On April 11th, 2020, the Canadian Government enacted the COVID-19 Emergency Response Act, No. 2 which implements the Canada Emergency Wage Subsidy (the “CEWS”) that was first announced by Prime Minister Trudeau on March 27th. The CEWS is provided for in new section 125.7 of the Income Tax Act (Canada) (the “ITA”).
The main features of the CEWS are as follows:
- It is available to “taxable corporations”, individuals, non-profit organizations, registered charities, and partnerships whose members are eligible entities, but is not available to public institutions;
- It applies to eligible remuneration paid over 12 weeks, divided into three qualifying periods: March 15 to April 11, 2020; April 12 to May 9, 2020; and May 10 to June 6, 2020;
- To qualify for a subsidy during a qualifying period, an eligible entity must generally attest that its gross revenue dropped 15% or more in March 2020 (for the first qualifying period), 30% or more during April 2020 (for the second qualifying period), and 30% or more during May 2020 (for the third qualifying period). However, if an eligible entity meets the test in one period, it automatically qualifies for the subsidy in the following period;
- The point of reference for the revenue drop test is either the same month in 2019 (March, April or May) or the average of January and February 2020. The same method must be applied for the duration of the program;
- The amount of the subsidy is generally equal to 75% of eligible remuneration paid to eligible employees from March 15 to June 6, 2020, up to a weekly maximum of $847 per employee;
- There is no maximum number of employees for which an eligible entity can claim a subsidy;
- There is no cap on the total amount of the subsidy that an eligible entity may claim; and
- An online application must be filed with the Canada Revenue Agency (the “CRA”) for a particular qualifying period no later than September 30, 2020. The online application is not expected to be available for at least two weeks and perhaps longer.
This measure is in addition to the 10 per cent temporary wage subsidy (the “10% Subsidy”) that was previously implemented by the federal government on March 25, 2020 under the COVID-19 Emergency Response Act. Amounts received under the 10% Subsidy will be deducted from amounts received under the CEWS in respect of the same remuneration (see “Amount of Subsidy” above).
Entities that are eligible for the CEWS include: (i) individuals, (ii) taxable corporations, (iii) partnerships consisting entirely of eligible entities, (iv) non‑profit organizations, (v) registered charities, (vi) agricultural organizations, boards of trade, and chambers of commerce, (vii) non-profit scientific research and experimental development (“SR&ED”) corporations, and (viii) labour organizations.
Public institutions (and partnerships consisting of public institutions) are excluded. These include municipalities and local governments, foreign governments, Crown corporations (and their subsidiaries), public universities and colleges, schools, school boards, health authorities, hospitals, and certain other publicly-funded entities.
Taxable corporations include Canadian subsidiaries of foreign corporations, publicly-listed corporations, corporations controlled by public corporations, and non-resident corporations with employees in Canada that are taxable in Canada and otherwise meet the remaining requirements.
To qualify for the subsidy for a particular 4-week qualifying period, the eligible entity must (i) file an application before October 2020, (ii) have the individual who has “principal responsibility” for the financial activities of the entity attest that the application is “complete and accurate in all material respects”, (iii) have had a CRA payroll account on March 15, 2020, and (iv) meet the revenue drop test described below for the relevant month or the preceding month.
Revenue Drop Test
The eligible entity must attest that its “qualifying revenue” suffered the required reduction for each 4-week period after March 15, 2020 when applying for the subsidy each month (see “Claiming the Subsidy” below). The legislation implementing the CEWS allows the Canadian Government to extend the subsidy by regulation up to September 30, 2020 (i.e. without further amendments to the ITA).
Subject to the paragraph below, eligible entities who suffer a decline in “qualifying revenue” of at least (i) 15 per cent in March 2020 may claim a subsidy for eligible remuneration paid during the first qualifying period (March 15 - April 11), (ii) 30 per cent in April 2020 may claim a subsidy for eligible remuneration paid during the second qualifying period (April 12 - May 9), and (iii) 30 per cent in May 2020 may claim a subsidy for eligible remuneration paid during the third qualifying period (May 10 - June 6).
