On April 11, 2020, Bill C-14 – A second Act respecting certain measures in response to COVID-19, received Royal Assent, which created the Canada Emergency Wage Subsidy (the Subsidy) by adding section 125.7 to the Income Tax Act.
The Subsidy is designed to enable employers to keep employees on payroll, to enable employers to re-hire workers that were previously laid off, and to help employers hire new workers during the COVID-19 pandemic.
The Subsidy was initially in place for a 24-week period from March 15 to August 29, 2020. However, on July 27, 2020, Bill C-20 – An Act respecting further COVID-19 measures, received royal assent, which extended the Subsidy to November 21, 2020, and gave the Government the ability to extend the Subsidy to December 31, 2020, by regulation.
On November 19, 2020, Bill C-9 – An Act to amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy) received royal assent, which provided that the CEWS could be extended by regulation until June 30, 2020.
The Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) are both currently set to expire in June 2021. Federal Budget 2021 proposes the following changes to the CEWS and CERS:
- Extend CEWS and CERS until September 25, 2021, and gradually decrease these subsidies beginning July 4, 2021 (calculations have not yet been proposed);
- The government will seek legislative authority to further extend the CEWS and CERS until November 20, 2021 if required; and
- Any publicly listed corporation receiving the wage subsidy and found to be paying its top executives more in 2021 than in 2019 will need to repay the equivalent in wage subsidy amounts received for any qualifying period starting after June 5, 2021 and until the end of the wage subsidy program.
Eligible entities
The following entities may qualify for the Subsidy as “eligible entities”:
- a corporation that is not tax-exempt;
- an individual;
- a registered charity;
- certain tax-exempt entities (including agricultural organizations, boards of trade or chambers of commerce, non-profit corporations for scientific research and experimental development, labour organizations or societies or benevolent or fraternal benefit societies or orders, and non-profit organizations) other than public institutions; and
- a partnership, each member of which is a person or partnership described in this list.
On May 15, 2020, the government extended eligibility for the Subsidy to the following additional groups, provided they meet all other eligibility criteria:
- partnerships that are up to 50-per-cent owned by non-eligible members;
- Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible employers;
- registered Canadian amateur athletic associations;
- registered journalism organizations; and
- non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.
On July 27, 2020, trusts that are not public institutions and trusts that are not exempt from tax under Part I of the Income Tax Act, were added to the definition of an “eligible entity”.
In order to qualify for the Subsidy, employers must have had a business number registered with the Minister to make source deductions on March 15, 2020 (i.e., a CRA business account number with an RP). Bill C-20 allows an employer that does not have its own business number to qualify for the subsidy if the employer used a payroll service provider with a business number to make remittances for source deductions.
Public Institutions
Public institutions, including Crown corporations, municipalities, schools, colleges (aside from non-public schools and colleges noted above), school boards, hospitals, health authorities, public universities, and First Nation bands, do not qualify for the Subsidy.
Partnerships
For the purpose of the Subsidy, a partnership is an eligible employer if each of its members is an eligible employer, including other partnerships that themselves are eligible employers. See also “Partnerships with one or more non-eligible members”, below.
Partnerships are also deemed to be a taxpayer for the purposes of the Subsidy, including for the purpose of repaying any amounts received under the Subsidy, if it is found not to meet eligibility requirements or that are in excess of what the partnership was entitled to.
Expanded list of eligible entities
On May 15, 2020, the government extended eligibility for the Subsidy to the following additional groups. These changes are retroactive to April 11, 2020, which means that the changes apply to the first qualifying period starting March 15, 2020 and to subsequent qualifying periods.
Partnerships with one or more non-eligible members
On May 15, 2020, the government expanded its definition of partnerships: Partnerships will be eligible entities 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% of the fair market value of all interests in the partnership.
Indigenous government-owned businesses
Indigenous government-owned corporations are eligible for the Subsidy, so long as the corporations are carrying on a business and are tax-exempt under the Income Tax Act, as all as their wholly-owned subsidiaries that are carrying on a business and are tax-exempt under the Income Tax Act. As well, partnerships where each partner of the partnership is either an Indigenous government or an eligible employer will be eligible entities for purposes of the Subsidy.
This rule is in addition to the rule for partnerships outlined above. Indigenous governments include First Nation bands, self-governing Indigenous governments, and other comparable Indigenous governing bodies.
