Updated on May 19, 2020
To encourage businesses to retain their employees during the COVID-19 pandemic, Parliament convened on an emergency basis on April 11, 2020 to enact Bill C-14, which legislates the Canada Emergency Wage Subsidy (the “CEWS”). Details of this program were announced by the federal government on a rolling basis over the course of several news releases from March 25 to April 8, and more recently on May 15, 2020 (collectively, referred to herein as the “Backgrounder”). Having received Royal Assent, Bill C-14 amends the provisions of the Income Tax Act (Canada) (the “Act”) to implement a wage subsidy program to provide eligible employers with 75% of the weekly remuneration they pay to their employees, up to a weekly maximum of $847, retroactive to March 15, 2020. The program was originally expected to end on June 6, 2020 to provide up to 12 weeks of subsidization; however, on May 15,, 2020, the federal government extended the program to August 29, 2020 to provide a wage subsidy for up to 24 weeks to eligible employers.
Legislative amendments to the CEWS are expected to be forthcoming to implement various announcements released on May 15, 2020. Key details of the CEWS, as expected to be amended, are summarized below.
Eligible employers (each defined as an “eligible entity” in subsection 125.7(1) of the Act) includes individuals, taxable corporations, non‑profit organizations, registered charities and partnerships consisting of eligible entities. Notably, since there is no requirement that a corporation be resident in Canada to be eligible for the CEWS, a corporation not resident in Canada with Canadian branch operations may be eligible for the CEWS. The legislation also provides flexibility for the government to deem organizations to be eligible by regulation. Public bodies (municipalities, local governments, Crown corporations, public universities, colleges, schools and hospitals) are not eligible for the CEWS.
On May 15, 2020, regulations to the Act were approved to extend the eligibility of the CEWS to the following groups:
- Partnerships that are up to 50-per-cent owned by Non-Eligible Members – In the absence of the regulation being approved, only a partnership made up of only partners who are eligible entities would be an eligible entity. As a result of the regulation being approved, partnerships will be eligible entities for purposes of the CEWS so long as non-eligible members, taken together, do not hold a majority of the interests in the partnership. Specifically, in order for a partnership to qualify for the CEWS, the fair market value of interests in the partnership held by non-eligible entities at all times in the qualifying period must not exceed 50 per cent of the fair market value of all interests in the partnership. This change is retroactive to April 11, 2020.
- Indigenous Government-Owned Businesses – In the absence of the regulation, Indigenous government-owned corporations could only be eligible for the CEWS if they were a taxable entity. As a result of the regulation being approved, Indigenous government-owned corporations that are carrying on a business and are tax-exempt under paragraph 149(1)(d.5) of the Act, as well as their wholly-owned subsidiaries that are carrying on a business and are tax-exempt under paragraph 149(1)(d.6) of the Act are eligible entities for the CEWS. In addition, partnerships where each partner of the partnership is either an Indigenous government or an eligible employer will be eligible entities for purposes of the CEWS. Indigenous governments would include First Nation bands, self-governing Indigenous governments and other comparable Indigenous governing bodies. This change is retroactive to April 11, 2020.
- Registered Canadian Amateur Athletic Associations (RCAAAs) – Generally, RCAAAs are national associations responsible for the promotion of sport on a nation-wide basis (e.g. Hockey Canada, Lacrosse Canada and Biathlon Canada). Although, provincial, regional and local members of an RCAAA are considered non-profit organizations and are eligible for the CEWS, the national-level RCAAAs were, in the absence of this regulatory approval, excluded because they are tax-exempt entities. As a result of the regulation being approved, national-level RCAAAs that are tax-exempt under paragraph 149(1)(g) of the Act are eligible entities for the CEWS. This change is retroactive to April 11, 2020.
- Registered Journalism Organizations – Although Canadian journalism organizations generally qualify for the CEWS, non-profit journalism organizations that register as qualified donees, as a tax exempt entity, were As are result of the regulation being approved, registered journalism organizations that are tax-exempt under paragraph 149(1)(h) of the Act are now eligible entities for the CEWS This change is retroactive to April 11, 2020.
- Non-public Colleges and Schools – a person or partnership operating a private school or private college, including, as indicated in the Backgrounder, institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools. This change is retroactive to April 11, 2020.
