Details on Canada Emergency Wage Subsidy (75% Subsidy)

Crowe BGK

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.

MEMORANDUM

Date: Last updated on April 21, 2020

From: Crowe BGK Tax Group

Subject: UPDATE: Details on the Canada Emergency Wage Subsidy (75% Subsidy)

Today, the Canada Revenue Agency announced details regarding the application process for the Canada Emergency Wage Subsidy (CEWS). It will be possible to submit applications starting on April 27, 2020. We also added to this publication a planning tip to optimize the CEWS. All important changes from the previous version of this publication are in italics.

Benefits provided under the Canada Emergency Wage Subsidy (CEWS)

The CEWS applies at a rate of 75% on the first $58,700 of annual salary normally earned by employees, which represents a benefit of up to $847 per week per employee. The program will be in place for a 12-week period, from March 15 to June 6, 2020. More specifically:
- The subsidy amount for a given employee on eligible remuneration paid between March 15 and June 6, 2020 is the greater of:
  - 75% of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
  - the amount of remuneration paid, up to a maximum benefit of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.
  The pre-crisis remuneration for a given employee is based on the average weekly remuneration paid between January 1 and March 15 inclusively, excluding any seven-day periods in respect of which the employee did not receive remuneration.
- The Federal Government mentioned that employers are expected where possible to maintain existing employees’ pre-crisis employment earnings (i.e. to pay them 100% of their pre-crisis wages). However, in the final legislation implementing the CEWS, this is not a condition to obtain the CEWS. Therefore, employers can receive a subsidy of up to 100% of actual salaries paid if they are only paying 75% of pre-crisis wages or salaries to existing employees.
- For example, prior to the COVID-19 crisis, Employer paid Employee $1,000/week. Due to the COVID-19 situation, Employer can only afford to pay $750/week to Employee (due to a reduction of the volume of work or to the Employer’s business being temporary closed by governmental order). In this case, the CEWS allows Employer to receive $750/week with respect to the amount ($750) paid to Employee. As a result, the entire $750 (i.e. 100%) of Employee’s earned salary during the COVID-19 crisis is covered by the CEWS.
- Employers are also eligible for a subsidy of up to 75% of salaries and wages paid to new employees (i.e. employees hired after March 15, 2020). The CEWS does not cover 100% in these cases, and employers must pay the additional 25%.
The CEWS cannot be claimed by two non-arm’s length employers with respect to the same employee. More specifically, if an employee is employed in a given week by two or more non-arm’s length employers, the total amount of the CEWS in respect of this employee for this week cannot exceed the amount that would arise if the employee’s remuneration had been paid by only one employer.

Eligible remuneration may include salary, wages, and other remuneration. These are amounts for which employers are generally required to withhold or deduct amounts to remit to the Receiver General on account of the employee’s income tax obligation. However, it does not include retiring allowances or severance pay, or items such as stock option benefits or the personal use of a corporate vehicle. It also excludes amounts that can reasonably be expected to be returned to the employer, and amounts paid as part of an arrangement whereby a salary is temporarily increased above the pre-crisis salary.
A special rule applies to employees that do not deal at arm’s length with the employer. The subsidy amount for such employees is limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, up to a maximum benefit of the lesser of $847 per week or 75% of the employee’s pre-crisis weekly remuneration. Therefore, the CEWS is only available in respect of non-arm’s length employees employed prior to March 15, 2020. This special rule also prevents employers from increasing salaries of non-arm’s length employees during the crisis in order to take maximum advantage of the CEWS.
There is no overall limit on the subsidy amount that an eligible employer may claim.
Another component of the CEWS pertains to payroll levies. The CEWS provides a 100% refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in certain circumstances.

This refund covers contributions for eligible employees for each week throughout which those employees are on leave with pay and for which the employer is eligible to claim the CEWS for those employees.
- In general, 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 is not 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 CEWS.
There is no overall limit on the refund amount that an eligible employer may claim.
For greater certainty, employers are required to continue to collect and remit employer and employee contributions to each program as usual. Eligible employers can apply for a refund at the same time that they apply for the CEWS.

Conditions to claim the CEWS

The CEWS can be claimed with respect to employees who are employed in Canada.
Eligible employers include employers of all sizes and across all sectors of the economy, with the exception of public sector entities, including schools and hospitals. This includes taxable corporations, individuals, partnerships consisting of eligible employers other than partnerships, non-profit organizations, registered charities and persons exempt from Part I tax under paragraphs 149(1)(e). (j) or (k) of the Income Tax Act. Foreign controlled corporations (such as Canadian subsidiaries) can claim the CEWS with respect to their employees involved in Canadian operations.
To claim the CEWS, an eligible employers must suffer a drop in gross Canadian revenues of at least 15% in March and 30% in April or May 2020.

