The Canada Emergency Wage Subsidy and Temporary Wage Subsidy for Employers
On March 18, 2020, the federal government announced Canada’s COVID-19 Economic Response Plan, which introduced new tax measures to support Canadian workers who are in need of financial assistance due to the COVID-19 situation. Part of this plan included a 10% wage subsidy for employers called the Temporary Wage Subsidy for Employers. However, with regard to eligible corporations, only Canadian-controlled private corporations with taxable capital less than $15 million are eligible. On March 25, Bill C-13, COVID-19 Emergency Response Act, enacted this wage subsidy.
Mere days later, the Prime Minister revealed that another 75% wage subsidy would be introduced, and all Canadian employers would be eligible to receive it. On April 1, the Department of Finance published a backgrounder that provided further details on this new subsidy, known as the Canada Emergency Wage Subsidy (“CEWS”). On April 8, the Department of Finance announced several changes to the CEWS in order to provide additional flexibility to employers, including an additional refund of employer-paid contributions to EI, CPP, QPP, and QPIP. On April 11, the CEWS was tabled in Bill C-14, COVID-19 Emergency Response Act, No. 2, which received Royal Assent on the same day. The online application portal for the CEWS will open on April 27, and the government expects to have 90% of claims processed by May 4 with payments coming later that same week.
This article is a summary of the key aspects of both wage subsidies that advisors and employers should be aware of.
THE CANADA EMERGENCY WAGE SUBSIDY
The CEWS is effective from March 15, 2020, to June 6, 2020, though Bill C-14 appears to give the government the authority to extend the subsidy to September 30, 2020. The estimated fiscal cost of this subsidy is $73 billion. The CEWS is provided under new section 125.7 of the Income Tax Act. If an employer does not qualify for the 75% subsidy, it can still potentially qualify for the 10% wage subsidy that was enacted by Bill C-13. This subsidy is 10% of remuneration paid from March 18 to June 20, up to a maximum subsidy of $1,375 per employee and $25,000 per employer. The 10% subsidy is discussed in the second part below.
Only an employer that is an eligible entity may access the CEWS. Under subsection 125.7(1), an “eligible entity” includes:
- a corporation, other than a tax-exempt corporation;
- an individual (which includes a trust);
- a registered charity;
- a non-profit organization that is exempt from tax because of paragraph 149(1)(e), (j), (k), or (l);
- a partnership, all of the members of which are an eligible entity; or
- a prescribed organization.
Thus, unlike for the 10% wage subsidy, there is no restriction where a corporation is controlled by a non-resident, is not a private corporation, or has taxable capital exceeding $15 million. However, the CEWS is not available to public institutions, which is also defined under subsection 125.7(1) as a school, school board, health authority, public university or college, or any organization described under paragraphs 149(1)(a) to (d.6).
To qualify for the 75% subsidy, an eligible entity must also be a qualifying entity. An employer must separately determine if it is a qualifying entity for each “qualifying period” to be eligible for the CEWS in that period. A qualifying entity is defined under subsection 125.7(1) as an eligible entity that files an application in a prescribed form before October 2020, had a business number as of March 15, 2020, and meets the revenue decline criteria for the qualifying period.
The CEWS can only be claimed with respect to remuneration paid to an eligible employee. Under subsection 125.7(1), “eligible employee” refers to an individual employed in Canada. However, if an employee is not remunerated by the employer with respect to 14 or more consecutive days in a qualifying period, they are not an eligible employee for that period.
Revenue decline for a qualifying period
To access the CEWS, an eligible entity must experience a significant decline in its revenue with respect to the qualifying period. There are three periods in which an employer might be eligible for the CEWS for its remuneration paid:
- Period 1: March 15 – April 11
- Period 2: April 12 – May 9
- Period 3: May 10 – June 6
The definition “qualifying period” under subsection 125.7(1) states that the government could prescribe additional periods, as long as they end no later than September 30, 2020. There is no indication that the CEWS will be extended, but this provision has made it possible.
Eligibility for a given period is determined on the basis of the decline of the employer’s year-over-year revenue for the calendar month in which the period began. For March 2020, April 2020, and May 2020, an employer’s year-over-year revenue must have declined by at least 15%, 30%, and 30%, respectively, when compared to the same month in 2019. For example, Period 1 pertains to March 2020, so an employer should compare its revenue for March 2020 to that of March 2019 to assess whether at least a 15% decline has occurred. If at least a 15% drop did occur, the employer is eligible for the subsidy for eligible remuneration paid from March 15 to April 11. Alternatively, an employer can instead compare a month’s revenue to the average revenue earned in January and February 2020. An employer must choose one of the two approaches when applying for the CEWS and continue to use that approach for the duration of the program.