On May 15, 2020, the government also announced proposed legislative amendments to include, as expanded eligible entities, the following:
- Corporations formed on Amalgamations – Since corporations formed on the amalgamation of two or more predecessor corporations (or where one corporation is wound up into another) may not qualify for the CEWS due to the absence, or a distortion, of benchmark revenues to prove a revenue decline. To remedy this, federal government proposes to amend the CEWS to allow such corporations to calculate benchmark revenue for the CEWS revenue-decline test using their combined revenues, unless it is reasonable to consider that one of the main purposes for the amalgamation (or the winding up) was to qualify for the CEWS. This change is proposed to be retroactive to April 11, 2020.
- Tax-Exempt Trusts – Although trusts are currently eligible for the CEWS, since they are considered to be individuals for tax purposes, the government proposes to amend the CEWS to ensure better alignment of the tax treatment of trusts and corporations for CEWS purposes. Consequently, trusts with employees would continue to be eligible for the CEWS, subject to the following new exceptions:
(A) Where the trust is a tax-exempt entity (other than a public institution), it would qualify only if it is a registered charity or one of the other types of eligible tax-exempt entities; and
(B) Where the trust is a public institution, it would qualify only if it is a prescribed organization.
This change is proposed to apply in respect of the third qualifying period (May 10 to June 6) and any subsequent qualifying period.
Eligibility will also require an individual who has principal responsibility for the financial activities of the employer to attest to meeting the revenue criteria for a “qualifying period,” in order for the employer to be considered a “qualifying entity.” In very general terms (and as described further below), the “qualifying revenues” of an eligible employer must decline by at least 15% in March 2020 and 30% for the following months to qualify for the CEWS, however, as outlined below, it is possible that the 30% decline may be modified for the claim periods in respect of the extension period (i.e., June 6th to August 29th). In addition, an eligible employer must have a business number registered for payroll purposes as of March 15, 2020.
Reference periods for measuring revenue declines
The revenue decline is measured for each “qualifying period” in respect of which the subsidy may be claimed. The claim periods are from March 15 to April 11, April 12 to May 9 and May 10 to June 6, 2020. Moreover, the legislation permits additional claim periods, not extending past September 30, 2020, to be prescribed. As a result, it appears that the government is able to extend the CEWS to August 29, 2020 with relative ease. However, since the Backgrounder announcing this extension also indicates that the federal government will consult with key business and labour representatives on potential adjustments to CEWS, including the 30 per cent revenue decline threshold, with the objective of maximizing employment support for the post-crisis economic recovery, legislative amendments are expected.
In respect of each claim period, the “qualifying revenues” (as described further below) for the current month, namely, March 2020, April 2020 and May 2020 (the “current reference period”), as applicable, are compared against the qualifying revenues for March 2019, April 2019 and May 2019, respectively (the “prior reference period”). However, an eligible entity may elect to compare the qualifying revenues for the current reference period against the average qualifying revenues for January and February 2020, provided this approach is consistently applied throughout all claim periods. This average is also required to be used by an employer who was not carrying on business or otherwise carrying on its ordinary activities on March 1, 2019.
The legislation provides that if an eligible entity qualifies for the CEWS for a specific claim period, such entity will automatically qualify for the claim period that immediately follows.
Although details of how the qualifying revenues for June, July and August claim periods are expected to be measured, these requirements for March, April and May claim period are summarized in the following table:
|Claim Period||Current Reference Period for Revenue Measurement||Minimum Required Revenue Decline||Reference Period used to Measure Eligibility|
|1.||March 15 to April 11||March 2020||15%||March 2019 or average for January & February 2020|
|2.||April 12 to May 19||April 2020||30%||April 2019 or average for January & February 2020, unless automatic qualification because eligibility for Claim Period 1 is met|
|3.||May 10 to June 6||May 2020||30%||May 2019 average for January & February 2020, unless automatic qualification because eligibility for Claim Period 2 is met|
For the purposes of determining eligibility, “qualifying revenue” for the current or prior reference period means the inflow of cash, receivables or other consideration arising in the course of ordinary activities of the eligible entity carried on in Canada, and generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity. Extraordinary items are excluded, and based on the Backgrounder, as are amounts on account of capital. Amounts derived from non-arm’s length persons or partnerships and certain refunds and deemed remittances under other COVID-19 tax measures are also excluded. Qualifying revenues are to be computed using the entity’s normal accounting method, subject to the exceptions discussed below. As outlined further below, eligible entities are permitted to calculate their revenues under the accrual method (as they are earned) or the cash method (as they are received), however, the method selected by an entity will be required to be followed for the duration of the program.