The final legislation implementing the CEWS introduced a deeming rule whereby if an employer is found eligible for a specific period, this employer would automatically qualify for the next period. For example, an employer with a revenue drop of more than 15% in March would qualify for the first and second periods of the program. Similarly, an employer with a revenue drop of 30% in April would qualify for the second and third periods of the program. Therefore, an employer may claim the subsidy for the entire 3-month duration of the program even if this employer qualifies only for the months of March and either April or May.

The revenue test is applied in comparison with the same month in 2019. Employers can however elect to calculate their change in revenue using an alternative benchmark, which can be useful especially for high-growth firms, sectors that faced difficulties in 2019, non-profits and charities, as well as employers established after February 2019. Under this alternative approach, employers may compare their revenue using an average of their revenue earned in January and February 2020. Employers must select the general year-over-year approach or this alternative approach when first applying for the CEWS and are required to use the same approach for the entire duration of the program.

The legislation contains additional guidelines for the computation of revenue:

Revenue is referred to 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”.
An employer’s revenue excludes amounts derived from persons or partnerships not dealing at arm’s length with the employer (subject to the below exception).
The default rule is that revenue is calculated using the employer’s normal accounting method, and excludes revenues from extraordinary items and amounts on account of capital.
However, employers can elect to calculate their revenue under the cash method. Note that a combination of both the accrual and the cash methods is not allowed. Employers may select an accounting method when first applying for the CEWS and are required to use that method for the entire duration of the program.

In the final legislation implementing the CEWS, it was clarified that the cash method is the one used in subsection 28(1) of the Income Tax Act, with any modifications that the circumstances require.
Revenues per subsection 28(1) are business receipts, excluding capital and other non-revenue receipts. The Income Tax Act provides for business receipts that are deemed to be received (even if not received in reality). These deemed business receipts must be included in revenues per subsection 28(1). A separate publication will follow on deemed business receipts. Subsection 28(1) also requires the adjustment of business receipts and deemed business receipts for the following items:

Recaptured capital cost allowance must be added to the cash receipts;
Any required income inclusion as a result of the debt forgiveness rules must be added to the cash receipts;
There is a mandatory inventory adjustment which requires an addition to cash receipts equal to the lesser of:

The taxpayer’s loss from the business calculated under the cash method; and
The value of inventory purchased by the taxpayer that was owned by the taxpayer in connection with the business at the end of the period.

The effect of this paragraph is to prevent taxpayers reporting income on the cash method from creating or increasing a loss by the purchase of inventory. Please speak to your Crowe BGK advisor for further details on this inventory adjustment.

For corporate groups, it seems possible to elect to compute revenue based on a consolidated or non-consolidated basis, depending on what is more favourable, as the legislation provides the following options:

where a group of employers normally prepares consolidated financial statements, each member of the group may determine its revenue separately, provided every member of the group determines its revenue on that basis;
where an eligible employer and each member of an affiliated group of employers of which this employer is a member jointly elect, the 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.

Where 90% or more of an employer’s revenue is from non-arm’s length parties, an election can be filed jointly by the employer and the non-arm’s length parties in order to allow the employer to consider non-arm’s length revenues for the revenue test. Where this election is filed, a given employer can calculate its revenue in the following manner:

The employer’s revenue for the prior reference period (for example, March 2019) is deemed to be $100; and
The employer’s revenue for the current reference period (for example, March 2020) is deemed to be the total of all amounts, each of which is determined by the following formula: $100 x (A/B) x (C/D), where

A is the employer’s revenue for the current reference period attributable to one particular non-arm’s length person.

B is the employer’s revenue for the current reference period attributable to all non-arm’s length persons.

C is the revenue of the particular non-arm’s length person referred to in A (determined by considering worldwide qualifying revenue) for the current reference period.

D is the revenue of the particular non-arm’s length person referred to in A (determined by considering worldwide qualifying revenue) for the prior reference period.

As can be seen from this formula, where an employer earns revenues from one than more non-arm’s length persons, the analysis must be done with each of the non-arm’s length persons.
Below is an example of how this formula works:

Facts

Aco has employees and would like to qualify for the CEWS.
Aco, Bco and Cco are non-arm’s length companies.
In March 2019, Aco made the following sales:

$100,000 to Bco;
$200,000 to Cco;
There were no other sales.

In March 2019, Bco made arm’s length sales of $150,000 and Cco made arm’s length sales of $300,000.
In March 2020, Aco made the following sales:

$70,000 to Bco;
$150,000 to Cco;
There were no other sales.

