The Canada Emergency Wage Subsidy- UPDATE

The Canada Emergency Wage Subsidy- UPDATE

This publication is an update to the previous publication detailing the April 11, 2020 Federal government announcements. This publication is a summary of the new rules that will apply for the CEWS payment related to June 7 to July 4, 2020.

We will focus on the changes and summarize the rules in the same format as previously. The overall plan is still a 75% wage subsidy to “eligible employers” for up to sixteen weeks retroactive to March 15, 2020 and ending July 4, 2020, up to a maximum of $847 per week per employee. The new rules only apply to the period June 7 to July 4, 2020. Any potential changes would commence as of Period 5 (July 5 to August 1) and/or Period 6 (August 2 to August 29).

Key Changes:

  • The CEWS revenue test threshold remains at 30% for Period 4. The reduction in qualifying revenue compares June 2020 to June 2019 or the average of January and February 2020 
  • Average qualifying revenue for January and February 2020 continues to be used for comparison purposes for any period. Once this method is chosen, it must be use for each period.
  • An employer must apply again for Period 4. If a company met the 30% revenue reduction test in Period 3 (i.e. May 2020), they are deemed to qualify for Period 4.

Ongoing Rules

  • If an eligible employer qualifies for Period 1, it will automatically qualify for Period 2. If an eligible employer qualifies for Period 2, it will automatically qualify for Period 3.
  • Revenue can be calculated using the accrual or cash method, but once a method is chosen, it cannot be changed.
  • Special rules for the computation of revenue would be provided to take into account certain non-arm’s length transactions, such as where an employer sells 90% or more of its output to a related company that in turn earns arm’s length revenue. As well, affiliated groups would be able to compute revenue on a consolidated basis.
  • Employer must have a payroll business number as of March 15, 2020.
  • The Federal government proposed to expand the CEWS by introducing a new 100 per cent refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund would cover 100 per cent of employer-paid contributions for eligible employees for each week throughout which those employees are on leave with pay and for which the employer is eligible to claim the CEWS for those employees.  
  • Eligibility for the CEWS of an employee’s remuneration will be available to employees other than those who have been without remuneration for 14 or more consecutive days in the qualifying period
  • Employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 per cent of the value of the subsidy claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed
How to Apply
Eligible employers can apply for the Canada Emergency Wage Subsidy through the Canada Revenue Agency’s My Business Account portal as well as a web-based application. Employers must keep records demonstrating their reduction in arm’s-length revenues (as discussed below) and remuneration paid to employees.

The employer must have a payroll business number with CRA as of March 15, 2020.  This would be a business number that ends “RP0001” or equivalent.  This means that if a company wants to start making payroll payments during this period and did not have a payroll business number, they will be ineligible.

Interaction with 10% Temporary Wage Subsidy- MAY 15, 2020 UPDATE
For employers that are eligible for both the Canada Emergency Wage Subsidy and the 10 per cent wage subsidy for a period, any benefit from the 10 per cent wage subsidy for remuneration paid in a specific period would generally reduce the amount available to be claimed under the Canada Emergency Wage Subsidy in that same period.  In other words, eligible employers can choose to reduce remittances up to 10% of the employee’s salary and then receive the Canada Emergency Wage Subsidy.  However, they cannot be added on top of each other.  The benefit is limited to 75%, not 85%.

On May 15, 2020, the government adopted regulatory changes that permit employers to elect to use a percentage lower than 10% in calculating its 10% Temporary Wage Subsidy for Employers. If you do not enter any amount for the 10% Temporary Wage Subsidy for Employers in your application, the CEWS will be determined as if you are electing 0% as the prescribed percentage for calculating your 10% Temporary Wage Subsidy for Employers and requesting the maximum CEWS.

