On April 1, 2020, Finance Minister Bill Morneau and other cabinet colleagues announced the general parameters of the new Canada Emergency Wage Subsidy (the “CEWS”) that was first announced by Prime Minister Justin Trudeau on March 27th.
It is generally proposed that the new measure will provide a monthly subsidy equal to 75 per cent of salary, wages and other remuneration paid by eligible employers (up to $847/week per employee) during a period of 12 weeks from March 15, 2020 to June 6, 2020, inclusively.
Additionally, the following points were clarified:
- eligible employers will include “taxable corporations” that are publicly-listed and foreign-controlled;
- eligible employers must attest to a reduction of gross revenue of at least 30 per cent on a monthly basis when compared to the same month in 2019 (see “Amount of Subsidy” below);
- there will be no cap on the total amount of the subsidy that an eligible employer may claim; and
- the CEWS will not be immediately available as the Canada Revenue Agency (the “CRA”) will need several weeks to setup an online portal through which the subsidy will be administered.
This measure is in addition to the 10 per cent temporary wage subsidy (the “10% Subsidy”) that was previously implemented by the federal government under the COVID-19 Emergency Response Act that was passed into law on March 25, 2020. Employers who are eligible for both programs, may only claim a subsidy under one or the other.
Please note that draft legislation implementing the CEWS has not yet been released. The information below is based on the News Release and Backgrounder published by the Department of Finance on its website on April 1, 2020, as well as comments made by Senior Finance Officials during a technical media session following the Finance Minister’s press conference. Many important details have yet to be confirmed. We highlight some questions and comments raised by our colleagues and clients in the discussion below. The final program passed by Parliament may differ considerably from this early description of the CEWS.
Given this uncertainty, in many cases, it may be prudent to hold off on taking steps to recall employees from layoff or restart paying employees until the final details regarding qualification for the CEWS are known.
The Department of Finance states that “individuals, taxable corporations, and partnerships consisting of eligible employers as well as non‑profit organizations and registered charities” will be eligible for the CEWS.
Unlike the 10% Subsidy, eligible employers under the CEWS appear to include Canadian subsidiaries of foreign corporations as well as publicly-traded corporations and companies controlled by public corporations. This casts a wide net and is a vast expansion over the types of employers eligible under the 10% Subsidy.
It is not clear at this time whether a “taxable corporation” must be resident in Canada or if it would also include, for example, a non-resident corporation that carries on business in Canada through a permanent establishment. It is also unclear whether the reference to individuals includes trusts or is only intended to include sole proprietors (and individual partners, in the case of partnerships).
The Department of Finance notes that public bodies such as municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals would not qualify as eligible employers.
30% Revenue Drop Test
Only eligible employers who suffer a drop in gross revenue of at least 30 per cent in March 2020, April 2020 or May 2020, when compared to the same month in the previous year (2019), would be eligible to access the subsidy. Eligible employers that were established after February 2019 (such as start-ups), will also be eligible if they realize a 30 per cent drop in gross revenue, calculated by comparing monthly revenues in March 2020, April 2020 and May 2020 to another “reasonable benchmark”.
Gross revenue for purposes of the 30% test is the eligible employer’s revenue from its business carried on in Canada and earned from arm’s length sources. It would be computed using the employer’s “normal accounting method” (which may differ from methods used for income tax purposes). The amount would exclude revenues from “extraordinary items and amounts on account of capital”. The amount of any wage subsidy received by the employer in a given month would be ignored for the purpose of measuring year-over-year changes in monthly revenues.
For non-profit organizations (“NPOs”) and registered charities for which the revenue test would not typically be relevant given their unique source of funding (i.e., donations, fundraising proceeds, government grants, etc.), the Department of Finance has stated that it is committed to working with the sector to define a test that would be more appropriate for their circumstances.
Each eligible employer will be required to attest to the 30% decline in gross revenue when applying for the subsidy each month (see “Claiming the Subsidy” below).