In March 2020, Bco made arm’s length sales of $80,000 and Cco made arm’s length sales of $170,000.

Application of the formula:

For March 2019, Aco’s revenue is deemed to be $100;
For March 2020, Aco’s revenue is deemed to be the total of:

100$ x ($70,000/$220,000) x ($80,000/$150,000) = $17
100$ x ($150,000/$220,000) x ($170,000/$300,000) = $39
For March 2020, Aco’s revenue is deemed to be $56.

Therefore, as Aco’s revenue for March 2020 is deemed to be lower than $85, then Aco meets the revenue test for the CEWS.

Specific rules were introduced for joint ventures.
For registered charities, revenue includes revenue from a related business (as defined in subsection 149.1(1) of the Income Tax Act), gifts and other amounts received in the course of their ordinary activities. Moreover, registered charities may elect as to whether or not to include revenue from government sources as part of the calculation. Once chosen, the same approach has to apply throughout the program period.
Specific rules apply to non-profit organizations and persons exempt from Part I tax under paragraphs 149(1)(e). (j) or (k) of the Income Tax Act
The amount of the existing 10% wage subsidy and of the CEWS received by the employer in a given month is ignored for the purpose of measuring year-over-year changes in monthly revenues.

The table below outlines each claiming period, the required reduction in revenue and the reference period of eligibility:

	Claiming period	Required reduction in revenue	Reference period for eligibility
Period 1	March 15 to April 11	15%	March 2020 over: March 2019 or Average of January and February 2020
Period 2	April 12 to May 9	30%	Eligible for Period 1 OR April 2020 over: April 2019 or Average of January and February 2020
Period 3	May 10 to June 6	30%	Eligible for Period 2 OR May 2020 over: May 2019 or Average of January and February 2020

An eligible employer’s entitlement to this wage subsidy is based entirely on the salary or wages actually paid to employees. In other words, employers have to actually pay the salaries to the employees in order to access the CEWS.
To qualify for the CEWS, an employer must have had, on March 15, 2020, a payroll account with the CRA.

Interaction between the CEWS and the Canada Emergency Response Benefit (CERB)

Eligibility for the CEWS of an employee’s remuneration will be limited to employees that have not been without remuneration for more than 14 consecutive days in the eligibility period, i.e., from March 15 to April 11, from April 12 to May 9, and from May 10 to June 6. The purpose of this restriction is to ensure that workers are not receiving, at the same time, the CERB and a salary which is subsidized by the CEWS.
Also, to ensure that the CERB applies as intended, the Federal Government implemented an approach to limit duplication. This includes a process to allow individuals rehired by their employer during the same eligibility period to cancel their CERB claim and repay that amount. The CRA has provided some details on this process on the following webpage: https://www.canada.ca/en/revenue-agency/services/benefits/apply-for-cerb-with-cra.html?employee=I was self-employed#return

Interaction with existing 10% wage subsidy

A temporary 10% wage subsidy was implemented (see separate publication on this topic – maximum of $1,375 per employee and $25,000 per employer – program available from March 18 to June 19, 2020). For employers that are eligible for both the CEWS and the 10% wage subsidy for a period, any benefit from the 10% wage subsidy for remuneration paid in a specific period reduces the amount available to be claimed under the CEWS in that same period.

Planning opportunity:
- If an employer is eligible to claim the 10% wage subsidy at any point between March 18 and June 19, 2020 but is only eligible to claim the CEWS for 1 or 2 of the 3 claiming periods of the CEWS program, it would be beneficial for this employer to claim the 10% wage subsidy outside the CEWS claiming period(s) in order to avoid a reduction of the CEWS amount.
- Below is an example of how the 10% wage subsidy can be claimed in a specific period without reducing the CEWS for the other periods:
  - Facts:
    - For the period covering March 18 to April 11, 2020 (“Period 1”), the employer is not eligible for the CEWS, but the employer is eligible for the 10% wage subsidy.
    - For Period 1, the employer is eligible to claim the maximum amount of $25,000 for the 10% wage subsidy.
    - For the period covering April 12 to May 9, 2020 (“Period 2”), the employer is eligible for both the CEWS and the 10% wage subsidy.
    - For Period 2, the employer is eligible to claim an amount of $150,000 under the CEWS program.
    - For Period 2, had employer not already claimed the maximum amount available under the 10% wage subsidy, the employer would have been eligible to claim $25,000.
  - Analysis:
    - Scenario A: The employer claims the maximum for the 10% wage subsidy during Period 1. The employer claims the CEWS during Period 2.
      
