Date: July 17, 2020
From: Crowe BGK Tax Group
Subject: Modifications to the Canada Emergency Wage Subsidy (CEWS)
On July 17, 2020, Finance Minister Bill Morneau announced extensive changes that the Federal Government would like to bring to the Canada Emergency Wage Subsidy (CEWS) program. Draft legislation implementing these changes was also made available to the public. Below are the highlights of the material shared by the Department of Finance and of the draft legislation.
The CEWS was put in place for an initial 12-week period from March 15 to June 6, 2020, providing a 75% wage subsidy to eligible employers (please refer to our previous publication regarding the rules applicable for the initial CEWS program ). On May 15, 2020 Finance Minister Bill Morneau announced that the Government of Canada would extend the CEWS by an additional 12 weeks to August 29, 2020. The government announced on June 10, 2020 that the same eligibility criteria for the initial three 4-week periods (March 15 to June 6, 2020) would continue to apply for Period 4 (June 7 to July 4, 2020).
Prior to this announcement, the claiming periods under the CEWS program were as follows:
March 15 to April 11, 2020
April 12 to May 9, 2020
May 10 to June 6, 2020
June 7 to July 4, 2020
July 5 to August 1, 2020
August 2 to August 29, 2020
The proposed changes bring minor modifications to the rules applicable to periods 1 to 4, but provide extensive changes to the rules applicable to period 5 and subsequent periods.
The government is proposing a further extension of the CEWS, until December 19, 2020. The extended periods are as follows:
August 30 to September 26, 2020
September 27 to October 24, 2020
October 25 to November 21, 2020
November 22 to December 19, 2020
II. Modified Rules for Periods 1 to 4
A. Implementation of modifications announced on May 15
The proposed draft legislation includes the CEWS modifications that were initially announced on May 15.
These proposed amendments would:
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 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. The Federal Government proposes to amend the CEWS to allow 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 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, which means that it would apply to the first qualifying period starting March 15, 2020 and subsequent qualifying periods.
Under the current rules, trusts are eligible for the CEWS, as they are generally considered to be individuals for tax purposes. The Federal Government proposes to amend the CEWS to better align the tax treatment of trusts and corporations for CEWS purposes. As a result, trusts with employees would continue to be eligible for the CEWS, subject to the following added exceptions:
This change is proposed to apply in respect of the third qualifying period (May 10 to June 6) and any subsequent qualifying period.
B. Implementation of modifications announced on June 10
The proposed draft legislation also includes changes regarding payroll service providers. These changes were initially introduced in a previous bill presented on June 10, which had never been adopted.
More specifically, these changes pertain to the following:
(A) on March 15, 2020,
(I) it employed one or more individuals in Canada,
(II) the payroll for its employees was administered by another person or partnership (referred to in this subparagraph as the “payroll service provider”), and
(III) the payroll service provider had a business number in respect of which it is registered with the CRA to make payroll remittances,
(B) the payroll service provider used its business number to make the payroll remittances in respect of the employees of the employer, and
(C) the CRA is satisfied that the conditions in clauses (A) and (B) are met.
C. Additional flexibility for the computation of the baseline remuneration (or pre-crisis remuneration)
Under the proposed rules, for Period 4, the pre-crisis remuneration of an employee would be based on the average weekly remuneration paid to the employee from January 1 to March 15, 2020; from March 1, 2019 to May 31, 2019; or from March 1, 2019 to June 30, 2019.
II. Modified Rules for Periods 5 and Subsequent
The proposed rules would be applicable until November 21, 2020. The rules that would apply to Period 10 are currently unknown.
Effective July 5, 2020, the CEWS would consist of two parts:
The two-part CEWS would apply with respect to the remuneration of active employees.
A separate CEWS rate structure would apply to furloughed employees.
In addition, a safe harbour would be available to ensure that, through August 29 (periods 5 and 6), employers would have access to a CEWS rate that is at least as generous as they would have had under the initial CEWS structure.
Finally, there are changes to some technical rules impacting the CEWS calculations.
Compared to the existing CEWS rules, the new rules for periods 5 and subsequent are generally more flexible but less generous.