If an eligible entity meets the revenue drop test for one qualifying period, it automatically qualifies for the subsidy for the following qualifying period. For example, if an eligible entity meets the March 2020 revenue drop test, it qualifies for the first and second qualifying periods (regardless of revenue in April 2020). To qualify for the subsidy during the entire 12-week period, an eligible entity need only realize (i) a 15% or more drop in revenue for March 2020, and (ii) a 30% or more drop in revenue for April or May 2020.
The revenue reduction is determined by reference to either: (i) the revenue earned in the same month in 2019 (March, April or May), or (ii) the average revenue earned in January and February 2020. The latter test must be used by eligible entities that were established after February 2019 (such as start-ups). Other eligible entities may elect to use either method. The same approach must be used for the entire duration of the program.
The conditions described above may be summarized as follows:
Reference Period for Eligibility
March 15 - April 11
March 2020 over: (i) March 2019 or (ii) average of January and February 2020
April 12 - May 9
Eligible for Period 1
April 2020 over: (i) April 2019 or (ii) average of January and February 2020
May 10 - June 6
Eligible for Period 2
May 2020 over: (i) May 2019 or (ii) average of January and February 2020
Qualifying Revenue Calculation
Qualifying revenue for the purposes of the revenue drop test is the eligible entity’s “inflow of cash, receivables or other consideration arising in the course of the ordinary activities” of the entity in Canada, excluding “extraordinary items” and amounts derived from non-arm’s length sources. It generally represents income derived from the sale of goods, the rendering of services, and the use of the eligible entity’s resources by others. For greater certainty, the amount of any wage subsidy received in a given month under the CEWS or the 10% Subsidy would be ignored in the calculation of this amount.
For a registered charity, qualifying revenue includes revenue from a related business, gifts and other amounts received in the course of its ordinary activities. For a non-profit organization and certain other organizations, qualifying revenue includes membership fees and other amounts received in the course of its ordinary activities. All of these entities may elect to exclude funding received from government sources in the determination of their qualifying revenue.
An eligible entity’s qualifying revenue is to be computed using its “normal accounting method” (which may differ from methods used for income tax purposes), subject to the following:
- An eligible entity may elect to use the cash method of accounting if it does so consistently for all qualifying periods;
- A group of eligible entities that “normally prepares” consolidated financial statements can elect to determine its revenue separately;
- An affiliated group of eligible entities may compute its qualifying revenue on a consolidated basis provided each member of the group determines its revenue on such basis; and
- Special rules may apply to joint ventures and entities that derive “all or substantially all” of their revenue from non-arm’s length sources.
The amount of subsidy an employer can claim will be based on the number of eligible employees on its payroll during each qualifying period. An eligible employee for a particular qualifying period (i.e., March 15 to April 11, April 12 to May 9, and May 10 to June 6) is an individual who is employed in Canada and who has not been without remuneration for 14 or more consecutive days in that qualifying period.
Eligible remuneration includes most salary, wages, commissions, and other remuneration (such as taxable benefits) for which an income tax source deduction is required. However, it expressly excludes retiring allowances (i.e., severance payments) and stock option benefits.
Special anti-avoidance measures provide that eligible remuneration also excludes: (i) any amount received by an eligible employee that can reasonably be expected to be paid or returned, directly or indirectly, to the eligible entity, an entity not dealing at arm’s length with the eligible entity, or another entity at the direction of the eligible entity, and (ii) an amount that is in excess of the employee’s “baseline remuneration” if, pursuant to an arrangement between the eligible entity and the employee, the employee is “reasonably expected to be paid a lower weekly amount than their baseline remuneration” after the qualifying period and one of the main purposes of such arrangement is to increase the amount of the subsidy.