      Period
      
      CEWS
      
      10% Wage Subsidy
      
      TOTAL
      
      Period 1
      
      $0 (Not eligible)
      
      $25,000
      
      $25,000
      
      Period 2
      
      $150,000
      
      $0 (maximum already reached)
      
      $150,000
- Scenario B: No wage subsidy is claimed for Period 1. The employer claims the maximum for the 10% wage subsidy during Period 2. The employer also claims the CEWS during Period 2.

Period

CEWS

10% Wage Subsidy

TOTAL

Period 1

$0 (Not eligible)

Period 2

$125,000

(CEWS is reduced by the 10% wage subsidy claimed in the same period)

$25,000

$150,000

IMPORTANT COMMENT: The legislation considers that the 10% wage subsidy pertaining to certain salaries is claimed at the time when these salaries are paid to the employees, which can cause unexpected results in certain circumstances.
- Example:
  - An employer pays its employees on a weekly basis. Payday is on Friday and the payment pertains to the previous week. Therefore, for work performed from April 5 to April 11, 2020, employees were paid on April 17, 2020.
  - In this case, the 10% wage subsidy is considered to be claimed on April 17, 2020, which falls in the second claiming period for the CEWS (April 12 to May 9, 2020). This is true even though the work was performed in the first claiming period for the CEWS (March 15 to April 11, 2020). Therefore, in this case, the 10% wage subsidy would impact the CEWS calculation for the second period.

Reminder about the 10% wage subsidy: Where an employer did not reduce its payroll remittances to claim the 10% wage subsidy in a specific period, the employer can either reduce any future payroll remittances to benefit from the subsidy, or the CRA will pay the 10% wage subsidy at the end of the year. However, it is important to keep documentation on file to support that the employer claimed the 10% wage subsidy for a specific period.

Interaction with the Work-Sharing Program

On March 18, 2020, the Prime Minister announced an extension of the maximum duration of the Work-Sharing program from 38 weeks to 76 weeks for employers affected by COVID-19. This measure will provide income support to employees eligible for Employment Insurance who agree to reduce their normal working hours because of developments beyond the control of their employers.
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 CEWS.

How to apply for the CEWS

Eligible employers will be able to access the CEWS by applying through the Canada Revenue Agency (CRA)’s My Business Account portal as well as through a web-based application. Authorized representatives could be able to submit CEWS applications on behalf of their clients as the CRA mentions the possibility to apply for the CEWS via the Represent a Client service.
The CRA will be ready to accept applications starting on April 27, 2020.
CEWS claims will be subject to verification by the CRA. Funds for approved applications will begin to be released on May 5, 2020.
- Employers may be required to provide a full list of their employees and their Social Insurance Numbers (SIN) for verification after they apply.
The CEWS will be processed at the payroll program (RP) account level, so employers will have to file a separate application for each RP account.
The amount of the CEWS will be paid by the CRA. Therefore, employers are encouraged to register for direct deposit with the CRA as soon as possible.
Employers will need to apply for the CEWS on a monthly basis.
Applications for the CEWS need to be made by October 2020.
In applying, the individual who has principal responsibility for the financial activities of the employer will have to attest that the application is complete and accurate in all material respects.
To help employers prepare their claim for the CEWS, the CRA launched on April 21 a webpage dedicated to the CEWS, which includes a CEWS calculator. This calculator allows employers to determine some specific line amounts that they will need to enter into the CEWS application form once it becomes available: https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy.html

Integrity of the program, and introduction of a strict anti-avoidance rule

Employers are required to repay amounts received under the CEWS if they did not meet the eligibility requirements.
A very broad anti-avoidance rule has been enacted. This rule 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.

Comment: This anti-avoidance rule is very broad and employers should refrain from using any accounting or business policy that would not be consistent with prior practices.

Where the anti-avoidance rule is triggered, in addition to repaying the CEWS, the employer is subject to a penalty of 25% of the CEWS.
Under existing provisions of the Income Tax Act, persons making, or participating in making, a false or deceptive statement could be prosecuted with a summary or indictable offence. Anyone found guilty could be sentenced to prison for up to 5 years.

Other information

The CEWS will be subject to general taxation rules, meaning it will be taxable under paragraph 12(1)(x) for employers. Assistance received under either wage subsidy (75% or 10% program) would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
For employees, subsidized salaries received from employers will be treated as taxable salaries. Employers will still be required to apply deductions at source on subsidized salaries paid to their employees.
The final legislation implementing the CEWS has been drafted in a way that would easily accommodate the extension of the program beyond June 6, should the Federal Government make such a decision.