Canada Emergency Wage Subsidy (“CEWS” or “the 75% wage subsidy”)
(Updated July 14, 2020)
***CEWS has been extended to December 31, 2020. The government has also announced that they will be adjusting the parameters of the program starting the July program period, however no further details are available at this time.
- To help businesses keep and return workers to their payroll through the challenges posed by the COVID-19 pandemic, Bill C-14 has been passed into law, providing for the new Canada Emergency Wage Subsidy. This measure will provide up to a 75 per cent wage subsidy to Eligible Entities for up to 24 weeks, retroactive to March 15, 2020.
- The 75% subsidy did not replace the previously announced 10% wage subsidy, but rather, is an entirely new program.
The “Big Picture”
Eligible Entities who have experienced a Required Revenue Reduction or deemed Required Revenue Reduction in a Reference Period (see the table below) will receive up to a 75% wage subsidy for Eligible Remuneration paid to Eligible Employees in respect of a Claiming Period.
We note that the legislation allows the government to extend the Claiming Periods up to September 30, 2020. If the subsidy is extended past May 30, 2020, the government also has the ability to change the maximum weekly amount of the subsidy.
- Individuals, corporations, partnerships, trusts, NPOs, and Charities
- There are specific rules dealing with organizations that are owned partially by governments.
- Had a payroll account registered with CRA on or before March 15, 2020
- Also of note is that Trusts do not appear to be Eligible Entities
Claiming Period, Required Revenue Reduction and Reference Period
|Claiming Period||Required Revenue Reduction||Reference Period|
|Period 1||March 15 to April 11||15%||March 2020 over:
|Period 2||April 12 to May 9||30%||
|Period 3||May 10 to June 6||30%||
|Period 4||June 7 to July 4||30%||
|Period 5||July 5 to August 1||30%||
|Period 6||August 2 to August 29||30%||
*** If an Eligible Entity meets the Required Revenue Reduction in a Reference Period they are deemed to meet the Required Revenue Reduction in the subsequent Reference Period.***
- an individual who is employed in Canada and;
- Has not been without work for more than 14 consecutive days in the Claiming Period.
- This additional requirement replaces the previously announced restriction that an employer cannot claim the CEWS for remuneration paid to an employee in a week that falls within a 4-week period in which the employee is eligible for the $2,000 per month Canada Emergency Response Benefit.
- If an Eligible Employee is employed in a week by two or more Eligible Entities that do not deal with each other at arm’s length, the total amount of the subsidy in respect of the Eligible Employee for that week shall not exceed the amount that would arise if the Eligible Employee’s Eligible Remuneration for that week were paid by one Eligible Entity.
- Revenue, means 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 in the particular period (does not appear to include work in progress)
- In general, normal accounting method/policies previously used by business must be used for comparison
- Excludes the following sources of revenue:
- Revenue from non-arm’s length parties
- extraordinary income
- proceeds from selling capital property
- The 75% wage subsidy, or the 10% wage subsidy
- Employers can make several elections when making their claim under the CEWS:
- Accounting method election – Employers can elect to calculate their Qualifying Revenue on an accrual basis or a cash basis. This election, if made, applies to all of the reference periods.
- Reference period election – Employers can elect to use the month-over-month comparison or the average revenue earned in January and February as the benchmark used to determine if there was a decline in Qualifying Revenue (see the Reference Periods in the above chart). This election, if made, applies to all of the reference periods.
- Government sources election (NPOs and charities only) – NPOs and registered charities can elect whether or not to include revenue from government sources in the calculation of Qualifying Revenue. This election, if made, applies to all of the reference periods.
- Consolidated financial statements – If a corporate group normally prepares consolidated financial statements, each member of the group may determine its Qualifying Revenue separately, provided every member of the group determines its Revenue on that same basis (i.e. each Eligible Entity within the group must determine its revenue separately)
- Affiliated Group – Alternatively affiliated groups may jointly elect to calculate the gross revenue on a consolidated basis and each Eligible Entity in the group will use the result of the calculation.