Qualifying revenues for registered charities include revenues from a related business (as defined in subsection 149.1(1) of the Act), gifts and other amounts received in the ordinary course of activities, and for non-profit organizations they include membership fees and other amounts received in the ordinary course of activities. Both registered charities and non-profit organizations may elect to exclude funding from government sources in determining qualifying revenues for a prior reference period and current reference period, provided that the method is consistently followed throughout the program duration.
Computing qualifying revenues
Qualifying revenues are determined in accordance with an entity’s normal accounting practices, with some exceptions. As noted above, one such exception is that an entity may elect to determine its revenues based on the cash method, as generally set out in subsection 28(1) of the Act, with modifications as may be required. This election may be helpful to a business that has not suffered a large enough revenue decline to qualify for the CEWS based on its normal accrual basis accounting, but which has suffered a significant drop in cash flow due to customers being slow or unable to pay.
The legislation also provides the following special rules for determining qualifying revenues:
- Consolidated financial statements – Where a group of eligible entities normally prepares consolidated financial statements, each member of the group may determine qualifying revenues separately, provided that all of the members of the group do so. The ability to compute revenues separately only extends to members that are eligible entities, and not separate divisions or lines of business carried out in a single corporation. Thus, a corporation with multiple business divisions will be required to compute qualifying revenues on a consolidated basis, rather than separately for each division.
- Using consolidated qualifying revenues – A joint election may be filed by an eligible employer and each member of an affiliated group of eligible entities to which the eligible employer belongs to have each member of the group use as its qualifying revenue, the group’s consolidated qualifying revenues, as determined in accordance with relevant accounting principles. There is no detail yet on the required form for the joint election or if or when it must be filed with CRA. It is clear, though, that all members of the affiliated group to which the applicant belongs must make the election. An eligible entity wanting to take advantage of the consolidated revenue calculation will need to be sure to identify all affiliated entities and include them all in the election.
- Joint ventures – Although an eligible entity includes a partnership made up of eligible entities, it does not include joint ventures. In the normal course, a participant of a joint venture would be required to determine eligibility for the CEWS based on its own qualifying revenues. Where all or substantially all of an eligible entity’s qualifying revenues are from a joint venture, then the entity is entitled to determine its eligibility for the CEWS using the qualifying revenues of the joint venture, rather than its own, determined as if the joint venture was an eligible entity for the CEWS. It should be noted that if the joint venture had multiple venture participants each of whom participated through the use of a single-purpose entity, then each such entity may earn all or substantially all of its revenues from the joint venture. As such, each entity should be entitled to use the qualifying revenues for the joint venture as a substitute for its own qualifying revenues to determine its eligibility for the CEWS.
- Revenues from intercompany transactions – The legislation provides a mechanism that enables an eligible entity that earns all or substantially all of its revenues from intercompany transactions with non-arm’s length persons and partnerships to qualify for the CEWS. By filing a joint election with each non-arm’s length person or partnership from which the entity earns revenues, eligibility for the CEWS is determined by deeming the entity to have qualifying revenues for a prior reference period of $100 and comparing this amount to the entity’s aggregate revenues for the current reference period in respect of each non-arm’s length person, computed with the following formula:
$100 (A/B)(C/D), where
A is the entity’s qualifying revenues (ignoring the exclusion for non-arm’s length amounts) earned in the current reference period from a particular non-arm’s length person or partnership
B is the entity’s qualifying revenues (ignoring the exclusion for non-arm’s length amounts) earned in the current reference period from all non-arm’s length persons or partnerships
C is the particular non-arm’s length person’s or partnership’s qualifying revenues (not limited to only Canadian activities) for the current reference period
D is the particular non-arm’s length person or partnership’s qualifying revenues (not limited to only Canadian activities) for the prior reference period.
Based on this formula, it is apparent that the eligibility for the CEWS of an entity that earns qualifying revenues (from activities carried on by the entity in Canada) from non-arm’s length entities is not based solely on the decline in the intercompany revenues, but also depends on the decline of qualifying revenues (from arm’s length transactions) during the claim periods of each non-arm’s length person or partnership, without regard to the country where the related person or partnership carries on these revenue generating activities.
