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Update on the Canada Emergency Wage Subsidy

Apr 13 2020

Over the weekend the Federal government approved an updated version of the Canada Emergency Wage Subsidy Program (“CEWS”). The Government’s intent with this program is to help employers keep and/or return workers to their payroll throughout the COVID-19 pandemic. This is an update to our previous announcements on the program as there has been a number of changes since then.

The overall plan is still a 75% wage subsidy to “eligible employers” for up to twelve weeks, retroactive to March 15, 2020 and ending June 6, 2020 up to a maximum of $847 per week.

Key Changes:

Initial change in Revenue for March 2020 is 15% from March 2019 or from the average of January and February 2020. For the two subsequent periods, the change in revenue required is 30%.
Average revenue for January and February 2020 can now be used for comparison purposes for any period. Once this method is chosen, it must be use for each period.
If an eligible employer qualifies for Period 1, it will automatically qualify for Period 2. If an eligible employer qualifies for Period 2, it will automatically qualify for Period 3.
Revenue can be calculated using accrual or cash method, but once the method is chosen, it cannot be changed.
Special rules for the computation of revenue would be provided to take into account certain non-arm’s length transactions, such as where an employer sells all of its output to a related company that in turn earns arm’s length revenue. As well, affiliated groups would be able to compute revenue on a consolidated basis.
Employer must have a payroll business number as of March 15, 2020.
The Federal government proposed to expand the CEWS by introducing a new 100 per cent refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund would cover 100 per cent of employer-paid 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 for the CEWS for those employees.
Eligibility for the CEWS of an employee’s remuneration will be available to employees other than those who have been without remuneration for 14 or more consecutive days in the eligibility period
Employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 per cent of the value of the subsidy claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed.

How to Apply:

Eligible employers would be able to apply for the Canada Emergency Wage Subsidy through the Canada Revenue Agency’s My Business Account portal as well as a web-based application. Employers would have to keep records demonstrating their reduction in arm’s-length revenues (as discussed below) and remuneration paid to employees.

The employer must have a payroll business number with CRA as of March 15, 2020. This would be a business number that ends “RP0001” or equivalent. This means that if a company wants to start making payroll payments during this period and does not have a payroll business number, they will be ineligible.

More details about the application process will be made available shortly. This means that the application process is still not available as of the publication of this article. Minister Morneau has verbally stated that he expects the money under the subsidy program to be available towards the end of April or beginning of May.

Interaction with 10% Wage Subsidy:

For employers that are eligible for both the Canada Emergency Wage Subsidy and the 10 per cent wage subsidy for a period, any benefit from the 10 per cent wage subsidy for remuneration paid in a specific period would generally reduce the amount available to be claimed under the Canada Emergency Wage Subsidy in that same period. In other words, eligible employers can choose to reduce remittances up to 10% of the employee’s salary and then receive the Canada Emergency Wage Subsidy. However, they cannot be added on top of each other. The benefit is limited to 75%, not 85%.

Eligible Employers:

Eligible employers include:

Individuals,
Taxable corporations,
Partnerships consisting of eligible employers
Non‑profit organizations and
Registered charities

Who is not included as an eligible employer?

Municipalities and local governments
Crown corporations
Public universities
Colleges
Schools
Hospitals

Key Condition- Drop In Revenues:

This subsidy would be available to eligible employers that see a drop of at least 15 percent in March 2020 and 30 per cent of their revenue for April and May 2020.

How is Revenue Calculated?

An employer’s revenue for this purpose would be its revenue from its business carried on in Canada earned from arm’s-length sources. Revenue would be calculated using the employer’s normal accounting method, and would exclude revenues from extraordinary items and amounts on account of capital. Revenues can now be calculated using the accrual method or the cash method but must use that same methodology throughout the period.

For registered charities and non-profit organizations, the calculation will include most forms of revenue, excluding revenues from non-arm’s length persons. These organizations would be allowed to choose whether or not to include revenue from government sources as part of the calculation. Once chosen, the same approach would have to apply throughout the program period.

Non-Arm’s Length Revenue:

In these new rules are different ways to calculate revenue in order to determine if a company qualifies for the CEWS.

Consolidated Financial Statements
- Where a group of eligible entities normally prepares consolidated financial statements, each member of the group can determine its qualifying revenue separately, provided each member of the group does the same.
- That is, one of the companies cannot state that because consolidated revenues decreased, they are eligible for the CEWS, when one of the other companies in the group uses its specific revenue to qualify. It is all or nothing.
Joint election
- Where there is a group of affiliated entities, and the entities jointly elect, the qualifying revenue for the group, can be used for each member of the group.
- This is relevant where there is a combination of arm’s length AND non arm’s length revenue. If for example, company A earned arm’s length revenue and paid affiliated company B a fee for providing employees. Without this rule, company B would have no arm’s length revenue and would therefore not qualify for the CEWS. With this provision, the arm’s length revenue for company A can be used for the whole group. Since company B is the only one with employees, company B would be the company that applies for the CEWS.
Joint Ventures
- Where the revenue is being allocated through a joint venture, then the eligible entity can use the revenue of the joint venture instead of only looking at the eligible entity’s share of revenue from the joint venture.