Registered Canadian amateur athletic associations
Registered Canadian amateur athletic associations (RCAAAs) are national associations responsible for the promotion of sport on a nation-wide basis, and are heavily involved in the preparation of Canada’s Olympic teams. There are approximately 125 RCAAAs in Canada, including Hockey Canada, Lacrosse Canada, and Biathlon Canada.
Before May 15, 2020, provincial, regional and local members of an RCAAA were already eligible for the Subsidy as they are considered non-profit organizations. However, as of May 15, 2020, the government expanded eligibility to now include the national-level RCAAAs that are tax-exempt under the Income Tax Act (the national-level RCAAAs were previously excluded from the list of “certain tax-exempt entities”).
Registered journalism organizations
Canadian journalism organizations generally qualify for support under the Subsidy. However, before May 15, 2020, non-profit Canadian journalism organizations that register as qualified donees under the new “registered journalism organization” category were ineligible for the Subsidy (as they were previously excluded from the list of “certain tax-exempt entities”). On May 15, 2020, the government addressed this discrepancy and extended eligibility to registered journalism organizations that are tax-exempt under the Income Tax Act.
Non-public educational training institutions
As of May 15, 2020, private colleges and private schools are now considered eligible entities for the purposes of the Subsidy. This includes for-profit and not-for-profit institutions such as arts schools, language schools, driving schools, flight schools, and culinary schools.
Eligible employee
An eligible employee is someone who is employed in Canada by an eligible entity and has not been without remuneration for 14 or more consecutive days in a qualifying period.
Bill C-20 allows employees who have been without remuneration for a period of 14 or more consecutive days in an eligibility period to qualify for the subsidy effective July 5, 2020.
Generally, a non-resident individual employed in Canada during a claim period will qualify as an eligible employee as long as all other conditions to be an eligible employee are met.
Applying for the Subsidy
Applications opened on April 27, 2020. Deadline to apply is before October 2020, however, Bill C-20 extended the deadline to apply to January 31, 2021.
Applications for the Subsidy will be submitted through CRA’s MyAccount website. Applications in respect of a claim period can be made only after the end of the claim period, provided the eligible employer has paid the eligible remuneration that it is claiming for that period.
Attestation
The individual who has principal responsibility for the financial activities of the employer must attest that the application is complete and accurate in all material aspects.
The CRA’s authority to publish names
Employers should note that the Minister can name any person or partnership that makes an application for the Subsidy. The CRA has indicated that it is finalizing the creation of a database called the “CEWS Employer Search” to show which corporations have received the Subsidy in order to provide transparency to Canadians. The CRA will not be publishing detailed employer information.
Representatives may apply on behalf of clients
Representatives (authorized at a level 2 or 3) will be able to apply for the CEWS on behalf of their clients through the Represent a Client service, as well as through the Web Forms application.
Processing of the CEWS
The processing of the CEWS will be performed at the payroll program account level. This means that employers will have to file a separate application for each payroll program account. For example, if an employer has two payroll program accounts (i.e., “RP” numbers) and are claiming the CEWS for eligible employees under each account, the employer will need to file two (2) separate applications.
Payroll cycles
An eligible employer’s payroll frequency (whether bi-weekly, semi-monthly, monthly, etc.) has no effect on the calculation of eligible remuneration paid for purposes of the Subsidy.
If an employer’s payroll cycle does not align with the wage subsidy for the claim periods, they will have to do a manual calculation to reflect the remuneration paid in respect of that claim period. Employers will not be permitted to use an average of the daily wages paid. The eligible remuneration reported on an employer’s wage subsidy application must reflect the actual amount paid in respect of the claim period.
Payment of the Subsidy
For applications that pass the CRA’s system validations, a payment will be issued automatically, though some applications may be selected for a pre-claim review. Generally, employers can expect to receive their payment within 10 business days if registered for direct deposit with the CRA. Employers not registered for direct deposit will need to allow for additional time for their cheque to be delivered by mail.
For employers expecting an amount of $25 million or more, they must be registered for both direct deposit and the Large Value Transfer System.
Reporting requirements
Employers will be expected to report the amount of the CEWS that was used to pay each of their employees’ salaries by using a special code in the “Other information” area at the bottom of the employees’ T4 slips. More information is expected to be released on the T4 reporting requirements before the end of the year.