Amount of Subsidy
The total amount of the subsidy for a 4-week qualifying period is equal to:
- For each eligible employee, the greater of the following amounts:
- 75 per cent of eligible remuneration paid to the employee, up to a maximum of $847 per week; and
- the total amount of eligible remuneration paid to the employee, up to a maximum of $847 per week or 75 per cent of the employee’s “baseline remuneration”, whichever is less; minus
- The total amount received under the 10% Subsidy for the qualifying period; minus
- The total amount of work-sharing benefits received by eligible employees for the qualifying period; plus
- The total amount of employer premiums and contributions paid on account of Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan and the Quebec Parental Insurance Plan in respect of eligible employees who are on leave with pay during the qualifying period.
The amount of the subsidy is not subject to an overall limit.
The amount referenced in 1(a) is intended to apply to remuneration paid to new employees, whereas the amount referenced in 1(b) targets remuneration paid to existing and former employees (i.e., employees who received some remuneration from January 1 to March 15, 2020). Generally speaking, employers are eligible for a 100% subsidy on remuneration paid to existing and former employees (up to the lesser of $847 weekly and 75 per cent of the employee’s “baseline remuneration”), but only a 75 per cent subsidy on eligible remuneration paid to new employees.
For example, if an existing or former employee earned an average of $1,000 per week between January 1 and March 15, his or her employer may maintain employment, recall the employee from layoff, or rehire the individual at $750 per week and claim a full subsidy on that amount, resulting in no net out-of-pocket cost. In contrast, if the employer hires a new employee at $750 per week, the employer would only be eligible to receive a subsidy equal to $562.50 (i.e., 75% of the amount paid). This appears to be consistent with the stated purpose of the measure, which is to encourage employers to keep and recall from layoff existing employees and rehire former employees.
The Canadian Government has repeatedly emphasized that employers are expected to “make their best effort” to maintain existing employees’ pre-crisis earnings (i.e., top up the remaining 25%). However, there does not appear to be anything in the legislation that specifies any particular consequence or penalty for the failure to do so and it is not clear how such “best effort” could be established to the satisfaction of the CRA.
Remuneration paid to employees who do not deal at arm’s length with their employer (such as owner-managers) will be eligible for the CEWS, provided that such employees were employed by the eligible entity from January 1 to March 15, 2020. The amount of the subsidy for such employees will generally be equal to the amount determined under 1(b) above. Non-arm’s length employees who are newly added to the payroll after March 15 will not be eligible for the subsidy.
Claiming the Subsidy
Eligible entities must submit online applications for each qualifying period through their My Business Account portal or a dedicated web-based application. Although it is not expected that the CRA will be conducting any pre-approval or review of eligibility before releasing funds, employers must keep records demonstrating their eligibility, including with respect to the requisite reduction in arm’s length revenue and remuneration paid to employees.
Employers and, in particular, the individual responsible for their financial activities will be expected to honestly attest to their eligibility during the application process. If eligibility requirements are not met, the CRA will reassess claimants for all or a portion of any subsidy received under the CEWS, in addition to penalties and interest.
We understand that the online portal is expected to be set up in two to five weeks from April 11, 2020.
Anti-avoidance Rules and Offences
The Canadian Government had warned that it would enact “severe” new anti-abuse provisions and offences to ensure compliance with the CEWS.
The CEWS includes an anti-avoidance rule which, if applicable, deems there not to have been a drop in gross revenue for the relevant qualifying period and would effectively disqualify the eligible entity for that 4-week period. This anti-avoidance rule applies if, generally, (i) the eligible entity (or a non-arm’s length person or partnership) enters into a transaction or participates in an event (or a series of transactions or events) or takes an action that has the effect of reducing qualifying revenues, and (ii) it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to qualify for the subsidy.
If the anti-avoidance rule applies, the CRA may assess a penalty equal to 25% of the amount of the subsidy claimed. This is in addition to the requirement that the employer repay the subsidy that was improperly claimed.