This option is welcome relief for entities that have significant payrolls and derive all or substantially all of their revenues from intercompany transactions. One example would be a manufacturing company that sells all or substantially all of its products to a related sales company. Another example would be a company that supplies management, administration or other services only to related companies and does not sell its services to the public.
To be eligible for the CEWS, an eligible employee must be an employee of an eligible employer in respect of a week during a “qualifying period”. This means an individual employed in Canada by the eligible employer in the “qualifying period”, other than an individual who is without remuneration by the eligible employer in respect of 14 or more consecutive days in the “qualifying period”. The CEWS will be limited where an eligible employee is employed in a week by two or more qualifying entities that do not deal at arm’s length.
Calculating the amount of the subsidy
The CEWS amount available to an eligible employer is not subject to an overall limit, nor is there a limit on how many employees of an employer may participate in the program. Generally, the program is designed to provide eligible entities with a subsidy of up to 100% of the first 75% of pre-crisis wages or salaries for existing employees, up to a maximum of $847 per week. Although the Backgrounder to the legislation indicates that there is an expectation that employers make their best effort to top-up employees’ salaries to bring them to pre-crisis levels, the legislation does not impose this requirement. Employers are also eligible for a subsidy of up to 75% of salaries and wages paid to new employees, and the Backgrounder indicates that the government encourages the rehiring of employees who were previously laid off as a result of the pandemic. The CEWS is also subject to adjustments for certain benefits received under other COVID-19 measures. Specifically, the CEWS is computed by the formula A – B – C + D, where
A (i.e., the main component of the subsidy) is the greater of:
(a) the lesser of (i) 75% of the eligible remuneration paid; (ii) $847; and (iii) nil, in respect of an employee that is not dealing at arm’s length with the employer in the claim period; and
(b) the lesser of: (i) eligible remuneration paid; (ii) 75% of the baseline remuneration; and (iii) $847.
- Eligible remuneration generally includes salary, wages, other remuneration, fees, commissions or other amounts for services. The included amounts are generally those in respect of which employers are required to withhold or deduct amounts to remit to the Receiver General on account of the employee’s income tax obligation. Excluded amounts include retiring allowance and stock option benefits.
The definition of “eligible remuneration” also incorporates two anti-avoidance rules that deter transactions that inflate the amount of eligible remuneration in respect of which the CEWS is claimed. First, excluded from eligible remuneration are amounts that can reasonably be expected to be returned, directly or indirectly, to the eligible entity, a person or partnership not dealing at arm’s length with the eligible entity, or any person or partnership at the direction of the eligible entity. Second, eligible remuneration excludes amounts paid to eligible employees during a qualifying period that are in excess of an employee’s baseline remuneration, if it is reasonably expected that the remuneration level will be reduced to an amount lower than the baseline remuneration after the qualifying period and one of the main purposes of the arrangement is to increase the eligible entity’s CEWS claim.
- The baseline remuneration for a given employee is the average weekly remuneration paid for the period January 1 to March 15, 2020, excluding any seven-day periods in respect of which the employee did not receive remuneration. Legislative amendments are expected regarding the computation of baseline remuneration of seasonal employees or employees who were on parental, disability or unpaid leave from January 1 to March, As announced on May 15, 2020, the government proposes to amend the CEWS to allow employers to choose one of two periods when calculating the baseline remuneration of their employees. 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. This change is proposed to be retroactive to April 11, 2020.
- The limit in paragraph (b) of item A of the formula effectively limits the subsidy in respect of employees who do not deal at arm’s length with the employer to a maximum benefit of $847 per week or 75% of the employee’s baseline remuneration. Consequently, no subsidy will be available in respect of a non-arm’s length employee who was not employed prior to March 15, 2020, as the baseline remuneration for such employee would be nil.
B is an adjustment that reduces the CEWS amount by deemed payroll remittances (pursuant to subsection 153(1.02) of the Act, implemented by Bill C-13, the COVID-19 Emergency Response Act, passed on March 25, 2020), which effectively implements the 10% wage subsidy that was announced and implemented prior to the introduction of the CEWS;
C is an adjustment that reduces the CEWS amount by the total employment insurance benefits received by the eligible employee’s work-sharing program under the Employment Insurance Act; and
D increases the CEWS by the amount of refund for certain employer-paid contributions to employment insurance, the Canada Pension Plan, the Quebec Pension Plan and the Quebec Parental Insurance Plan (as outlined further below).
