The Canadian Emergency Wage Subsidy

The Canada Emergency Wage Subsidy – The Cavalry Is Coming

Volume No. 20-02

The Canada Emergency Wage Subsidy (“CEWS”) legislation has been released and is now law.  In general, the CEWS will reimburse eligible employers 75 per cent of the amount of remuneration paid to eligible employees (to a maximum benefit of $847 per week).

The legislation was prepared under less than ideal circumstances so it is not surprising that there are a number of questions and observations we hope the government will address.  However, we can now provide more answers than in our April 7, 2020 Tax Tip.

What Entities are Eligible

The following entities qualify for the CEWS, if other conditions, discussed below, are met:

• corporations that are not public institutions or tax exempt;
• individuals;
• registered charities that are not public institutions;
• most Not-for-Profit entities that are not public institutions; and
• partnerships where all of the members are any of the above.

Public bodies such as municipalities, local governments, Crown corporations, wholly owned municipal corporations, public educational institutions and hospitals do not qualify for the CEWS.

What Eligible Entities Qualify

If you determine you are an eligible entity you must then determine if you are an eligible entity that qualifies for the CEWS (“Qualifying Entity”). This requires that:

• the eligible entity suffered a decrease in revenue of at least 15% in March 2020 and at least 30% for April and May when compared to revenue earned in the same period in 2019; or

• when compared to the average revenue earned in January and February 2020 if the entity was not carrying on business on March 1, 2019 or, if it was, it elects to use this period instead of March, April and May 2020; and

• the entity had a valid account number with the Canada Revenue Agency (“CRA”) on March 15, 2020 in relation to payroll remittances. This is typically a 9 digit business number with the program code RP affixed to it (e.g., 12345 6789 RP 0001).

• the individual who has principle responsibility for the financial affairs of the eligible entity attests that the entire application is complete and accurate (e.g., the decline in revenue); and

• Application for the CEWS is submitted in prescribed form and manner before October 2020

There are no prescribed forms or procedures yet but, according to the CRA press release , employers will be able to apply through the CRA’s “My Business Account” portal (must register for this service) or a web-based application that, at the time of writing, has not been released. Signing up for direct deposit should expedite the receipt of funds once an application is approved.

Employers will be required to apply for each qualifying period in which they feel they are eligible for the subsidy. Applications can be made up until September 30, 2020 so, for companies that can weather the storm for a while, they may want to wait so they can determine what eligibility method is best for them. The first method used is the one that must be used for subsequent claims.

Qualifying Revenue

There are some inconsistencies in the wording of some of the legislation regarding how revenue is to be calculated.  It seems that qualifying revenue is intended to be arm’s length revenue earned in the course of ordinary activities in Canada, calculated using normal accounting methods.  Employers must select an accounting method when first applying for the CEWS and are required to use that method for the duration of the program. It excludes extraordinary items or items on account of capital (e.g., capital gain).

Alternatively, employers can calculate revenue using the cash method.  No matter what the choice is, employers must use the same method consistently when determining eligibility.

The previous announcements did not address circumstances where an employer would be an intended beneficiary of the CEWS but is blocked for a variety of reasons, such as an inappropriate corporate structure.  Concerns were raised to the government and the legislation now provides relief for some of these situations:

For a group of eligible entities that normally prepares consolidated financial statements, each member of the group may determine its qualifying revenue separately but the same method must be applied for all other members of the group.

Similarly, all members of an affiliated group (e.g., common control by a person or the person’s spouse) may jointly elect to use the same consolidated revenue for the comparison.

Where a non-arm’s length group of companies pays its employees through a single company (for a fee), the entity can calculate revenue using a formula that, essentially, applies the pro-rata changes in the arm’s length revenues earned by the operating entities to the fee charged by the payroll entity.

Reference Periods

The reduction in revenue percentage is calculated by comparing revenue earned in specified periods to defined “reference periods”.

The following table illustrates the choices of reference periods for each “claiming period”. Please note that an applicant can use the average revenue of the first two months of 2020 if the employer did not operate during the regular reference period or if they elect to use this method.

Eligible Periods

An employer’s eligibility is generally determined by the change in monthly revenues, year over year, for the calendar month in which the claiming period began. Alternatively, employers can elect to compare their monthly revenues to their average revenues for January and February 2020. Employers must select an approach when first applying for the CEWS and use that approach for the entire duration of the program.

To provide greater certainty to employers, once an employer is found eligible for a specific claiming period, the employer would automatically qualify for the next period.

This table outlines each claiming period and the month in which a decline in revenue would be required to qualify for the subsidy.