The Department of Finance has emphasized that existing summary and indictable offences in the ITA could also apply. This includes imprisonment for up to 5 years for anyone making, or participating in making, a false or deceptive statement.
Interaction With Other Government Assistance
An entity that is eligible for both the 10% Subsidy and the CEWS may not claim benefits under both. Any amount received under the 10% Subsidy in respect of remuneration paid to an employee would generally be required to be reduced from the amount claimed under the CEWS in respect of that same remuneration (see “Amount of Subsidy” above).
For employers and employees who participate in a Work-Sharing program, EI benefits received by employees under the Work-Sharing program for a qualifying period will reduce the amount of the employer’s subsidy for that qualifying period.
Any wage subsidy received by an eligible entity would be considered government assistance which must generally be included in the employer’s taxable income in the taxation year in which the subsidy is received (except in the case of tax-exempt entities).
In contrast to the general taxpayer privacy and confidentiality requirements in the ITA, there is a provision in the CEWS legislation that allows the CRA to communicate or otherwise make available to the public, in any manner that the CRA considers appropriate, the name of any person or partnership that makes an application for the CEWS.
The reported cost of the CEWS is $73 billion. Presumably, some of this staggering number will be offset by income taxes collected on salary and wages paid to employees under the program and a reduction of benefits paid under the Canada Emergency Response Benefit and Employment Insurance programs. Although the CEWS will be considered taxable government assistance for a taxable employer, the income inclusion should generally be offset by a deduction for employee remuneration.
We understand the Canadian government’s concern for the potential abuse of this generous program. However, we anticipate that there will be many instances of confusion and/or honest mistakes when employers make claims under this program. There will be genuine disagreements regarding, for example, the computation of gross revenue and baseline remuneration, the application of the anti-abuse provisions, and the sufficiency of efforts to maintain pre-crisis earnings, among other possible disputes.
Another provision that may have received little attention, at least initially, is that in contrast to the strict taxpayer privacy and confidentiality provisions in the ITA, the Canadian Government has specifically included a provision in the legislation that will allow it to publicize the names of any entity that applies for the CEWS. Applicants should be mindful of this unusual provision when preparing their application, given that there could be unintended consequences to this kind of publicity, especially if it is later determined that an entity somehow improperly took advantage of the program or filed a claim based on inaccurate or incomplete information.
Employers will need to determine whether they qualify for the CEWS and, if so, the impact it will have on their staffing decisions. The program is structured so as to encourage employers to both limit the number of future lay-offs and recall employees that have already been laid-off. In appropriate circumstances, other measures such as temporary wage reductions can be used in concert with CEWS to facilitate the objectives of the legislation. What steps an employer will want to take as a result of the CEWS will vary from organization to organization and will require a detailed assessment of each organization’s current financial position and its short and medium term business prospects.
Because this is a CRA-administered program, we suggest that all best practices normally followed by taxpayers to comply with our self-assessment system be equally applied here, including seeking help interpreting the most up-to-date legislation and CRA guidance, doing the proper due diligence, and keeping contemporaneous records and documentation.
We are committed to helping employers navigate the CEWS and will provide further interpretative information communicated by the federal government as it becomes available.
 Unless otherwise indicated, all statutory references are to the ITA.
 As defined in subsection 149.1(1). A related business for a registered charity is generally: (i) a business that is run substantially by volunteers, or (ii) a business that is linked to a charity’s purpose and subordinate to that purpose.
 Including agricultural organizations, boards of trade, chambers of commerce, non-profit SR&ED corporations, and labour organizations.
 The CRA generally interprets this phrase as meaning 90% or more.
 Baseline remuneration refers to the average weekly eligible remuneration paid to eligible employees from January 1, 2020 to March 15, 2020, excluding any period of seven or more consecutive days for which the employee was not remunerated.