Recordkeeping
Employers must keep records supporting their CEWS claim. This includes maintaining adequate books and records to ensure that their claim is accurate and complete, and clearly supports their eligibility for the CEWS for a claim period.
Books and records includes ledgers, journals, financial statements, contracts, elections, calculations, or other working papers, payroll records, sales invoices, and any other relevant document. For more information about adequate records and recordkeeping, employers may refer to the What are records and who has to keep them webpage.
Adequate calculations should generally be prepared and maintained through working papers in order for employers to support their claim in the CEWS application that revenue for a current reference period has declined sufficiently from the relevant prior reference period.
In addition to showing the calculation of the wage subsidy claimed for each eligible employee, the documentation maintained must also include an analysis of the nature of the remuneration. Dividends and other ineligible remuneration should be recognized and then clearly indicated as having been removed from the calculation. Any supporting documentation should be retained.
A signed attestation, and record of any elections made for the purposes of determining an employer’s qualifying revenue, must also be maintained and made available to the CRA upon request.
Amount of the Subsidy
For the first four qualifying periods, between March 15, 2020 and July 4, 2020, the Subsidy is up to a maximum of $847 per week per employee for up to three months, retroactive to March 15, 2020.
The Subsidy for each eligible employee is the greater of (a) and (b):
Where (a) is the least of the following:
- 75% of eligible remuneration paid to the eligible employee in respect of that week,
- $847, and
- Nil, if the eligible employee does not deal at arm’s length with the employer;
and,
where (b) the least of the following:
- the amount of the eligible remuneration paid to the eligible remuneration paid to the eligible employee in respect of that week,
- 75% of the baseline remuneration in respect of the eligible employee determined for that week, and
- $847
The Subsidy for period 5 and all subsequent periods (i.e. from July 5th onwards), will be based on the calculations set out in Tables 1 and 2 below. Furthermore, baseline remuneration will not be used to calculate the Subsidy for arm’s length employees starting on August 30th, the first day of the 7th qualifying period.
The Subsidy would consist of two parts effective July 5, 2020:
- a base subsidy would be available to all eligible entities that are experiencing any decline in revenues. The Subsidy amount will vary depending on the scale of revenue decline; and
- a top-up subsidy of up to an additional 25 per cent for those eligible entities that have been most adversely affected by the COVID-19 crisis.
The two-part CEWS would apply with respect to the remuneration of active employees. A separate CEWS rate structure would apply to furloughed employees (as described further below).
Base Subsidy
The base subsidy for the periods starting after July 5, 2020 would be calculated as set out in the following tables published by the Department of Finance Canada:
| Table 1: Rate Structure of the base CEWS | |||||
|---|---|---|---|---|---|
| Timing | Period 5*: July 5 – August 1 |
Period 6*: August 2 – August 29 | Period 7: August 30 – September 26 | Period 8: September 27 – October 24 | Period 9: October 25 – November 21 |
| Maximum weekly benefit per employee | Up to $677 | Up to $677 | Up to $565 | Up to $452 | Up to $226 |
| Revenue drop | |||||
| 50% and over | 60% | 60% | 50% | 40% | 20% |
| 0% to 49% | 1.2 x revenue drop (e.g., 1.2 x 20% revenue drop = 24% base CEWS rate) |
1.2 x revenue drop (e.g., 1.2 x 20% revenue drop = 24% base CEWS rate) |
1.0 x revenue drop (e.g., 1.0 x 20% revenue drop = 20% base CEWS rate) |
0.8 x revenue drop (e.g., 0.8 x 20% revenue drop = 16% base CEWS rate) |
0.4 x revenue drop (e.g., 0.4 x 20% revenue drop = 8% base CEWS rate) |
| * In Periods 5 and 6, employers who would have been better off in the CEWS design in Periods 1 to 4 would be eligible for a 75% wage subsidy if they have a revenue decline of 30% or more. As described further below (see Safe harbour rule for Periods 5 and 6). | |||||
Top-up Subsidy
A top-up CEWS of up to 25 per cent would be available to eligible entities that were the most adversely impacted by the pandemic. Generally, an eligible entity’s top-up CEWS would be determined based on the revenue drop experienced when comparing revenues in the preceding three months to the same months in the prior year.