The legislation includes a welcomed provision that deems an applicant to meet the declining revenue test for the current claim period if it met the test for the immediately prior claim period.  This rule ensures that employers will have one month’s notice before losing eligibility.

For example, an employer that increases its revenues (or did not have a 30% decline in revenue) in Period 3, will be eligible in Period 3 if it met the declining revenue test in Period 2. Note that eligibility in Period 3 cannot be based on eligibility in Period 1 as it is not the immediately preceding period.

There are currently 3 qualifying periods but the government can extend the program until the end of September 2020.

Eligible Employees

The CEWS is only available for remuneration paid to eligible employees.  Eligible employees are individuals employed in Canada other than those who have not been remunerated for 14 or more consecutive days within the qualifying period.

This 14 day exception ensures that the CEWS will not be paid for employees who were eligible for the Canada Emergency Response Benefit (“CREB”) in the qualifying period.

Amount of Subsidy

The subsidy amount for a given employee on eligible remuneration paid for the period between March 15 and June 6, 2020 is be the greater of:

• 75 per cent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
• the amount of remuneration paid, up to a maximum benefit of $847 per week or 75 per cent of the employee’s baseline remuneration (defined below), whichever is less.

To avoid abuse, the CEWS is only available for non-arm’s length employees employed prior to March 15, 2020.  For these employees the subsidy is the least of:

• eligible remuneration paid in any pay period between March 15 and June 6, 2020,
• 75 per cent of the employee’s baseline remuneration for that week; and
• $847

The baseline remuneration is defined to be the average weekly eligible remuneration paid to the employee from January 1 to March 15, 2020.  Employers can exclude, when calculating this average remuneration, any period of seven or more consecutive days (between January 1, 2020 and March 15, 2020) for which the employee was not remunerated.  It is only the subsidy on any amount above the baseline remuneration that is denied for non-arm’s length employees that is not allowed.

The baseline remuneration can actually be helpful to any employee that is hired back for less than they were paid prior to March 14, 2020.  For these situations, the CEWS will be calculated on the baseline remuneration as it will be higher than the post March 15, 2020 wages.  The benefit actually accrues to the employer because they receive the subsidy but the government has stated that they strongly encourage employers benefiting from this baseline bump to top up employees’ post March 15, 2020 salaries accordingly.

Eligible Remuneration

Only eligible remuneration paid to an eligible employee can qualify for the CEWS.  Eligible remuneration includes salary, wages, commissions, fees, or other amounts for services.  Eligible remuneration does not include retiring allowances, stock option benefits and amounts that can reasonably be expected to be paid back to the employer (or a person related to the employer).

Furthermore, there is an anti-avoidance rule that excludes from eligible remuneration, amounts above the baseline amount where the employer increases the pay of an employee during the qualifying periods with the intent to reduce the pay afterwards where one of the main purposes was to increase the amount of CEWS available.

The object of the anti-avoidance rule appears to focus on questionable behaviour of employers trying to gain an advantage during this period of distress.  It does not appear to target situations where an employer has bona fide reasons to increase the pay (e.g., paying higher than normal salary due to risk of contracting COVID-19).

Compliance and “Getting Cute”

Applicants will have to keep records demonstrating their eligibility to claim the CEWS and employee remuneration and attest to eligibility for the CEWS.

If it is subsequently determined that an employer did not meet the eligibility requirements repayment of the amounts received under the program will be required.

Applicants that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS will be subject to a penalty equal to 25% of the value of the subsidy claimed; on top of repaying the entire subsidy.  In addition, employers could be charged a 200% penalty and face up to 5 years in prison under the regular tax avoidance provisions in the Income Tax Act.

The government also has the option to disclose any applicants’ identity to the public.  This deviation from confidentiality seems to be included as a deterrent to abusing the program but its use is not limited to those situations.  Absent any other laws to the contrary, the government could, for example, disclose identities to promote the program and its successes.

Interaction with Other Relief Programs

Things have not changed since our previous release.  Employers that have claimed the 10% wage subsidy, must reduce the subsidy from the wages claimed for CEWS purposes.

The CEWS will be reduced by EI benefits received by the employees participating in the Work-Sharing program.

Government Assistance

The CEWS will be taxable to the employer as government assistance.

Beyond the CEWS: Refund for Payroll Contributions

The government has expanded the CEWS to a 100% refund of certain employer-paid contributions to Employment Insurance, Canada Pension Plan, Québec Pension Plan, and Québec Parental Insurance Plan. This refund covers 100% of these amounts for each week throughout which an employee is on leave with pay and for which the employer is eligible to claim the CEWS for that employee.

The Cavalry has started to arrive.  We hope the government will continue to send it out to help Canadians coast to coast until the economy begins to recover from the COVID-19 pandemic.