To provide certainty for employers, once an employer is eligible for a qualifying period, they automatically qualify for the CEWS in next period. For example, an employer with a revenue drop of more than 15% in March qualifies for the first and second periods of the program, covering remuneration paid between March 15 and May 9. Similarly, an employer with a revenue drop of 30% in April qualifies for the second and third periods of the program, covering remuneration paid between May 10 to and June 6.
The key time periods and revenue reduction thresholds are summarized in this chart.
|Required revenue reduction||Reference period for determining decline in revenue||Period during which remuneration paid is eligible for CEWS|
|Period 1||15%||March 2020 compared to:
• March 2019 or
• Average of January and February 2020
|March 15 to April 11|
|Period 2||30%||Eligible in Period 1, or
April 2020 compared to:
• April 2019 or
• Average of January and February 2020
|April 12 to May 9|
|Period 3||30%||Eligible in Period 2, or
May 2020 compared to: • May 2019 or
• Average of January and February 2020
|May 10 to June 6|
The definition of “qualifying revenue” under subsection 125.7(1) specifies how to compute an employer’s past and current revenue amounts used to determine the extent of the revenue decline. Qualifying revenue includes 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 the entity’s resources, in Canada. Revenue excludes extraordinary items, amounts on account of capital, and amounts derived from a non-arm’s length person or partnership. Also, revenue excludes the amount of the CEWS received. Moreover, registered charities and non-profit organizations are permitted to choose whether or not to include revenue from government sources.
Subsection 125.7(4) further provides that qualifying revenue is determined in accordance with normal accounting practices using either the accrual method or the cash method. Subsection 125.7(4) also provides special rules for computing qualifying revenue on a consolidated basis, for affiliated groups, joint ventures, and non-arm’s length entities.
Determining the amount of the subsidy
The amount of the subsidy is computed under subsection 125.7(2). On a per employee, per week basis, the amount of the subsidy for eligible remuneration paid in a qualifying period is the greater of:
- the lesser of 75% of the remuneration paid, or $847; and
- the least of the eligible remuneration paid, $847, or 75% of the employee’s baseline (i.e., pre-crisis) remuneration.
However, if the eligible employee does not deal at arm’s length with the employer, amount (a) in the above formula is nil. The result of this is that unlike for arm’s length employees, the CEWS for a non-arm’s length employee is limited to their pre-crisis remuneration.
There is no overall limit to the total subsidy amount that an eligible employer may receive. Since the goal of the program is to encourage employers to retain staff and/or rehire laid-off workers, an employer’s entitlement to the subsidy is dependent on salary or wages actually paid to its employees. With the help of this subsidy, employers are expected to make their best efforts to top up their employees’ salaries to pre-crisis levels.
Eligible remuneration includes salary, wages, and other remuneration. Essentially, these are amounts from which an employer is generally required to withhold and remit taxes. Eligible remuneration does not include severance pay, stock option benefits, or taxable benefits for personal use of a corporate vehicle. The complete definition of “eligible remuneration” can be found under subsection 125.7(1). An employee’s pre-crisis baseline remuneration is their average weekly remuneration paid during the period that began on January 1, 2020, and ended on March 15, 2020—this excludes any period of seven or more consecutive days for which the employee was not remunerated.
Refund of payroll contributions
Subsection 125.7(2) also provides a refund of 100% of employer-paid contributions to EI, CPP, QPP, and QPIP. More specifically, the refund covers contributions for eligible employees for each week throughout which those employees are on leave with pay and for which the employer can claim the CEWS for those employees. There is no weekly or overall limit to the amount that can be refunded. Employers are required to continue collecting and remitting employer and employee contributions, and the amounts will be refunded along with the payment of the CEWS.
Application and compliance matters
Subsection 125.7(2) deems an employer to have overpaid the government on account of the employer’s tax liability, and the amount of the overpayment is the amount of the CEWS. Thus, the government will pay out the subsidy to eligible entities after they submit an application. An application can be submitted via either a portal under the CRA’s My Business Account or a web-based application, both of which are expected to be available on April 27. Most claims should be processed by May 4 and payments will be made later that same week. A business can apply via any of the following methods:
- using My Business Account;
- representatives can apply using Represent a Client; or
- using a separate online application form.