Under the alternative approach to the calculation of baseline revenues, an eligible entity’s top-up CEWS would be determined based on the revenue drop experienced when comparing average monthly revenue in the preceding three months to the average monthly revenue in January and February 2020.
| Table 2: Rate structure of the top-up CEWS | ||
|---|---|---|
| 3-month average revenue drop | Top-up CEWS rate | Top-up calculation = 1.25 x (3 month revenue drop – 50%) |
| 70% and over | 25% | 1.25 x (70%-50%) = 25% |
| 65% | 18.75% | 1.25 x (65%-50%) = 18.75% |
| 60% | 12.5% | 1.25 x (60%-50%) = 12.5% |
| 55% | 6.25% | 1.25 x (55%-50%) = 6.25% |
| 50% | 0.0% | 1.25 x (50%-50%) = 0.0% |
There is no limit on how much an eligible entity is entitled receive in Subsidies.
Safe harbour rule for Periods 5 and 6
For Periods 5 and 6, an eligible entity would be entitled to a CEWS rate not lower than the rate that they would be entitled to if their entitlement were calculated under the CEWS rules that were in place for Periods 1 to 4.
This means that in Periods 5 and 6, an eligible entity with a revenue decline of 30 per cent or more in the relevant reference period would receive a CEWS rate of at least 75 per cent or potentially an even higher CEWS rate using the new rules outlined above for the most adversely affected entities (up to 85 per cent).
Baseline remuneration
Baseline remuneration is defined as the average weekly eligible remuneration paid to the eligible employee by the eligible employer during the period that begins on January 1, 2020 and ends on March 15, 2020, excluding any period of seven or more consecutive days for which the employee was not remunerated.
Bill C-20 amended the definition of baseline remuneration to allow eligible entities to use the following alternative baseline periods to the original baseline period of January 1, 2020 to March 15, 2020:
| Table 3: Alternate baseline periods for determining baseline remuneration | ||
|---|---|---|
| Qualifying period | Qualifying period dates | Alternate baseline periods to January 1, 2020 to March 15, 20 |
| 4 | June 7, 2020 to July 4, 2020 | March 1, 2019 to May 31, 2019 March 1, 2019 to June 30, 2019 |
| 5 |
July 5, 2020 to August 1, 2020 |
July 1, 2019 to December 31, 2019 |
| 6 |
August 2, 2020 to August 29, 2020 |
July 1, 2019 to December 31, 2019 |
| 7 | August 30, 2020 to September 26, 2020 | July 1, 2019 to December 31, 2019 |
| 8 | September 27, 2020 to October 24, 2020 | July 1, 2019 to December 31, 2019 |
| 9 | October 25, 2020 to November 21, 2020 | July 1, 2019 to December 31, 2019 |
| 10 | A period that ends no later than December 31, 2020 | July 1, 2019 to December 31, 2019 |
Employers can choose which period to use on an employee-by-employee basis.
Employers do not have to “top-up” the salaries of their employees so that they are equivalent to their baseline earnings in order to receive the Subsidy.
Starting in the 7th qualifying period on August 30, 2020, baseline remuneration will not be used for calculating the Subsidy for arm’s length employees.
CEWS for Furloughed Employees
For Periods 5 and 6, the subsidy calculation for a furloughed employee (an employee on leave with pay) would remain the same as for Periods 1 to 4. It would be the greater of:
- For arm’s-length employees, 75 per cent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
- 75 per cent of the employee’s pre-crisis weekly remuneration up to a maximum benefit of $847 per week or the amount of remuneration paid, whichever is less.
Beginning in Period 7, CEWS support for employees on leave with pay would be adjusted to align with the benefits provided through the Canada Emergency Response Benefit (CERB) and/or Employment Insurance (EI).
The employer portion of contributions in respect of the Canada Pension Plan, Employment Insurance, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in respect of furloughed employees would continue to be refunded to the employer as set out below.
Eligible remuneration
Eligible remuneration includes: (i) salary, wages or other remuneration, and (ii) fees, commissions or other amounts for services.
Controlled tips, as well as declared tips, are also “eligible remuneration” for the purpose of the Subsidy. Controlled tips are tips that an employer controls or possesses and then must pay to the employee. Declared tips (in Québec only) is the amount of tips that provincial law requires an employee to declare to their employer along with their controlled tips.