Eligible Employers- NO CHANGE

Eligible employers include:

  • Individuals (including trusts)
  • Taxable corporations,
  • Persons that are exempt from corporate tax, other than public institutions:
    • Non-profit organizations
    • Agricultural organizations
    • Board of trade
    • Chambers of commerce
    • Non-profit corporations for scientific research and experimental development
    • Labour organizations or societies
    • Benevolent or fraternal benefit societies or orders
  • Partnerships consisting of eligible employers (including partnerships where at least 50% of the interests in the partnership are held by eligible employers)
  • Registered Canadian amateur athletic associations
  • Registered journalism organizations
  • Private schools or private colleges
  • Non‑profit organizations and
  • Registered charities

Who is not included as an eligible employer?

  • Municipalities and local governments
  • Crown corporations
  • Public universities
  • Colleges
  • Schools
  • Hospitals
How is Revenue Calculated?
An employer’s revenue for this purpose would be its revenue from its business carried on in Canada earned from arm’s-length sources. Revenue would be calculated using the employer’s normal accounting method, and would exclude revenues from extraordinary items and amounts on account of capital.  Revenues can be calculated using the accrual method or the cash method but must use that same methodology throughout all qualifying periods.

For registered charities and non-profit organizations, the calculation will include most forms of revenue, excluding revenues from non-arm’s length persons. These organizations would be allowed to choose whether or not to include revenue from government sources as part of the calculation. Once chosen, the same approach would have to apply throughout all qualifying periods.

Non-Arm’s Length Revenue

In a situation where an employer earns non-arm’s length revenue, there are different ways to calculate revenue in order to determine if a company qualifies for the CEWS.

  • Consolidated Financial Statements
    • Where a group of eligible entities normally prepares consolidated financial statements, each member of the group can determine its qualifying revenue separately, provided each member of the group does the same.
    • That is, one of the companies cannot state that because consolidated revenues decreased, they are eligible for the CEWS, when one of the other companies in the group uses its specific revenue to qualify. It is all or nothing.
  • Joint election
    • Where there is a group of affiliated entities, and the entities jointly elect, the qualifying revenue for the group, can be used for each member of the group.
    • This is relevant where there is a combination of arm’s length AND non arm’s length revenue. If for example, company A earned arm’s length revenue and paid affiliated company B a fee for providing employees.  Without this rule, company B would have no arm’s length revenue and would therefore not qualify for the CEWS.  With this provision, the arm’s length revenue for company A can be used for the whole group.  Since company B is the only one with employees, company B would be the company that applies for the CEWS.
  • Joint Ventures
    • Where the revenue is being allocated through a joint venture, then the eligible entity can use the revenue of the joint venture instead of only looking at the eligible entity’s share of revenue from the joint venture.
Revenue Comparisons- Eligible Periods
Eligibility would generally be determined by the change in an eligible employer’s monthly revenues, year-over-year, for the calendar month in which the period began.  As well, an eligible employer can now compare March 2020 to the average of January and February 2020.   In determining monthly revenues, the wage subsidy would NOT be considered in revenues.

If an eligible employer qualifies for Period 1, it will automatically qualify for Period 2.  If an eligible employer qualifies for Period 2, it will automatically qualify for Period 3.

The Eligible Periods are as follows:
This means that the first step is to determine if monthly revenue, year over year, decreased by at least 15% in March 2020 or 30% for each month thereafter.  Then an eligible employer would make a claim for the above qualifying period based on the salaries/wages paid during the qualifying period.

Each month will be a separate application.  It may be possible that a company is not eligible for Period 1 but is eligible for Periods 2,  3 and 4.

Eligible Employee
An eligible employee is an individual who is employed in Canada. Eligibility for the CEWS of an employee’s remuneration will be available to employees other than those who have been without remuneration for 14 or more consecutive days in the qualifying period, i.e., from March 15 to April 11, from April 12 to May 9, May 10 to June 6 or from June 7 to July 4.
Amount of Subsidy
The subsidy amount for a given eligible employee is 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 pre-crisis weekly remuneration, whichever is less.
The pre-crisis remuneration for a given employee is based on the average weekly remuneration paid between January 1 and March 15 inclusively, excluding any seven-day periods in respect of which the employee did not receive remuneration.