The CEWS will be processed at the payroll program (“RP”) account level, separate applications must be filed for each RP account.
If a business is expecting a payment of $25 million or more, they will have to receive the payment through the large value transfer system (“LVTS”). This requires being enrolled in direct deposit for the payroll account and being registered for the LVTS.
Since the wage subsidy is considered government assistance for the purposes of the Income Tax Act, the amount of assistance received will be included in the employer’s taxable income.
Eligible employers should keep records that demonstrate their revenue reduction, remuneration paid to each employee, and pre-crisis remuneration for each employee. Being certain of eligibility is important because if an employer does meet the eligibility requirements, it will have to repay all of the government subsidies and will also be expected to pay its employees.
An employer that engages in artificial transactions to manipulate its revenue for the purpose of claiming the CEWS will be subject to a penalty under subsection 163(2.901) equal to 25% of the subsidy claimed. The employer must also repay the entire amount of the subsidy. There is also a new penalty for false statements relating to the CEWS under paragraph 163(2)(i).
TEMPORARY WAGE SUBSIDY FOR EMPLOYERS
The Temporary Wage Subsidy for Employers (“the 10% subsidy”) was enacted by Bill C-13 on March 25, 2020. It provides a subsidy equal to 10% of remuneration paid between March 18, 2020, and June 20, 2020. The amount of the subsidy is subject to a maximum of $1,375 per employee and $25,000 per employer. Unlike the CEWS, which employers are still waiting to apply for, employers can access the 10% subsidy right now by reducing their payroll tax remittances to the Receiver General.
“Eligible employer” is defined under subsection 153(1.03) as a person or partnership that employs one or more eligible employees, has a business number as of March 18, 2020, and is any of the following entities:
(a) a Canadian-controlled private corporation (“CCPC”) with less than $15 million of taxable capital employed in Canada (including that of any associated corporations) for the prior taxation year;
(b) an individual other than a trust;
(c) a non-profit organization that is exempt from tax under paragraph 149(1)(l);
(d) a registered charity; or
(e) a partnership, all of the members of which are described in (a), (b), (d), or (e) above.
Amount of the subsidy
The subsidy is computed on the basis of “eligible remuneration” paid to an “eligible employee”—both of these terms are defined under subsection 153(1.03). An eligible employee is simply an individual who is employed in Canada. Eligible remuneration means salary, wages, or other remuneration paid to the eligible employee during the eligible period that begins on March 18, 2020, and ends on June 19, 2020.
The amount of the subsidy is computed as 10% of eligible remuneration paid, subject to a limit of $1,375 per employee and a total limit of $25,000 per employer. However, the calculation of the subsidy under subsection 153(1.02) does not actually reference these numbers; it instead references a “prescribed amount” and “prescribed percentage”. This means that the government could enact regulations that prescribe these values. At the time of writing, these regulations have not been introduced, but the government could choose to increase these 10%, $1,375, and $25,000 amounts if it so desires.
How to access the subsidy
Subsection 153(1.02) deems an employer to have remitted the amount of the wage subsidy to the Receiver General. An employer should calculate its payroll remittances of federal and provincial/territorial taxes, and reduce the total remittance by the amount of the subsidy. Remittances of CPP contributions and EI premiums cannot be reduced.
Since an employer does not reduce its deductions from its employees’ pay and remits less to the Receiver General, the difference (i.e., the amount of the subsidy) is effectively money in the employer’s pocket. An employer can begin to reduce its remittances in the first remittance period that includes remuneration paid between March 18, 2020, and June 20, 2020. If the subsidy exceeds total remittances, an employer can reduce its future remittances, including amounts that are due after the subsidy period ends.
As mentioned above, the 10% subsidy is considered government assistance, and will therefore be included in the employer’s taxable income.
Employers are expected to keep records to support their subsidy calculations. Such records include:
- total remuneration paid,
- the amount of taxes deducted from the remuneration, and
- the number of employees in that pay period.
The 10% subsidy only allows an employer to reduce their remittances to the CRA and does not affect remittances that must be made to Revenu Québec.
INTERACTIONS BETWEEN THE TWO SUBSIDIES AND OTHER MEASURES
If an employer is eligible for both subsidies in a period, any benefit from the 10% subsidy will reduce the amount that can be claimed for the CEWS in the same period.
Also, assistance received under either subsidy will reduce the amount of remuneration expenses eligible for other federal tax credits that are computed on the basis of the same remuneration.