Eligible remuneration does not include the following amounts:
- retiring allowances;
- stock options;
- any amount that can reasonably be expected to be paid or returned, directly or indirectly to the employer, or a person with which the employer does not deal at arm’s length, or another person or partnership at the direction of the employer;
- any amount that is in excess of the employee’s baseline remuneration, if the employee is reasonably expected to be paid a lower weekly amount than the baseline remuneration, and one of the main purposes of the arrangement is to increase the amount of the Subsidy received by the employer;
- dividends;
- direct tips (tips paid directly by the customer to the employee, and for which the employer has no control over the tip amount or its distribution).
Dividends paid to an employee who is also a shareholder is not considered “eligible remuneration” and therefore, will not be used in the computation of the Subsidy.
New employees
New employees that are hired after March 15, 2020 may be entitled to the Subsidy, however, the Subsidy will be limited to the 75% of their eligible remuneration, up to $847.
Non-arm’s length employees
Non-arm’s length employees will only be eligible for the Subsidy if they were employed by their employer prior to March 15, 2020 and the Subsidy for these employees will be limited to 75% of their baseline remuneration (i.e. average salary that they were paid from January 1, 2020 to March 15, 2020).
Retroactively hiring and paying employees
Employees who have been laid off or furloughed can become eligible retroactively for the CEWS, as long as employers rehire the laid off or furloughed employees, and their retroactive pay and status meet the eligibility criteria for the claim period. Employers must rehire and pay such employees before employers can include them in calculations for the subsidy.
CRA Calculator
An online calculator is available to employers who are interested in applying for the Subsidy. The calculator will provide employers with an estimate of how much money they will be able to claim through the CEWS program.
The calculator allows employers to plug in the number of eligible employees and their gross payroll to provide an estimate of the amount available to their business through the CEWS. Employers may access the calculator, here.
Refund for certain payroll contributions
Employers will be entitled to a refund of 100% of the employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Québec Pension Plan, and the Québec Parental Insurance Plan for employees who are on leave with pay and are also eligible for the Subsidy.
An employee is 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 will not be available for eligible employees that are on leave with pay for only a portion of a week.
This refund is not subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the Subsidy. There is no overall limit on the refund amount that an eligible employer may claim.
Employers will be required to continue to collect and remit employer and employee contributions for CPP and EI as usual and then they will apply for a refund for their contributions at the same time that they apply for the Subsidy.
Declines in revenue
In order to qualify for the Subsidy, for the first four periods, an employer must have a decline in “qualifying revenue” of at least 15% in March and at least 30% in April, May or June when compared to a “prior reference period”. The employer can use the following as “prior reference periods”:
- The same month of the preceding year (i.e. qualifying revenue of March 2020 is compared to the prior reference period of March 2019); or
- An average of January and February 2020.
The average of January and February 2020 can only be used as prior reference periods if either:
- the employer was not carrying on business or otherwise carrying on its ordinary activities on March 1, 2019, or
- if the employer elects to use January and February 2020 as the prior reference periods for all qualifying periods between March 15, 2020 and July 4, 2020 and/or all qualifying periods between July 5, 2020 and December 31, 2020.
If an eligible entity qualifies for the Subsidy for one of the first three qualifying periods (ie. period 1 from March 15 to April 11, period 2 from April 12 to May 9, or period 3 from May 10 to June 6), then it is deemed to qualify for the immediately following qualify period.
Starting in period 5, Bill C-20 allows eligible entities to use the greater of its percentage revenue decline in the current period and that in the previous period for the purpose of determining its qualification for the base CEWS and its base CEWS rate in the current period.