B. Details of the proposed rules
1. CEWS for Active Employees
The overall CEWS rate would be equal to the base CEWS rate plus the top-up CEWS rate.
a) Base Subsidy
Effective July 5, 2020 (i.e., Period 5 and subsequent periods), all eligible employers with a revenue decline would now qualify for CEWS support for active employees.
This base CEWS would be a specified rate, applied to the amount of remuneration paid to the employee for the eligibility period, on remuneration of up to $1,129 per week.
The rate of the base CEWS would now vary depending on the level of revenue decline, and its application would be extended to employers with a revenue decline of less than 30% (see table 1 below). The maximum base CEWS rate would be provided to employers with a revenue drop of 50% or more.
The specified rate would be determined based on the change in an eligible employer's monthly revenues, as described further below.
Table 1 - Rate structure of the base CEWS
July 5 – August 1
Period 6*: August 2 – August 29
Period 7: August 30 – September 26
Period 8: September 27 – October 24
October 25 – November 21
Maximum weekly benefit per employee
Up to $677
Up to $565
Up to $452
Up to $226
50% and over
0% to 49%
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.
Rate structure of the base CEWS, without the top-up
b) Top-up Subsidy
A top-up CEWS of up to 25% would be available to employers that were the most adversely impacted by the pandemic.
Generally, an eligible employer’s top-up CEWS would be determined based on the revenue drop experienced when comparing revenues in the preceding 3 months to the same months in the prior year. Under the alternative approach to the calculation of baseline revenues, an eligible employer’s top-up CEWS would be determined based on the revenue drop experienced when comparing average monthly revenue in the preceding 3 months to the average monthly revenue in January and February 2020.
If an employer had $600,000 in revenue between April 1 and June 30, 2019, and $210,000 in revenue between April 1 and June 30, 2020, the employer would have a 3-month revenue drop of 65%. Under the alternative approach, if an employer had $400,000 in revenue between January 1 and February 29, 2020 (average monthly revenue of $200,000), and $210,000 in revenue between April 1 and June 30, 2020 (average monthly revenue of $70,000), the employer would have a 3-month revenue drop of 65%.
Employers that have experienced a 3-month average revenue drop of more than 50% would receive a top-up CEWS rate equal to 1.25 times the average revenue drop that exceeds 50%, up to a maximum top-up CEWS rate of 25%, which is attained at a 70% revenue decline.
As with the base CEWS rate, the top-up CEWS rate would apply to remuneration of up to $1,129 per week. The top-up CEWS rate for selected average revenue drop levels is illustrated in the table 2 below.
Table 2 - Top-up CEWS rates for selected levels of average revenue drop over the preceding three months
3-month average revenue drop
Top-up calculation= 1.25 x (3 month revenue drop - 50%)
70% and over
1.25 x (70%-50%) = 25%
1.25 x (65%-50%) = 18.75%
1.25 x (60%-50%) = 12.5%
1.25 x (55%-50%) = 6.25%
50% and under
1.25 x (50%-50%) = 0.0%
2. CEWS for Furloughed Employees
For Period 5 and subsequent periods, the CEWS for furloughed employees would be available to eligible employers that qualify for either the base rate or the top-up for active employees in the relevant period.
For Periods 5 and 6, the subsidy calculation for a furloughed employee would remain the same as for Periods 1 to 4.
Beginning in Period 7, CEWS support for furloughed employees would be adjusted to align with the benefits provided through the Canada Emergency Response Benefit (CERB) and/or Employment Insurance (EI). More details will be available upon publication of regulations on this matter.
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.
3. Other Changes Impacting the CEWS
(i) Safe harbour rule for Periods 5 and 6 (only for CEWS for active employees)
For Periods 5 and 6, an eligible employer 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 employer with a revenue decline of 30% or more in the relevant reference period would receive a CEWS rate of at least 75% or potentially an even higher CEWS rate using the new rules outlined above for the most adversely affected employers (up to 85%).
(ii) Deeming rule and reference periods
The rules for Periods 1 to 4 allow an employer that meets the revenue test in one period to automatically qualify for the following period (the deeming rule). For periods 5 and subsequent, the deeming rule is preserved for the base CEWS through the option to use the previous month (see in red in table 3 below).