Revenue Comparisons- Eligible Periods:

Eligibility would generally be determined by the change in an eligible employer’s monthly revenues, year-over-year, for the calendar month in which the period began. As well, an eligible employer can now compare March 2020 to the average of January and February 2020. In determining monthly revenues, the wage subsidy would NOT be considered in revenues.

If an eligible employer qualifies for Period 1, it will automatically qualify for Period 2. If an eligible employer qualifies for Period 2, it will automatically qualify for Period 3. The Eligible Periods are as follows:

Period	Claiming Period	Reference Period
Period 1- 15% reduction required	March 15- April 11	March 2020 over : · March 2019 or · Average of January and February 2020
Period 2- 30% reduction required	April 12- May 9	If Eligible for Period 1- qualifies OR April 2020 over: · April 2019 or · Average of January and February 2020
Period 3- 30% reduction required	May 10- June 6	If Eligible for Period 2- qualifies OR May 2020 over: · May 2019 or · Average of January and February 2020

This means that the first step is to determine if monthly revenue, year over year, decreased sufficiently. Then an eligible employer would make a claim for the above claiming period based on the salaries during the claiming period. Each month will be a separate application. It may be possible that a company is not eligible for Period 1 but is eligible for Periods 2 and 3.

Eligible Employee:

An eligible employee is an individual who is employed in Canada.

Eligibility for the CEWS of an employee’s remuneration will be available to employees other than those who have been without remuneration for 14 or more consecutive days in the eligibility period, i.e., from March 15 to April 11, from April 12 to May 9, or from May 10 to June 6.

This rule replaces the previously announced restriction that an employer would not be eligible to claim the CEWS for remuneration paid to an employee in a week that falls within a 4-week period for which the employee is eligible for the Canadian Emergency Response Benefit.

Amount of Subsidy:

The subsidy amount for a given employee on eligible remuneration paid between March 15 and June 6, 2020 would be the greater of:

75 per cent 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 per cent of the employee’s pre-crisis weekly remuneration, whichever is less.

The pre-crisis remuneration for a given employee would be 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.

In effect, employers may be eligible for a subsidy of up to 100 per cent of the first 75 per cent of pre-crisis wages or salaries of existing employees. These employers would be expected where possible to maintain existing employees’ pre-crisis employment earnings.

Employers will also be eligible for a subsidy of up to 75 per cent of salaries and wages paid to new employees.

Eligible Remuneration:

Eligible remuneration may include salary, wages, and other remuneration.

These are amounts for which employers would generally be 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 severance pay, or items such as stock option benefits or the personal use of a corporate vehicle. In addition, if an arrangement is made to temporarily scale up remuneration during the qualifying period, followed by a reduction after the qualifying period, then any amount paid will be excluded from eligible remuneration.

Non Arm’s Length Employees:

A special rule will apply to employees that do not deal at arm’s length with the employer. The subsidy amount for such employees will be limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, up to a maximum benefit of $847 per week or 75 per cent of the employee’s pre-crisis weekly remuneration. That is, a non arm’s length employee cannot increase their salary after March 15, 2020 to maximize the benefit. The entitlement will be based on what the non-arm’s length employee was earning before March 15^th.

Refund for Certain Payroll Contributions:

The Federal government proposed to expand the CEWS by introducing a new 100 per cent refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund would cover 100 per cent of employer-paid 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 for the CEWS for those employees.

In general, an employee will be 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 would not be available for eligible employees that are on leave with pay for only a portion of a week.

This refund would not be subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the CEWS. There would be no overall limit on the refund amount that an eligible employer may claim. For greater certainty, employers would be required to continue to collect and remit employer and employee contributions to each program as usual. Eligible employers would apply for a refund, as described above, at the same time that they apply for the CEWS.

To be clear, this is an amount over and above the CEWS. There is no maximum on this.

No Limit on Subsidy Claim:

There would be no overall limit on the subsidy amount that an eligible employer may claim. That is, the actual dollar amount of subsidy is only limited per employee. The number of employees is not limited.

Employers must make their best effort to top-up employees’ salaries to bring them to pre-crisis levels.

Interaction with the Canadian Emergency Response Benefit (CERB):

As noted in previous publications, employees can claim $2,000 per month if they lose their job or have reduced earnings because of COVID 19. If an employee is eligible to claim the CERB, the employer cannot claim the 75% subsidy in the 4 week period in which the employee is eligible for the CERB. In order to claim the CERB, the employee is not supposed to have earned any income in the four week period and they have to have been out of work or unable to work for 14 consecutive days.

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.

Taxation of Subsidy:

The subsidy is fully taxable. From a cash perspective, the tax cost of obtaining the subsidy will not be due until the eligible employer’s tax filing due date. For a CCPC with a December 31, 2020 year end, the taxes on the subsidy would not be due until March 31, 2021.

Ensuring Compliance:

If the employer does not meet the eligibility requirements and has incorrectly received the subsidy, the employer would be required to repay amounts received under the Canada Emergency Wage Subsidy. Penalties may apply in cases of fraudulent claims. Employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 per cent of the value of the subsidy claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed.

As always, please contact your trusted advisor at Mowbrey Gil if you need any assistance or have further questions on the wage subsidy program.

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