On May 15, 2020, the federal government announced an alternative approach in the determination of baseline remuneration. Specifically, employers would be allowed to calculate baseline remuneration for an employee as the average weekly remuneration paid to the employee from January 1 to March 15 of 2020 or, alternatively, as the average weekly remuneration paid to the employee from March 1 to May 31 of 2019, in both cases excluding any period of 7 or more consecutive days without remuneration. Employers would be able to choose which period to use on an employee-by-employee basis.

In effect, employers may be eligible for a subsidy of up to 100 per cent of the first 75 per cent of pre-crisis wages or salaries of existing employees. These employers would be expected where possible to maintain existing employees’ pre-crisis employment earnings.

Employers will also be eligible for a subsidy of up to 75 per cent of salaries and wages paid to new employees.
Eligible Remuneration
  Eligible remuneration may include salary, wages, and other remuneration.

These are amounts for which employers would generally be required to withhold or deduct amounts to remit to the Receiver General on account of the employee’s income tax obligation.

However, it does not include severance pay, or items such as stock option benefits or the personal use of a corporate vehicle. In addition, if an arrangement is made to temporarily scale up remuneration during the qualifying period, followed by a reduction after the qualifying period, then any amount paid will be excluded from eligible remuneration.

Non Arm’s Length Employees
A special rule will apply to employees that do not deal at arm’s length with the employer. The subsidy amount for such employees will be limited to the eligible remuneration paid in any pay period between March 15 and July 4, 2020, up to a maximum benefit of $847 per week or 75 per cent of the employee’s pre-crisis weekly remuneration.  That is, a non arm’s length employee cannot increase their salary after March 15, 2020 to maximize the benefit.  The entitlement will be based on what the non-arm’s length employee was earning before March 15th.
Refund for Certain Payroll Contributions
The Federal government proposed to expand the CEWS by introducing a new 100 per cent refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund would cover 100 per cent of employer-paid contributions for eligible employees for each week throughout which those employees are on leave with pay and for which the employer is eligible to claim for the CEWS for those employees.

In general, an employee will be considered to be on leave with pay throughout a week if that employee is remunerated by the employer for that week but does not perform any work for the employer in that week. This refund would not be available for eligible employees that are on leave with pay for only a portion of a week.

This refund would not be subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the CEWS. There would be no overall limit on the refund amount that an eligible employer may claim.

For greater certainty, employers would be required to continue to collect and remit employer and employee contributions to each program as usual. Eligible employers would apply for a refund, as described above, at the same time that they apply for the CEWS.

To be clear, this is an amount over an above the CEWS.  There is no maximum on this.

No Limit on Subsidy Claim
There would be no overall limit on the subsidy amount that an eligible employer may claim.  That is, the actual dollar amount of subsidy is only limited per employee.  The number of employees is not limited. Employers must make their best effort to top-up employees’ salaries to bring them to pre-crisis levels.
Interaction with the Work Sharing Program
On March 18, 2020, the Prime Minister announced an extension of the maximum duration of the Work-Sharing program from 38 weeks to 76 weeks for employers affected by COVID-19. This measure will provide income support to employees eligible for Employment Insurance who agree to reduce their normal working hours because of developments beyond the control of their employers.

For employers and employees that are participating in a Work-Sharing program, EI benefits received by employees through the Work-Sharing program will reduce the benefit that their employer is entitled to receive under the CEWS.

Taxation of Subsidy
The subsidy is fully taxable.  From a cash perspective, the tax cost of obtaining the subsidy will not be due until the eligible employer’s tax filing due date.  For a CCPC with a December 31, 2020 year end, the taxes on the subsidy would not be due until March 31, 2021.  In Ontario, the tax due would be 12.2% if eligible for the small business deduction or 26.5% if not eligible for the small business deduction.

Ensuring Compliance
If the employer does not meet the eligibility requirements and has incorrectly received the subsidy, the employer would be required to repay amounts received under the Canada Emergency Wage Subsidy. Penalties may apply in cases of fraudulent claims. Employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 per cent of the value of the subsidy claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed.

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