Table 3 - Reference periods for the base CEWS
July 5 to August1,2020
July 2020 over July 2019 or June 2020 over June 2019
July 2020 or June 2020 over average of January and February 2020
August 2 to August29, 2020
August 2020 over August 2019 or July 2020 over July 2019
August 2020 or July 2020 over average of January and February 2020
September 2020 over September 2019 or August 2020 over August 2019
September 2020 or August 2020 over average of January and February 2020
October 2020 over October 2019 or September 2020 over September 2019
October 2020 or September 2020 over average of January and February 2020
November 2020 over November 2019 or October 2020 over October 2019
November 2020 or October 2020 over average of January and February 2020
Note that for the purpose of the top-up CEWS, eligibility would generally be determined by the change in an eligible employer's revenues for a 3-month period. Table 4 below outlines each claiming period and the relevant period for determining an eligible employer’s average change in revenue.
Table 4 - Reference periods for the top-up CEWS
April to June 2020 over April to June 2019
April to June 2020 average over January and February 2020 average*
May to July 2020 over May to July 2019
May to July 2020 average over January and February 2020 average*
June to August 2020 over June to August 2019
June to August 2020 average over January and February 2020 average*
July to September 2020 over July to September 2019
July to September 2020 average over January and February 2020 average*
August to October 2020 over August to October 2019
August to October 2020 average over January and February 2020 average*
* 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.
Employers that have elected to use the alternative approach for the first 4 periods would be able to either maintain that election for Period 5 and onward or revert to the general approach. Similarly, employers that have used the general approach for the first 4 periods would be able to either continue with the general approach or elect to use the alternative approach for Period 5 and onward. Whichever approach they choose would apply for Period 5 and onward and would apply to the calculation of the base CEWS and the top-up CEWS.
(iv) Reference to the baseline remuneration to determine the CEWS amount
For active arm’s-length employees, the amount of remuneration on which the CEWS is calculated would be based solely on actual remuneration paid for the eligibility period, without reference to the pre-crisis remuneration concept used for earlier CEWS periods. As a result, paying a salary lower than the employee’s baseline remuneration would no longer allow to increase the percentage of salary covered by the CEWS.
A modified special rule would apply to active employees that do not deal at arm's length with the employer. For Period 5 and subsequent periods, the wage subsidy for such employees would be based on the employee’s weekly eligible remuneration or pre-crisis remuneration, whichever is less, up to a maximum of $1,129. The subsidy would only be available in respect of non-arm's-length employees that were employed prior to March 16, 2020. For Period 5 and subsequent periods, the pre-crisis remuneration of an employee would be based on the average weekly remuneration paid to the employee from January 1 to March 15, 2020 or from July 1, 2019 to December 31, 2019. In all cases, the calculation of average weekly remuneration would exclude any period of 7 or more consecutive days without remuneration. Employers can choose which period to use on an employee-by-employee basis.
(v) Definition of eligible employee
Effective July 5, 2020, this definition would no longer exclude employees that are without remuneration in respect of 14 or more consecutive days in an eligibility period.
(vi) Acquisition of assets
Continuity rules for the calculation of an employer’s drop in revenues are provided in certain circumstances where the employer purchased all or substantially all the assets used in carrying on business by the seller.These rules allow to transfer some revenues from the seller to the purchaser of the assets.
(vii) Accounting methods
The modified rules would allow entities that use the cash method of accounting to elect to use accrual-based accounting to compute their revenues for the purpose of the CEWS.
4. Other Comments
(i) Application process
Eligible employers would now have until February 2021 to submit their CEWS applications.
(ii) Anti-avoidance rule now broader
The current CEWS rules contain a specific anti-avoidance rule which provides that an employer will be deemed not to qualify for the CEWS if this employer (or a person or partnership not dealing at arm’s length with this employer) enters into a transaction, participates in an event or takes an action (or fails to take an action) that has the effect of reducing the revenues of the employer for the current reference period (i.e. March, April or May 2020), and if it is reasonable to conclude that one of the main purposes of the transaction, event or action is to cause the employer to qualify for the CEWS. It is proposed to add that one of the main purposes of the transaction, event or action can also be to increase the amount of the CEWS claim.
(iii) Appeal process
The modified rules also provide an appeal process based on the existing procedure for notices of determination that allows for an appeal to the Tax Court of Canada.