Refund for payroll contributions
The CEWS includes a 100% refund for certain employer-paid contributions to employment insurance, the Canada Pension Plan, the Quebec Pension Plan and the Quebec Parental Insurance Plan.
- The refund covers 100% of the employer contributions made for eligible employees for each week in the “qualifying period” that the employees are on paid leave throughout the week.
- It should be noted that the refund is only available if the employee is remunerated for an entire week but does not perform any work for the employer for that week. A paid leave that only extends for a portion of a week does not qualify for this refund.
- Although the CEWS is limited to a weekly maximum benefit per employee of $847, there is no overall limit on the refund amount that an eligible employer may claim. That is, the refund is based on actual remuneration paid to an eligible employee for a week and not limited to the CEWS $847 maximum limit.
- Since all employers are required to continue to collect and remit employer (and employee) contributions as usual, eligible employers will still be required to fund employer contributions until such time as the CEWS amount is received.
Interaction with the 10% wage subsidy
Organizations that do not qualify for the CEWS may continue to qualify for the previously announced wage subsidy of 10% of remuneration paid from March 18 to before June 20, up to a maximum subsidy of $1,375 per employee and $25,000 per employer. For employers that are eligible for both the CEWS and the 10% subsidy, the amount eligible to be claimed under the CEWS for that period will be reduced (i.e., as item B, of the formula computing the CEWS amount, as outlined above).
The CEWS is computed as a “deemed overpayment” of an eligible entity’s Part I tax liability, which triggers a refund of tax that is payable by the Minister to the entity (without any refund interest). Although the Minister is required to issue (pursuant to subsection 164(1) of the Act) with “all due dispatch”, it is reasonable to assume that eligible employers will need to fund their payroll while they await their CEWS refunds.
Interaction with CERB
The Canada Emergency Response Benefit (CERB) should not overlap with the CEWS. Individuals are only eligible for the CERB if they are without remuneration by the eligible employer in respect of 14 or more consecutive days in a claim period. As a result, the employer will not be eligible for the CEWS for that particular employee for the claim period. If the employee is rehired after being laid off for fewer than 14 days in the claim period, the employer is still entitled to claim the CEWS in respect of that employee.
Taxable income to employers
The CEWS (and the 10% wage subsidy) received by an employer is considered government assistance and is required to be included the employer’s income (i.e., under paragraph 12(1)(a) of the Act). Such assistance will also impact the quantum of remuneration expenses eligible for other federal tax credits (e.g., scientific research and experimental development). Notwithstanding that the subsidy is included in the employer’s income, the inclusion should be offset by a deduction for the corresponding payroll expenses, thereby minimizing the overall tax burden.
Compliance and program integrity
Generally, the integrity of the CEWS program largely depends on self-assessment by applicants with the use of strict repayment requirements if eligible requirements are not met, stiff penalties for abuse and indictable offences where necessary:
- If an eligible entity enters into a transaction, participates in an event (or a series of transactions or events) or takes or fails to take an action that has the effect of reducing qualifying revenues for a current period and it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause the eligible entity to qualify for the CEWS for a period, then:
- the eligible entity is deemed to have had no drop in revenue and so is not entitled to the CEWS for that period, and
- is liable to a penalty of 25% of the CEWS claimed for that period.
- The penalties in subsection 163(2) of the Act now extend to the CEWS program. Ineligible employers can be liable for fines up to 50% of amounts received where employers knowingly, or by gross negligence, provide false or misleading information on their CEWS application.
- Existing section 239 of the Act may also apply to persons making, or participating in making, a false or deceptive statement, and such persons may be prosecuted with a summary or indictable offence and subject to a prison sentence for up to five years.
Applications for the CEWS must be made before October 2020 and can be made through the CRA My Business Account portal, as well as through a web-based application. Employers are encouraged to set up a direct deposit on the portal for the CEWS, so that they can receive the subsidy efficiently. Employers are expected to maintain records demonstrating their reduction in arm’s-length revenues and remuneration paid to employees.
Publication of CEWS applicants
The Government may publish the identity of all applicants for the Canada Emergency Wage Subsidy.
Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.