- For example, if a corporate group has met the Required Revenue Reduction in a Reference Period this could alleviate the situation where a “payroll corporation” has no arm’s length Revenue.
- Joint Venture – if all of the interests in an Eligible Entity are owned by participants in a joint venture and all or substantially all of the Qualifying Revenue of the eligible entity for a Reference Period is in respect of the joint venture, then the Eligible Entity may use the Qualifying Revenues of the joint venture instead of its Qualifying Revenues.
- “Look Through” Rule – If all or substantially all of a qualifying employer’s income is from non-arm’s length sources, the Eligible Entity can “look through” to the non-arm’s length payor(s) Revenue Reduction to determine whether the Eligible Entity qualifies for the subsidy.
- Where income is received from multiple non-arm’s length sources special rules prorate and average the Revenue Reduction of each payor in determining the Eligible Entities’ Revenue Reduction.
- A special rule provides that an Eligible Entity will not receive a subsidy where the Eligible Entity enters into a transaction, event or series of transactions or events, or takes an action (or fails to take an action) – that has the effect of reducing its revenue in a Reference Period and it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause the Eligible Entity to qualify for the subsidy.
- If the anti-avoidance rule applies, the Eligible Entity is liable to a penalty of 25% of the subsidy claimed in the application made by the Eligible Entity.
- The wording on this test is incredibly broad and could be invoked by CRA in many circumstances. However one limitation inherent in the rule is, if the action (or failure to take an action) would not have made the difference between receiving the subsidy and not, it would be hard for the CRA to argue that one of the main purposes of the action (or failure to take an action) is to qualify for the subsidy.
- Defined to be the average weekly remuneration paid between January 1 and March 15, 2020, excluding any 7 consecutive days (or longer) where the employee was not remunerated.
- An employer can elect, on an employee by employee basis, to instead use the period of March 1 – May 31, 2019 as the baseline remuneration period.
- We note that Baseline Remuneration is based on the average weekly remuneration paid (cash basis) whereas the 75% wage subsidy is based on wages paid to an eligible employee in respect of a week (accrual basis) in a Claiming Period.
- Employees paid monthly will not be able to include their March pay in the calculation of Baseline Remuneration (when using the Jan – March 2020 baseline period). As a result the Baseline Remuneration may be smaller than expected.
- The legislation does not specify exactly how to calculate “average weekly remuneration” however we believe the following approach is reasonable:
- (A) * (7/(C – B)).
- The variable “A” represents the total Eligible Remuneration paid by the Eligible Employer to the Eligible Employee between January 1, 2020 and March 15, 2020
- The variable “B” represents the period of time measured in days that are excluded from the calculation of baseline remuneration (periods of 7 or more consecutive days for which the employee was not remunerated).
- The variable “C” represents the period of time measured in days that are within the baseline period (for March 1 – May 31, 2019 this would be 92, for January 1 – March 15, 2020 this would be 75).
- The 7 represents the number of days per week.
Eligible Remuneration (maximum benefit based on $58,700 of annualized remuneration)
- Consists of most forms of taxable remuneration provided to employees including commissions with the exception of severance pay, stock option benefits or personal use of a corporate vehicle.
- Bonus income may technically be included in the definition of Eligible Remuneration, however, it is likely difficult to argue that the full amount of the bonus is in respect of a Claiming Period
- Employers are also eligible for the subsidy with respect to new employees.
- Anti-avoidance rules have been added to exclude the following amounts from Eligible Remuneration:
- Any amount that can reasonably be expected to be paid or returned (directly or indirectly) to the employer including amounts returned to a non-arm’s length entity or paid or returned to another entity at the employer’s direction
- Amounts paid in excess of the employee’s Pre-crisis weekly remuneration where subsequent to the Claiming Periods the employee is reasonably expected to be paid lower than their Pre-crisis weekly remuneration (i.e. increasing remuneration during a Claim Period and subsequently clawing the income back)
Amount of the wage Subsidy
- There is no overall limit on the subsidy amount that an Eligible Entity can claim.
