneration page, read 3 September 2026: “An amount paid at the time of termination in lieu of notice is remuneration that is subject to EHT”, while “Severance pay is considered retiring allowance under the federal Income Tax Act section 56 and is not subject to EHT.” Hence: “Severance pay is not the same as termination pay, which is subject to EHT.” Accrued vacation and bonus balances of the kind Treadstone Law tracks in liabilities carried to closing stay inside the base, and settling contractors who are really employees moves remuneration into it retroactively. Note the boundary with statutory severance an asset buyer inherits: that is about who owes the money.
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The Minister can secure the debt against property. Section 23(2) makes unpaid tax, once registered under the Personal Property Security Act, “a lien and charge on any interest in personal property in Ontario owned or held at the time of registration or acquired afterwards” by the taxpayer. A PPSA search against the seller’s exact legal name finds it. Clearance will not help: section 19(2) imposes its certificate duty on an “assignee, liquidator, receiver, receiver-manager and other agent”, not on purchasers, so the protection is contractual — a tax indemnity with a holdback behind it, of the kind Treadstone Law describes for reassessment risk.
Then ask for the returns. Section 5(1) requires one “on or before March 15 of the following year”; section 3(1) requires monthly instalments above $1,200,000 of Ontario remuneration; Reg. 319, s. 3(2) requires a final return “within forty days after the employer ceases to have the permanent establishment”. Confirm an allocation agreement was filed for every year, and note that the Ministry’s registration list names “you sold or bought another employer during this year” as a trigger to file as an associated employer. Then model your own group, not the target’s: add its payroll to every employer you are associated with, including those held personally or in trust, and test the total against $5,000,000. This is Ontario law only; other provinces levy their own payroll charges under their own statutes, which I did not fetch.
No. The exemption belongs to an associated group as a whole, not to any one company, and it is reduced to nil once that group’s combined Ontario payroll exceeds $5,000,000 — an acquisition can push a buyer’s entire group across that line even where the target’s own payroll is small.
No. The Employer Health Tax Act has no successor or purchaser provision, so each employer is taxed only on what it itself paid — an asset buyer inherits neither the seller’s pre-closing tax nor its used-up exemption, though a newly formed acquisition company must prorate its own exemption for its first partial year.
The exemption is denied to the entire group, not just the company that failed to file. The Ministry is explicit that if any associated employer is missing from the allocation form, or the form is not submitted at all, every employer in the group loses the exemption.
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