Modifications to the Canada Emergency Wage Subsidy (CEWS)

Crowe BGK

Memorandum

The information contained in the below publication was current at the time it was published. The COVID-19 programs evolve continuously, and the relevant information may have changed since publication. Readers are advised to discuss their particular situation with their Crowe BGK advisor.

Date: Last updated on January 22, 2021

From: Crowe BGK Tax Group

Subject: Modifications to the Canada Emergency Wage Subsidy (CEWS)

The Canada Emergency Wage Subsidy (CEWS) was first introduced on April 11, 2020 by the passing of Bill C-14, and expanded with the passing of Bill C-20 on July 27, 2020. The federal government has extended the wage subsidy to June 30, 2021; however details have been announced only for claim periods until March 13, 2021 (period 13). Details for claim periods beginning after March 13, 2021 will be announced at a later date.

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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. The eligibility criteria governing the three initial 4-week periods (March 15 to June 6, 2020) continue to apply for Period 4 (June 7 to July 4, 2020) (please refer to our previous publication regarding the rules applicable for the initial CEWS program). Following the passing of Bill C-20 on July 27, 2020 and the Economic update on November 30, 2020, the CEWS details were provided until March 13, 2021.

Following the Economic update, the claim periods under the CEWS program are as follows:

Period 1	March 15 to April 11, 2020
Period 2	April 12 to May 9, 2020
Period 3	May 10 to June 6, 2020
Period 4	June 7 to July 4, 2020
Period 5	July 5 to August 1, 2020
Period 6	August 2 to August 29, 2020
Period 7	August 30 to September 26, 2020
Period 8	September 27 to October 24, 2020
Period 9	October 25 to November 21, 2020
Period 10	November 22 to December 19, 2020
Period 11	December 20, 2020 to January 16, 2021
Period 12	January 17 to February 13, 2021
Period 13	February 14 to March 13, 2021

I. RULES FOR PERIOD 5 AND SUBSEQUENT PERIODS

Following the Economic Update, the rules are known until Period 13. It was announced that the CEWS would be extended to June 2021, however the rules for Periods after March 13, 2021 are currently unknown.

A. Summary

For Periods 5 and onward, the CEWS consists of two parts:

a base subsidy available to all eligible employers that are experiencing a decline in revenues, with the subsidy amount varying depending on the scale of revenue decline; and
a top-up subsidy of up to an additional 25% (35% for Periods 11 to 13) for those employers that have been most adversely affected by the COVID-19 crisis.

The two-part CEWS applies with respect to the remuneration of active employees.

A separate CEWS rate structure applies to furloughed employees.

In addition, a safe harbour has been made available to ensure that, for Periods 5 and 6, employers have access to a CEWS rate that is at least as generous as they would have had under the initial CEWS structure (i.e. under the rules applicable to Periods 1 to 4).

B. CEWS for Active Employees

The overall CEWS rate is equal to the base CEWS rate plus the top-up CEWS rate.

(i) Base Subsidy

Effective July 5, 2020 (i.e., Period 5 and subsequent periods), all eligible employers with a revenue decline qualify for CEWS support for active employees.

The base CEWS is 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 varies depending on the level of revenue decline, and its application is extended to employers with a revenue decline of less than 30% (see table 1 below). The maximum base CEWS rate is provided to employers with a revenue drop of 50% or more.

The specified rate is determined based on the change in an eligible employer's monthly revenues, as described further below.

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 to Period 13
Maximum weekly benefit per employee	Up to $677	Up to $677	Up to $565	Up to $452
Revenue drop
50% and over	60%	60%	50%	40%
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)
* In Periods 5 and 6, employers who would have been better off in the CEWS design in Periods 1 to 4 are eligible for a 75% wage subsidy if they have a revenue decline of 30% or more.

(ii) Top-up Subsidy

A top-up CEWS of up to 25% (35% for Periods 11 to 13) is available to employers that were the most adversely impacted by the pandemic.

For Periods 5 to 7, generally, an eligible employer’s top-up CEWS is 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 is 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.

Example:

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% can 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.

For Period 8 and onward, instead of using the three-month revenue-decline test for the top-up subsidy, both the base and top-up rates are determined by the change in an employer's monthly revenues, year-over-year, for either the current or previous calendar month. For employers using the alternative revenue-decline test, both the base subsidy and the top-up subsidy are determined by the change in the employer's monthly revenues relative to the average of its January 2020 and February 2020 revenues.

The rules applicable to Periods 8 and onward include a “safe harbour” rule applicable to Periods 8, 9 and 10. This rule entitles an employer to a top-up subsidy rate that is no less than it would have received under the three‑month revenue-decline test applicable to Periods 5 to 7.

As with the base CEWS rate, the top-up CEWS rate applies to remuneration of up to $1,129 per week. The top-up CEWS rate for selected average revenue drop levels is illustrated in the tables 2 and 3 below.