As set out in the table below, there are currently four claim periods:
| Period | Dates | Required decline in qualifying revenue | Reference period | No top-up subsidy |
|---|---|---|---|---|
| 1 | March 15 to April 11, 2020 | 15% | March 2020 compared to
|
|
| 2 | April 12 to May 9, 2020 | 30% | April 2020 compared to
|
|
| 3 | May 10 to June 6, 2020 | 30% | May 2020 compared to
|
|
| Bill C-20 added the following periods | ||||
| Period | Dates | Required decline in qualifying revenue | Reference period for base subsidy | Reference period for top-up |
| 4 | June 7, 2020 to July 4, 2020
|
30%
|
June 2020 compared to
|
n/a |
| 5 | July 5, 2020 to August 1, 2020
|
See table above | June 2020 compared to
July 2020 compared to
|
April to June 2020 over April to June 2019
or April to June 2020 average over January and February 2020 average* |
| 6 | August 2, 2020 to August 29, 2020
|
See table above
|
July 2020 compared to
August 2020 compared to
*CRA to confirm reference periods for this newly announced claim period. |
May to July 2020 over May to July 2019
or May to July 2020 average over January and February 2020 average* |
| 7 | August 30, 2020 to September 26, 2020 | See table above | August 2020 compared to
September 2020 compared to
|
June to August 2020 over June to August 2019
or June to August 2020 average over January and February 2020 average* |
| 8 | September 27, 2020 to October 24, 2020 | See table above | September 2020 compared to
October 2020 compared to
|
July to September 2020 over July to September 2019
or July to September 2020 average over January and February 2020 average* |
| 9 | October 25, 2020 to November 21, 2020 | See table above | October 2020 compared to
November 2020 compared to
|
August to October 2020 over August to October 2019
or August to October 2020 average over January and February 2020 average* |
| 10 | A period that ends not later than December 31, 2020 | tbd | tbd | tbd |
| * The calculation would equal the average monthly revenue over the 3 months of the reference period divided by the average revenue for the months of January and February 2020. | ||||
The Minister has the power to add additional qualifying periods that end no later than December 31, 2020 by regulation.
Qualifying revenue
Qualifying revenue is defined as the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity — generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity — in Canada in the particular period.
Qualifying revenue excludes the following:
- extraordinary items;
- amounts derived from persons or partnerships not dealing at arm’s length with the eligible entity; and
- the amount of Subsidy received by the employer.
“Off-calendar” or “floating” calendar months cannot be used for the purposes of determining qualifying revenue. If an eligible entity’s accounting period does not align to the end of the month cut-off, then the eligible entity will have to do a manual adjustment compute qualifying revenue.
Investment revenue
Investment revenue, such as interest or dividends from investments in securities, that arises in the course of an eligible employer’s ordinary activities in Canada in the particular period, is not an extraordinary item or on account of capital, and is included in revenue under its normal accounting practices, it would generally be included in qualifying revenue.
Extraordinary items
The determination of whether an entity has an extraordinary item is a question of fact. Generally, the CRA would expect extraordinary items to meet all three of the following characteristics:
- Not be expected to occur regularly or frequently within several years;
For example, grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.
- Not typical of the normal activities or risks inherent in the normal operations of the entity;
Consideration should be given to the nature of the services or products offered by an entity and the normal environment in which it operates.
- Primarily out of the control of owners or management;
Consideration should be given to the extent that inflows are influenced by the decision of owners or management.
Government assistance
Due to the highly unusual economic impact and response resulting from COVID-19, the CRA would generally consider emergency government assistance, including assistance from provinces and municipalities, directly related to COVID-19 to be an extraordinary item. However, the CRA would not consider COVID-related government assistance to be extraordinary to the extent that it replaces or is meant to replace normal or recurring government assistance.
Registered charities and non-profits
Registered charities are required to include revenues from related businesses, gifts and other amounts received in the course of their ordinary activities in the computation of their qualifying revenues. However, registered charities may elect to exclude funding received from government sources in the determination of their qualifying revenues for all of their prior reference periods and current reference periods.
Similarly, certain tax-exempt entities, including non-profit organizations, must include membership fees and other amounts received in the course of their ordinary activities in their qualifying revenues; however, they may also elect to exclude funding received from government sources from their qualifying revenue for all of their prior reference periods and current reference periods.
Accounting methods
Employers are required to determine their qualifying revenues in accordance with their “normal accounting practices”. However, an employer may make an election to determine its revenues based on the cash method (based on when amounts are actually received) instead of the accrual method (based on when amounts are earned). It is important to note that the election would apply for all of the qualifying periods. Pursuant to Bill C-20, eligible entities that use the cash method of accounting can elect to use accrual based accounting to compute their revenues for the purpose of the Subisdy.
Since the deadline to apply for the Subsidy has been extended to February 2021 pursuant to Bill C-20, employers may wish to wait until after all the qualifying periods in order to determine whether they would benefit by electing to use the cash method of accounting.
Bill C-20 grants the Minister the power to issue a notice of determination. This will provide an appeal process for an appeal to the Tax Court of Canada.
