B.C. fleshes out proposed payroll tax

Employers and payroll professionals in British Columbia need to begin preparing for a brand-new payroll tax.

Beginning Jan. 1, 2019, the provincial government plans to levy an employer health tax (EHT).

B.C. Finance Minister Carole James proposed the EHT in this year’s provincial budget, saying the revenue it would generate would help replace money lost when the government eliminates Medical Services Plan (MSP) premiums in 2020.

 “In order to ensure that we are fiscally responsible, we are bringing in an employer health tax, as other provinces have done, that 85 per cent of the businesses in British Columbia will pay nothing towards,” said James.

Manitoba, Ontario, Quebec, and Newfoundland and Labrador also levy payroll taxes on employers. James said the design elements of B.C.’s EHT are consistent with those in other jurisdictions.

Last month, the government released an information bulletin with more details about the tax, including effective rates, employment income subject to it, remittance rules, and special requirements for charities and non-profit employers.

The tax is scheduled to apply to employers with an annual payroll of more than $500,000. Employers whose payroll was between $500,000.01 and $1.5 million would subtract the $500,000 exemption threshold from their payroll to determine the amount of tax owing, using the formula 2.95 per cent x (payroll - $500,000).

Employers whose payroll exceeded $1.5 million would pay the tax at a rate of 1.95 per cent on their total payroll.

The B.C. Ministry of Finance said the tax, as a percentage of payroll, would vary from 0.98 per cent to 1.95 per cent, depending on the amount of an employer’s payroll above $500,000.

In the information bulletin, the ministry provided examples on how much EHT employers would pay based on their payroll.

It said an employer with a payroll of $750,000 would pay EHT of about $7,313, compared with $14,625 for a $1-million payroll, and $39,000 for a payroll of $2 million.

The EHT would apply to payments employers make to employees who report to work at their permanent establishment in British Columbia and to employees who do not report to work at the permanent establishment, but who are paid from or through it.

It would not apply to payments to employees who report for work at the employer’s permanent establishment if it is outside of the province.

The finance ministry said it would provide more details in the coming weeks on the EHT for employers with multi-jurisdictional payrolls. It has said that national retailers who pay their employees from a central paymaster in B.C. would only include the salaries and benefits paid to employees who report to work at their B.C. stores when calculating the tax.

The types of payments that would be included in payroll for the EHT would be the same ones that are considered employment income under the federal Income Tax Act. They include salary and wages, advances, bonuses, commissions, vacation pay, top-up payments paid by employers, director’s fees, and taxable allowances and benefits.

Gratuities or tips paid through an employer would also be included in payroll, while those that a customer paid directly to an employee would be excluded.

The EHT would not apply to contributions employers made or premiums they paid for registered pension plans, private health services plans, supplementary unemployment benefit plans, deferred profit-sharing plans, or retirement compensation arrangements.

To help employers determine the timing for including taxable payments to employees in their payroll, the finance ministry advises that for bonuses — including signing bonuses, non-compete payments, commissions, and vacation pay, employers must include the payments in their payroll in the year they pay them to employees.

Employers would be required to pay the EHT online. Those with B.C. payrolls exceeding $600,000 would have to pay quarterly instalments. All employers subject to the tax would also have to file an annual return.

Special rules would apply for registered charities and non-profit employers. They would calculate the tax for each of their locations and pay the total of each location’s EHT. For each location with a B.C. payroll of up to $1.5 million, there would be no EHT owing.

For payroll between $1.5 million and $4.5 million, the EHT for the charity’s or non-profit’s location would be calculated as 2.95 per cent x (the payroll for the location - $1.5 million). Once payroll exceeded $4.5 million, the tax would be calculated at 1.95 per cent times the payroll for the location.

Charities and non-profits would only have to make quarterly instalment payments if their B.C. payroll was over $1.6 million at one location.

Business groups in the province have called on the government to either cancel or change the tax, saying it will hurt the province’s economy.

“There are a series of serious flaws with the employer health tax as proposed and (it) will cause hardship for business owners during a period where they must already cope with several other increasing business costs (EI, CPP, carbon tax, minimum wage),” said the Canadian Federation of Independent Business (CFIB) in a recent report.

It added that the tax could force businesses to raise prices, hire fewer workers, cut employee benefits, and reduce planned wage increases.

The CFIB also disagreed with James’ view that only 15 per cent of B.C. businesses would have to pay the tax. It said her figures include micro businesses, many of which do not have employees. It said its own survey of businesses with employees found that 44 per cent had a payroll exceeding $500,000.

“When only looking at businesses with employees (for example, those with an actual payroll), it is clear a much smaller percentage of businesses would be exempt from the employer health tax,” said the CFIB report.

Business groups have put forward a number of suggestions that they say the government should implement to help employers deal with the EHT if it will not shelve the tax.

One recommendation is to delay levying it until 2020 when the government eliminates MSP premiums. Otherwise, some employers will face double taxation, said the B.C. Chamber of Commerce in a policy statement on the EHT.

“A business or non-profit organization paying MSP premiums on behalf of their employees and which has a payroll of $500,000 will also be charged the employer health tax in 2019 — paying twice to fund the same health program,” it said.

If the government opts for 2019 implementation, the chamber said it should create an EHT exemption or reduction for organizations that pay MSP premiums for their employees.

Business groups also want the government to increase the exemption threshold for the tax. The chamber said it should be at least $1 million, adding that a $500,000 threshold would mean that businesses with as few as 10 or 11 employees could be subject to the tax.

“Few would define a company with 10 or 11 employees as a ‘big business’ and this low threshold means tens of thousands of true small businesses and small non-profit organizations will still have to pay this new tax.”

The CFIB recommended that the exemption threshold be at least $1.25 million.

“If the government increased the exemption to $1.25 million in payroll, 85 per cent of B.C.’s small businesses with a payroll will be excluded from paying the EHT,” said the CFIB.

The chamber would also like to see the structure of the tax changed so that it only ever applies to payroll above the threshold. Under the government’s plan, employers with payrolls exceeding $1.5 million would pay the EHT on their total payroll.

Both the chamber and CFIB have said they would also like to see the government tie the tax rate thresholds to inflation by linking them to the consumer price index.

“Indexing the thresholds will prevent a scenario where, over time, the exemptions become less meaningful as the amounts are no longer relevant,” said the chamber.

“In addition, indexing the thresholds to inflation would allow businesses to offer at least ‘cost-of-living’ increases to wages and salaries without the risk of inadvertently raising their payroll above an exemption cut-off,” it said.

So far, the government has not indicated that it plans to implement any of the suggested changes. However, more details on the proposed tax will come in the fall when the government tables legislation to implement it.