The legislation implementing the Canada Emergency Wage Subsidy (CEWS) was passed into law on April 11.  The CEWS was introduced upon realization that the initial 10 per cent wage subsidy (further described in RSM’s Tax Alert) was insufficient, both in regards to the number of employers it applied to and the amount the subsidy provided, to have a meaningful impact on keeping Canadians employed and businesses afloat. While it is intended to subsidize wages from March 15 to June 6, the legislation is drafted in a manner which allows it to be extended as Parliament sees fit.

What businesses are considered eligible employers?

The CEWS is available to “eligible employers”. Basically, all employers, including taxable corporations, individuals, trusts, registered charities and not-for-profit entities, other than public bodies (i.e. Crown corporations, government bodies, public schools, etc.) can be considered eligible employers if their revenues have dropped sufficiently for each of three 4-week claim periods consisting of March 15 to April 11, April 12 to May 9 and May 10 to June 6.  The revenue drop tests are 15 per cent for the month of March and 30 per cent for April and May 2020, respectively. The drop is determined by comparing the revenues for the month to that of the same month in 2019 or the average of revenues earned in January and February 2020.  The same comparison method must be used for all three claim periods.  Revenues can be calculated on a cash or accrual basis and the same basis must be used for all three periods.

Although claims must be filed for each month, an employer who qualifies in one month is deemed to qualify for the next month so that funding of the subsidy is not delayed. 

Calculating revenue

When initially announced, the revenue tests were to be determined by excluding revenue from non-arm’s length entities.  For example, assume one company manufactures a product, all of which is sold to a non-arm’s length distributor and the distributor sells the product to arm’s length customers. Under the original program, the distribution company could have a significant drop in its revenues and qualify for the CEWS but most of the employees involved are in the manufacturing company.  The manufacturing company would not qualify for the subsidy as its revenues for each of the periods being compared would be zero if non-arm’s length revenues are excluded. The legislation addresses this issue in two ways.

Employers who are “affiliated” can elect to calculate revenues on a consolidated basis. As a result, only revenue from arm’s length third parties will be considered. However, the consolidation method cannot be used selectively, meaning that all affiliated eligible employers within the group must report revenue for purposes of the CEWS on a consolidated basis. This may or may not help depending on the amount and proportion of arm’s length revenues by the members of the group. For example, one member of the affiliated group may consistently have high revenues such that on a consolidated basis there is not a sufficient drop in revenue and no company in the group will qualify. On the other hand, the revenue drop for one company in the group could be so large that companies within the group who would otherwise not qualify, would satisfy the revenue decline test.

Alternatively, eligible entities that “earn all or substantially all” (an expression that the Canada Revenue Agency (“CRA “) views as meaning 90 per cent or more), of their revenue from a non-arm’s length person can elect to apply the revenue decline test to the revenues of that non-arm’s length person to determine eligibility for the CEWS.

Amount of subsidy

While there is no limit to the total amount of subsidy an employer can receive, there is a limit to the amount of subsidy which will be paid in respect of any particular employee. For employees who were hired prior to March 15, the subsidy will be calculated as the greater of:

• 75 per cent of that employee’s actual remuneration paid for the week to a maximum of benefit of $847 per week; and
• 75 per cent of that employee’s pre-crisis weekly remuneration, or the actual remuneration paid, whichever is less, to a maximum of $847 per week. 

As a result of this formula, if an existing employee earned a weekly salary of $1,129 prior to the crisis and it was reduced to $847 post-crisis, the subsidy for that employee would be $847 or the full amount of his post-crisis salary. However, if the employee’s post-crisis remuneration is less than 75 per cent of pre-crisis remuneration, the subsidy will be calculated as the least of the actual remuneration paid and $847 per week. For the example above, if the pre-crisis remuneration was reduced to $600, the subsidy would be $600.

For those employees hired during the period the subsidy program is in place, the subsidy is calculated as the least of 75 per cent of their weekly remuneration and $847 per week.

The legislation also permits a subsidy for employees who do not deal at arm’s length with the employer, (i.e. example an owner/manager or individuals related to the owner), but only if that person was employed prior to March 15. In this case, the subsidy will be limited to the least of 75 per cent of the pre-crisis remuneration and $847 per week.

Taxable benefits, other than severance payments, such as stock option benefits and the benefit from using an employer provided automobile, are included in an employee’s remuneration for purposes of calculating the subsidy. 

For employees on paid leave, employers can supplement the subsidy by an amount equal to the employer’s share of Employment Insurance and Canada Pension Plan payments in respect of those employees’ wages.

The CEWS will be reduced by any amount of 10 per cent COVID-19 relief wage subsidy received by the employer.  Where an employer participates in the “work sharing program”, under which employees agree to work less than their normal hours at reduced pay, the CEWS will be reduced to take into account the Employment Insurance benefits the employee receives.

The legislation essentially treats the amount of a subsidy as an overpayment of income taxes by a taxpayer with the amount paid to employers as a refund of that overpayment. While partnerships are not taxpayers, the legislation deems them to be for purposes of the CEWS. Presumably, payment will be in the form of direct deposit, for taxpayers who choose so, or by cheque. The amount of subsidy received will be fully taxable in the hands of the employer in the year it is received as are all other government subsidies and forgivable loans. However, if there are any federal tax credits calculated with regards to the amount of remuneration paid, the subsidy will not be included in that remuneration.

In situations where an inappropriate CEWS claim is the result of gross negligence by the employer, the employer could be subject to a penalty of 50 per cent of the overpayment. A penalty of 25 per cent of the subsidy could also be applied if employers enter into transactions, the purpose of which is to reduce their revenues so that they are eligible for the subsidy.

How to apply

In order to apply, the employer must have a business number with the CRA for purposes of making or withholding payroll remittances on March 15, 2020. The CRA is processing CEWS applications through the payroll program (RP) account, so businesses with multiple RP accounts will have to file a separate application for each account. An application is made through the “My Business Account”, an internet based portal on the CRA website. In the alternative, if you represent a business, you may apply using the “Represent a Client” option. Applications will be operational on Monday, April 27, 2020.

The person responsible for the financial activities of the employer will be acquired to attest the completeness and accuracy of the information submitted and the employer is required to maintain records that support it.

For reasons that are not clear, the legislation contains a provision allowing the CRA to make public the names of employers who have made an application for the subsidy. This could only serve as a detriment to make an application for concerns of customer disapproval or competitive disadvantage.

Despite a few flaws, CEWS is beneficial

Although not without some flaws, the CEWS is a very generous program.  While unemployment will most likely continue to be very high for some time, this subsidy is a welcome stopgap until the crisis is over and the economy has restarted in full.