The following entities are permitted to use methods other than their normal accounting methods when calculating their qualifying revenues. The following entities may also choose to apply a different accounting approach in a subsequent claim period, provided that all requirements for the application of that different rule are met for that subsequent claim period.
Group of eligible entities
If a group of eligible entities normally prepares consolidated financial statements, then each member of the group may determine its qualifying revenue separately if every member of the group determines its qualifying revenue on that basis.
Affiliate group of eligible entities
If the eligible entity is a member of an affiliated group of entities, then the qualifying revenue of the group determined on a consolidated basis in accordance with relevant accounting principles is to be used for each member of the group if each member of the affiliated group of entities elects to do so.
Joint venture
If all of the interests of an eligible entity are owed by participants in a joint venture and all of the or substantially all (i.e. 90% or more) of the qualifying revenue of the eligible entity for a qualifying period is in respect of the joint venture, then the eligible entity may use the qualifying revenues of the joint venture. This special accounting method is currently available for the first four qualifying periods; however, this matter has been referred by the CRA to the Department of Finance for review.
Non-arm’s length persons or partnerships
If all or substantially all (i.e. 90% or more) of an eligible entity’s qualifying revenue for a qualifying period is from one or more particular persons or partnerships with which the eligible entity does not deal at arm’s length, then the eligible entity can calculate its qualifying revenues in reference to the qualifying revenues of those non-arm’s length persons or partnerships. The calculation is based on the eligible entity’s proportionate share of the qualifying revenue from each non-arm’s length person or partnership. Each particular person or partnership must elect to calculate their qualifying revenue in this manner along with the eligible entity. It is important to note that the qualifying revenue of the non-arm’s length person or partnership is not limited to income from Canada. This special accounting method is currently available for the first four qualifying periods; however, this matter has been referred by the CRA to the Department of Finance for review.
Amending Applications
An eligible entity can file an amended application for the Subsidy, provided it is filed before the deadline to apply for the Subsidy, which currently January 31, 2021. Where an application form was previously filed for a qualifying period but an election was not filed, the election can be made in an amended application for that qualifying period. However, an eligible entity cannot revoke or amend election by filing an amended application form.
Taxation of the Subsidy
The Subsidy received by an employer would be considered government assistance and would be included in the employer’s taxable income. Employers will be entitled to a corresponding deduction for salary and wages that are paid to employees and the Subsidy will likely be tax neutral in most cases. However, the Subsidy would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration. Therefore, special consideration must be made when an employer applies for the Subsidy if it intends to claim credits such as Film Tax Credits and Scientific Research and Experimental Development Tax Credits. Employers are deemed to have received the Subsidy immediately before the end of the qualifying period.
Non-arm’s length entities
If an employee is employed by two or more qualifying entities that do not deal with each other at arm’s length, then the amount of the Subsidy shall not exceed the amount that would arise if the employee was paid by one of the qualifying entities.
Outstanding returns
Normally, the Minister cannot issue refunds when there are any outstanding returns. However, the Minister is permitted to pay the Subsidy to an employer even if the employer has outstanding returns under the Income Tax Act, the Air Travellers Security Charge Act, or the Excise Tax Act.
Employers should note that the CRA does have the discretion to withhold the amount of the CEWS payment in cases where there is a significant history of not complying with a duty or obligation under tax laws.
Outstanding debts
The CEWS payments will not be automatically applied against any outstanding debts an employer may have with the CRA. However, the legislation gives the CRA the ability to administer the CEWS program fairly and reasonably and allows for a common-sense approach to dealing with situations that prevent compliance with tax laws.
The CRA does have the discretion to reduce the amount of the CEWS if an applicant owes or is about to owe a debt and the CRA determines there is a risk of not collecting all or part of the tax debt.
Ensuring compliance
The CRA will use a combination of automated queries and validation within its data, follow-up phone calls to verify certain elements of the claim when necessary, and more comprehensive post-payment reviews of audits.
The CRA will monitor the initial intake of claims and adjust its queries as necessary. The extent of future post-payment reviews will depend on the conclusions the CRA reaches as it reviews the intake of claims. The CRA will actively monitor the situation to ensure compliance.
Bill C-20 grants the Minister the power to issue a notice of determination. This will provide an appeal process for an appeal to the Tax Court of Canada.