Table 2 - Top-up Percentage Examples for Periods 5 to 10

Top-up revenue reduction percentage	Top-up CEWS rate	Top-up calculation= 1.25 x (top-up revenue reduction - 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% and under	0.0%	1.25 x (50%-50%) = 0.0%

Table 3 - Top-up Percentage Examples for Periods 11 to 13

Top-up revenue reduction percentage	Top-up CEWS rate	Top-up calculation= 1.75 x (top-up revenue reduction - 50%)
70% and over	35%	1.75 x (70%-50%) = 35%
65%	26.25%	1.75 x (65%-50%) = 26.25%
60%	17.5%	1.75 x (60%-50%) = 17.5%
55%	8.75%	1.75 x (55%-50%) = 8.75%
50% and under	0.0%	1.75 x (50%-50%) = 0.0%

C. CEWS for Furloughed Employees

For Period 5 and subsequent periods, the CEWS for furloughed employees is 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 to 8, the subsidy calculation for a furloughed employee remains the same as for Periods 1 to 4.

As of October 25, 2020 (Period 9), the CEWS for furloughed employees is aligned with the benefits provided through Employment Insurance. This means the subsidy per week in respect of an arm’s length employee (or a non-arm’s length employee who received pre-crisis remuneration for the relevant period) is equal to the lesser of:

the amount of eligible remuneration paid in respect of the week; or,
if the employee receives remuneration of $500 or more in respect of the week, the greater of
- $500 and
- 55% of pre-crisis remuneration for the employee, up to a maximum subsidy amount of $573 (increased to $595 for Periods 11 to 13).

The employer portion of contributions in respect of the Canada Pension Plan, the Employment Insurance, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in respect of furloughed employees continues to be refunded to the employer.

D. Other CEWS Rules

(i) Safe Harbour Rule for Periods 5 and 6 (Only for CEWS for Active Employees)

For Periods 5 and 6, an eligible employer is 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 can 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 table 4 below).

Table 4 - Reference Periods for the Base CEWS

	Claim period	General approach	Alternative approach
Period 5	July 5 to August 1,2020	July 2020 over July 2019 or June 2020 over June 2019	July 2020 or June 2020over average of January and February 2020
Period 6	August 2 to August 29, 2020	August 2020 over August 2019 or July 2020 over July 2019	August 2020 or July 2020over average of January and February 2020
Period 7	August 30 to September 26, 2020	September 2020 over September 2019 or August 2020 over August 2019	September 2020 or August2020 over average of January and February 2020
Period 8	September 27 to October 24, 2020	October 2020 over October 2019 or September 2020 over September 2019	October 2020 or September 2020 over average of January and February 2020
Period 9	October 25 to November 21, 2020	November 2020 over November 2019 or October 2020 over October 2019	November 2020 or October 2020 over average of January and February 2020
Period 10	November 22 to December 19, 2020	December 2020 over December 2019 or November 2020 over November 2019	December 2020 or November 2020 over average of January and February 2020
Period 11	December 20, 2020 to January 16, 2021	December 2020 over December 2019 or November 2020 over November 2019	December 2020 or November 2020 over average of January and February 2020
Period 12	January 17 to February13, 2021	January 2021 over January 2020 or December 2020 over December 2019	January 2021 or December 2020 over average of January and February 2020
Period 13	February 14 to March 13, 2021	February 2021 over February 2020 or January 2021 over January 2020	February 2021 or January 2021 over average of January and February 2020

For the purpose of the top-up CEWS, eligibility is determined by the change in an eligible employer's revenues for a 3-month period for Periods 5 to 7. Table 5 below outlines each claiming period and the relevant period for determining an eligible employer’s average change in revenue.

Table 5 - Reference Periods for the Top-up CEWS

	Claim period	General approach	Alternative approach
Period 5	July 5 to August 1, 2020	April to June 2020 over April to June 2019	April to June 2020 average over January and February 2020 average*
Period 6	August 2 to August 29, 2020	May to July 2020 over May to July 2019	May to July 2020 average over January and February 2020 average*
Period 7	August 30 to September 26, 2020	June to August 2020 over June to August 2019	June to August 2020 average over January and February 2020 average*
Period 8**	September 27 to October 24, 2020	October 2020 over October 2019 or September 2020 over September 2019	October 2020 or September 2020over average of January and February 2020
Period 9**	October 25 to November 21, 2020	November 2020 over November 2019 or October 2020 over October 2019	November 2020 or October 2020over average of January and February 2020
Period 10**	November 22 to December 19, 2020	December 2020 over December 2019 or November 2020 over November 2019	December 2020 or November 2020 over average of January and February 2020
Period 11	December 20, 2020 to January 16, 2021	December 2020 over December 2019 or November 2020 over November 2019	December 2020 or November 2020 over average of January and February 2020
Period 12	January 17 to February13, 2021	January 2021 over January 2020 or December 2020 over December 2019	January 2021 or December 2020 over average of January and February 2020
Period 13	February 14 to March 13, 2021	February 2021 over February 2020 or January 2021 over January 2020	February 2021 or January 2021 over average of January and February 2020
* 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. ** For Periods 8, 9 and 10, the employer may calculate its top-up CEWS rate using the three-month revenue reduction test instead of the one-month revenue reduction test if this is more advantageous.