Amount of Subsidy
If an eligible employer meets the 30 per cent test described above, it may claim a subsidy on remuneration paid to eligible employees during the relevant “claiming period”:
Reference Period for Eligibility
March 15 - April 11
March 2020 over March 2019*
April 12 - May 9
April 2020 over April 2019*
May 10 - June 6
May 2020 over May 2019*
*Or other “reasonable benchmark” for eligible employers established after February 2019.
For example, if an eligible employer meets the 30% test for March 2020, it would be eligible for a wage subsidy on salary and other remuneration paid from March 15 to April 11, inclusively.
The Department of Finance has confirmed that there will be no overall limit on the amount of the subsidy that an eligible employer may claim.
The amount of the subsidy is calculated on a per employee basis and is equal to the greater of:
1. 75 per cent of the actual amount of remuneration paid to the employee, up to a maximum weekly benefit of $847; and
2. the actual amount of remuneration paid to the employee, up to a maximum weekly benefit of $847 or 75 per cent of the employee’s “pre-crisis weekly remuneration”, whichever is less.
It appears that the amount referenced in (1) targets remuneration paid to new employees, whereas the amount referenced in (2) appears to target remuneration paid to existing and former employees (i.e., individuals who were employed prior to March 15), though such details remain to be confirmed. If accurate, this means that employers may be eligible for a 100% subsidy on the first 75 per cent of pre-crisis remuneration paid to existing and former employees (up to $847 weekly), but only a 75 per cent subsidy on salaries and wages paid to new employees.
For example, if an existing or former employee earned $1,000 per week prior to 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 weekly, 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. However, such details remain to be confirmed.
The Canadian government has repeatedly emphasized that employers “must make their best effort” to maintain existing employees’ pre-crisis earnings (i.e., top-up the remaining 25%), but has suggested that this will not be a requirement. It is not clear at this time what the consequences or penalties (if any) would be for the failure to do so or how such efforts could be established to the satisfaction of the CRA.
Remuneration paid to employees who do not deal at arm’s length with their employer (as is typically the case in an owner-manager context) will be eligible for the CEWS. However, senior officials from the Department of Finance have suggested that such remuneration will only be eligible for the subsidy if the non-arm’s length employee was employed prior to March 15, 2020. Non-arm’s length employees who are newly added to the payroll appear to be excluded. This remains to be confirmed.
Eligible remuneration may include salary, wages, and other remuneration but will not include other forms of employment income, such as severance pay (i.e., a retiring allowance) and certain other amounts such as stock option benefits or taxable benefits resulting from the personal use of a corporate vehicle.
Claiming the Subsidy
Eligible employers must submit online applications for each period shown in the table above through their My Business Account or a dedicated web-based application. Although it is not expected that the CRA will be conducting any pre-approval or review of eligibility prior to releasing funds, employers must keep records demonstrating their eligibility, including with respect to their 30 per cent or more reduction in arm’s length revenue and remuneration paid to employees.
Employers will be expected to honestly attest to their eligibility during the application process. If eligibility requirements are not met, the CRA will reassess ineligible employers for all or a portion of any subsidy received under the CEWS. The Canadian government is proposing to enact “severe” new anti-abuse provisions and offences to ensure compliance.
We understand that it could take up to three to six weeks to have the online portal ready to receive applications. Accordingly, it could be several weeks before employers receive any wage subsidy under the CEWS program. As discussed below, immediate relief may be available under the 10% Subsidy.
The Department of Finance promises that more details about the application process will be made available shortly.
Interaction With Other Government Assistance
An employer 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. No double dipping will be permitted.
In addition, an employer would not be eligible to claim the CEWS for remuneration paid to an employee for a week that falls within a 4-week period for which the employee is eligible for the Canadian Emergency Response Benefit (i.e., the $2,000 monthly benefit available to individuals who are not working as a result of COVID-19).
Any wage subsidy received by an employer 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 an NPO or registered charity).
The reported cost of the CEWS will be $71 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 Canadian 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 relevant test for computing gross revenue for a particular employer, the “reasonable benchmark” period for employers established after February 2019, whether the “existing” employee benefit or the “new” employee benefit applies to a particular employee, and the sufficiency of efforts to maintain pre-crisis earnings, among other possible disputes.
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 information in this regard as it becomes available.