Penalties
Penalty of 25% of Subsidy
An employer that enters into a transaction or participates in an event (or series of transactions or events) or takes an action (or fails to take an action) for the main purpose of reducing its qualifying revenues to receive the Subsidy, then the employer is liable to a penalty of 25% of the amount of the Subsidy.
Gross negligence penalties of 50%
Every person who knowingly, or under the circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of a false statement or omission in an application for the Subsidy is liable to a penalty of up to 50% of the amount of the Subsidy to which the employer was not entitled.
Third-party penalties
If a person (such as an accountant or tax preparer) files or prepares the CEWS application on behalf of an employer, they could be subject to a third-party penalty under the Act, if they know or would reasonably be expected to know, that the application contains false statements, including an omission of information.
Application to Partnerships
Partnerships will be liable to any penalties as if it were a corporation and may have to pay back any Subsidy amount that it received for a claim period.
Temporary Wage Subsidy of 10%
Organizations that do not qualify for the Subsidy may continue to qualify for the previously announced wage subsidy of 10 per cent 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 Subsidy and the 10 per cent wage subsidy for a period, any benefit from the 10 per cent wage subsidy will reduce the amount available to be claimed under the Subsidy in that same period.
Work-Sharing program
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 Subsidy.
The Canada Emergency Response Benefit
Claiming the CEWS for eligible employees who are in receipt of CERB benefits
In certain situations, an eligible employer may be eligible to claim the CEWS in respect of an eligible employee who has received payments under the Canada Emergency Response Benefit (“CERB”) program.
However, the employee must still meet the eligibility criteria for the CEWS. Where an individual has not received any remuneration from the eligible employer for 14 or more consecutive days in a claim period, the individual will not qualify as an eligible employee for that period of employment. Therefore, the eligible employer will not be eligible for the CEWS in respect of that employee for that claim period.
The onus is on the eligible employer to ensure that an employee has received eligible remuneration for more than 14 consecutive days in a claim period, to be eligible for the CEWS in respect of that employee, for that claim period. However, it is the employee’s responsibility to determine their eligibility for the CERB for any period.
Where an employee has received a CERB payment from the CRA for a claim period, and it is later determined that they are no longer eligible for the CERB, whether due to employment or otherwise, there are ways for the employee to return or repay the CERB amount. For details on repayment, employees should visit the Apply for CERB webpage and refer to the “Return or repay CERB” section.
Requirement of eligible employees upon re-hiring or finding a new job
Eligible employees are required to repay the CERB if they no longer meet the eligibility requirements for the four-week period in question. For example, if the eligible employee applied for the CERB for the four-week period of April 12 – May 9. At the time the eligible employee applied, he or she expected to have little or no work or income for the four-week period of April 12 – May 9, but the eligible employee just found out that they have been rehired and will be provided with back-pay for that same four-week period. In this situation, the eligible employee will be asked to repay the CERB for that four-week period of April 12 – May 9.
The conditions under which eligible employees are required to pay back the CERB differ slightly depending on whether it is the first four-week period for which he or she claimed the CERB, or whether it is for his or her subsequent four-week period.
For an eligible employee’s first four-week CERB eligibility period, he or she will need to repay the $2,000 for this period if he or she has or will earn, for a period of two consecutive weeks in this four-week period, more than $1,000 (before taxes) from employment and self-employment income.
For an eligible employee’s second four-week CERB eligibility period, he or she will need to repay the $2,000 for an eligibility period if he or she has or will earn more than $1,000 (before taxes) from employment and self-employment income during that period.
Amalgamations
Corporations formed on the amalgamation of two or more predecessor corporations (or where one corporation is wound up into another) did not qualify for the Subsidy under previous versions of the CEWS legislation since they would not have benchmark revenues to prove a revenue decline or their benchmark revenues may not provide a full picture of their pre-crisis revenues.
Bill C-20 allows corporations formed on an amalgamation of two or more predecessor corporations (or where a corporation is wound up into another), to calculate benchmark revenue for the Subsidy 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 Subsidy.
This change is retroactive to April 11, 2020, which means that it would apply to the first qualifying period starting March 15, 2020 and subsequent qualifying periods.
Asset Sales
Bill C-20 proposes to provide continuity rules for the calculation of an employer’s drop in revenues in certain circumstances where the employer purchased all or substantially all the assets used in carrying on business by the seller.