(iii) Elections

Employers that have elected to use the alternative approach for the first 4 periods can 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 can either continue with the general approach or elect to use the alternative approach for Period 5 and onward. Whichever approach they choose applies for Period 5 and onward and applies 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 is based solely on actual remuneration paid for the eligibility period, without reference to the pre-crisis remuneration concept used for CEWS periods 1 to 4. As a result, paying a salary lower than the employee’s baseline remuneration no longer allows to increase the percentage of salary covered by the CEWS.

A modified special rule applies 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 is based on the employee’s weekly eligible remuneration or pre-crisis remuneration, whichever is less, up to a maximum of $1,129. The subsidy is only available in respect of non-arm's-length employees that were employed prior to March 16, 2020.

(v) Definition of Eligible Employee

Effective July 5, 2020, this definition no longer excludes employees that are without remuneration in respect of 14 or more consecutive days in an eligibility period.

(vi) Anti-avoidance Rule Now Broader

The CEWS rules applicable to Periods 1 to 4 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, 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. The rules applicable to Period 5 and onward add that one of the main purposes of the transaction, event or action can also be to increase the amount of the CEWS claim.

II. ADDITIONAL RULES APPLICABLE TO ALL PERIODS

A. CEWS Eligibility for Corporations Formed on the Amalgamation of Two or More Predecessor Corporations

A new corporation formed on an amalgamation of two or more predecessor corporations (pursuant to subsection 87(1) of the Income Tax Act)(or where one corporation is wound up into another one a tax-deferred basis (pursuant to subsection 88(1) of the Income Tax Act), may be eligible for the wage subsidy provided all other required conditions have been satisfied.

Amalgamation: To determine if the amalgamated corporation has experienced the required reduction in revenue, the new corporation will use the combined qualifying revenue of the predecessor corporations to calculate its qualifying revenue for each relevant reference period.
Wind-up: To determine if the parent company has experienced the required reduction in revenue, the parent’s qualifying revenue will be combined with its subsidiary’s qualifying revenue for each relevant reference period

However, in either of these situations, the wage subsidy will be denied if it is reasonable to consider that one of the main purposes for the amalgamation (or the wind-up) was to qualify for the wage subsidy or to increase the amount of the wage subsidy.

B. CEWS Eligibility for Trusts

For Periods 1 and 2, trusts are generally eligible for the CEWS, as they are generally considered to be individuals for tax purposes.

For Periods 3 and onward, the following trusts are eligible employers:

a trust that is not exempt from tax under Part I of the Income Tax Act and is not a public institution;
a trust that is exempt from tax under Part I of the Income Tax Act (other than a public institution) because it is a registered charity or is one of the other types of eligible tax-exempt entities;
a trust that is a public institution if it is a prescribed organization.

C. Payroll Service Providers

To claim the CEWS, an employer must be a “qualifying entity”. This definition was made more flexible to allow certain employers to qualify. Indeed, under a previous version of the rules, one of the conditions to meet to be a “qualifying entity” was that the employer had to have, on March 15, 2020, a payroll account with the CRA. The legislation was amended to introduce an alternative if this condition is not met. Under the new rules, an employer qualifies as a “qualifying entity” if:

(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

D. Additional Flexibility for the Computation of the Baseline Remuneration (or Pre-crisis Remuneration)

The pre-crisis remuneration of an employee means the average weekly eligible remuneration paid to an eligible employee by an eligible employer during the period that begins on January 1, 2020, and ends on March 15, 2020. Any period of seven or more consecutive days for which the employee was not remunerated is excluded from the calculation. However, the eligible employer may elect for each claim period in respect of an employee, a different period to calculate the average weekly eligible remuneration, as described in the table 1 below.
Table 6 - Alternative Baseline Remuneration Periods in Respect of an Eligible Employee

Periods	If the eligible employer elects for an employee for each claim period, then average weekly eligible remuneration paid during the period that begins on:
Periods 1 to 3	March 1, 2019 and ends on May 31, 2019
Period 4	March 1, 2019 and ends on May 31, 2019, OR March 1, 2019 and ends on June 30, 2019
Periods 5 to 13	July 1, 2019 and ends on December 31, 2019

Special rules apply to employees who were on parental leave, who were sick/injured/quarantined or who were on leave to provide care to family members.

E. Acquisition of Assets

Continuity rules for the calculation of an employer’s drop in revenues are provided in certain circumstances where an employer purchased assets used by the seller in carrying on business. These rules allow to transfer some revenues from the seller to the purchaser of the assets.

F. Accounting Methods

Entities that use the cash method of accounting can elect to use accrual-based accounting to compute their revenues for the purpose of the CEWS, and vice versa. If it is made, this election applies to all claim periods.

III. OTHER COMMENTS

(i) Due Date to Submit CEWS Applications

Eligible employers must submit their CEWS application on or before the later of:

January 31, 2021; and
180 days after the end of the claim period.

(ii) Appeal Process

The CEWS 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.