- The amount of the wage subsidy is calculated on an employee by employee basis as 75% of the Eligible Employee’s Baseline Remuneration in respect of a week to a maximum benefit of $847 per week. In order to get this benefit, the employee must be paid at least the amount of the wage subsidy in respect of the week. In addition, if an Eligible Employee is paid more than the Eligible Employee’s Baseline Remuneration, the amount of the benefit is 75% of the amount paid in respect of the week to a maximum of $847.
- Written in a more numeric fashion the calculation of the wage subsidy in respect of an Eligible Employee for a particular week within a Claiming Period is as follows:
The greater of:
- The least of:
- 75% of Eligible Remuneration paid to the Eligible Employee in respect of the week,
- $847, and
- The least of:
- 100% of Eligible Remuneration paid to the Eligible Employee in respect of the week,
- 75% of the Baseline Remuneration in respect of the Eligible Employee
Example 1 – An employee is paid salary once per month at the end of the month of $6,000 and the salary does not change.
The employee was paid $12,000 in the period of January 1 to March 15, 2020. Therefore the Baseline Remuneration for the employee is: $12,000 * 7 / (75 – 0) = $1,120
The employee’s weekly earnings are calculated as follows: $6,000 * 12 months/year / 52 weeks/year = $1,385.
Note: The baseline remuneration is different from the weekly earnings because half a month’s worth of earnings was not included in the calculation of Baseline Remuneration
Each week the employer would be eligible for a wage subsidy in respect of the employee of $847 as calculated below. The amount of the subsidy with respect to the employee for the Claiming Period is $3,388 (4 weeks * $847 per week)
The greater of ($847):
- The least of ($847):
- 75% * $1,385 = $1,039,
- $847, and
- The least of ($840):
- 100% * $1,385 = $1,385
- 75% * $1,120 = $840
Example 2 – Employee pre-crisis earnings of $3,200/month, and starting March 15, earnings of $2,400/month (75% of the pre-crisis earnings) because the business is closed during the pandemic and the employee is on leave with partial pay:
The employee was actually paid $6,400 in the period of January 1 to March 15, 2020. Therefore the Baseline Remuneration for the employee is: $6,400 * 7 / (75 – 0) = $597.
The employee’s weekly earnings after March 15, 2020 are calculated as follows: $2,400 * 12 months/year / 52 weeks/year = $1,385 = $553.
Each week the employer would be eligible for a wage subsidy in respect of the employee of $447 as calculated below. The amount of the subsidy with respect to the employee for the Claiming Period is $1,792 (4 weeks * $448 per week)
The greater of ($448):
- The least of ($415):
- 75% * $553 = $415,
- $847, and
- The least of ($448):
- 100% * $553 = $553
- 75% * $597 = $448
The employee’s pay was reduced from $3,200 to $2,400, however, as the employer was paying 75% of the employee’s pre-crisis earnings, we would expect the employer to be fully reimbursed by the wage subsidy. However because baseline earnings are calculated on a cash basis, the employer does not receive a subsidy of all cash paid. In addition in this situation, the employer may be eligible to get a refund of the employer portion of the CPP and EI paid with respect to this employee.
Refund for Certain Payroll Contributions
- The government is expanding the CEWS by introducing a new 100% refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan.
- Requires both of the following conditions to be satisfied:
- The employee must not have worked at any point throughout a week
- The wages must be paid in a claiming period of the Eligible Entity where the employer is eligible to claim the CEWS
- Employers will be required to repay amounts paid under the CEWS if they do not meet the eligibility requirements.
- Penalties may apply in cases of fraudulent claims. The penalties may include fines of up to as much as 200% (in addition to the 25% penalty and the gross-negligence penalty) or even imprisonment.
- If an Eligible Entity knowingly, or under circumstances amounting to gross negligence, makes a false statement in the application for the wage subsidy, a penalty equal to 50% of the amount, if any, by which the subsidy claimed in the Eligible Entity’s application exceeds the Eligible Entity’s actual entitlement to the wage subsidy.
