Ontario Income Tax is different from other provinces, territories and the federal income tax rules in the sense that when you speciify that an employee is tax exempt (Claim Code E on the TD1-ON Setup) that there will still be some risidual taxation left on the employees payroll.
Why is Ontario Income tax comming off my "Tax Exempt" Ontario employees?
The answer is simple, Ontario has an additional taxation called Ontario Health Premium which is imbedded in the calculations of the Ontario Income tax. Setting an employee as Income tax exempt DOES NOT make them exempt from the Ontario Health Premium.
Who is exempt from the Ontario Health Premium?
The only individiuals who can be and are exempt from the Ontario Health Premium are aboriginial employees.
How to setup an aboriginal employee to be exempt from the Ontario Health Premium?
In order to setup an employee to be exempt from the Ontario income taxes AND the Ontario Health Premium you must create a new payroll category in which you shall reports this employees wages too. The payroll category will primary category used for the employees wages and therefore should be defined as earning. On the payroll category setup you will NOT select that this category is "Subject too" Ontario Income tax. Additionally you must specify on the "Form Assignments" tab for this category that it will be reporting to "BOX 40", Sub-box 71 "Status Indian Wages"