- This penalty would be in addition to the penalty for inappropriately reducing the Qualifying Revenue
- Criminal penalties are also applicable with respect to claims made under the CEWS. Penalties on conviction can include a fine of up to 200% of the amount of the CEWS claimed (in addition to the other penalties) plus imprisonment for up to 5 years.
Non-arm’s length wages
- Bill C-14 limits the 75% wage subsidy in respect of Eligible Remuneration paid to owner-managers to 75% of Baseline Remuneration. When considering the detailed formula described above, non-arm’s length employees always calculate paragraph “a” as nil.
- Recall that Pre-crisis weekly remuneration is defined to be the average weekly remuneration paid between January 1 and March 15 or between March 1 and May 31, 2019.
- The recent legislation does not appear to address the concern of owner managers that have historically compensated themselves with dividends. From a policy perspective this seems to be an unfair result for active owner managers receiving dividends rather than salary.
Interaction with the 10% wage subsidy
- Any amounts claimed under 10% wage subsidy program in a Claiming Period reduces the 75% wage subsidy in that same period.
- The calculation of the 75% wage subsidy requires that the “deemed” 10% wage subsidy first be claimed and then subtracted from the 75% wage subsidy.
- This may have unintended consequences. Consider the following example:
- An Eligible Entity is entitled to the maximum $25,000 10% wage subsidy in March and is also eligible for the 75% wage subsidy in respect of that period. The $25,000 10% wages subsidy must be claimed first and reduce the 75% claim. If the company was not eligible for the 75% wage subsidy in May they would not be able to claim the 10% wage subsidy as it was deemed to be received in March.
- Alternatively, if the same Eligible Entity was not entitled to the 75% wage subsidy in March they would be able to claim the 10% wage subsidy. If they then became eligible for the 75% wage subsidy in April (and May) they would end up with a larger total subsidy.
- It remains to be seen how CRA will apply this calculation in practice.
Taxability of Wage Subsidy
- The wage subsidy is taxable income to the employer.
How to Apply
- Employers must file an application in respect of each Claiming Period in prescribed form and manner on or before September 30, 2020.
- The individual who has principal responsibility for the financial activities of the Eligible Entity attests that the application is complete and accurate in all material respects.
- Employers will be able to apply through My Business Account Portal and through a web-based application.
- Employers will need to keep records to support their application.
- The amount of any wage subsidy by an Eligible Entity in respect of a Claim Period cannot exceed the amount claimed by the Eligible Entity in its application in respect of that Claim Period.
- This provision appears to indicate that if you have filed your application incorrectly (understating the Eligible Entities’ entitlement to the subsidy) there is not an opportunity to amend the application, or perhaps no opportunity to amend the application after September 30, 2020.
Information made available to the Public
- The Minister may communicate or otherwise make available to the public, in any manner that the Minister considers appropriate, the name of any person or partnership that makes an application for the 75% wage subsidy.
Maintaining pre-crisis salary levels
- In past press conferences and news releases the Department of Finance had indicated that Eligible Entities are expected to make their best effort to top-up employees’ salaries to bring them to pre-crisis levels. Bill C-14 does contain any such requirement.
- 6 week lead time to receive the Subsidy.
- After submitting the claim CRA is promising a 7 – 10 day period to pay the Eligible Entity.
- Business owners will need to consider cash flow concerns in regards to bringing workers back on payroll.
- The Canada Emergency Business Account may assist small employers with cash flow in the short term.
- Payroll remittances cannot be reduced as is provided for under the 10% wages subsidy program.
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.
- This interaction would eliminate all of the benefit from the work-sharing program to the extent that the employer was participating in both programs
Interaction with the Canada Emergency Response Benefit (CERB)
- If an employee is being paid more than $1,000 in a claiming period and the employee doesn’t have a 14 consecutive day period in a claiming period where they are not paid, the employee would not be eligible for CERB with respect to the claiming period. It is the responsibility of the employee to repay any CERB that they have received.
- If an employee is earning less than $1,000 in a claiming period, it may be possible (if all other criteria are satisfied) for the employee to be eligible for CERB in addition to the employer being eligible for CEWS with respect to the employee’s wages.