Dov Begun, Colena Der
Apr 13, 2020
For further information on the changes below or other tax matters, please contact one of the authors above or any member of our National Tax Group.
The Canada Emergency Wage Subsidy (CEWS) was first announced by the federal government on March 27, 2020. This program provides a 75% wage subsidy for up to 12 weeks, retroactive to March 15, 2020, for eligible businesses that have suffered a significant decrease in revenues as a result of the economic circumstances arising from the COVID-19 crisis.
The federal government introduced and passed legislation on April 11, 2020, to implement the CEWS. This program will be administered by the Canada Revenue Agency under the Income Tax Act (Canada).
The terms of the CEWS program respond to many of the concerns noted by Canadian businesses regarding the application to businesses that are either currently in the start-up phase or that operate through multiple corporate and/or partnership affiliates. These businesses had raised concerns that the measurement of the revenue reduction criterion could inappropriately exclude them from qualifying for the subsidy.
Overview of the CEWS
The following is a summary of the key elements of the CEWS. Each of the elements will be examined in further detail in the remainder of this Update.
- The subsidy is available to employers that are individuals, taxable corporations, non-profit organizations, registered charities and partnerships consisting of eligible employers.
- For current employees, the subsidy is generally equal to the remuneration paid to each eligible employee or 75% of the employee’s pre‐crisis remuneration (whichever is less), up to a maximum benefit of $847 per week. For employees hired during the program term, the subsidy will be calculated based solely on actual remuneration paid, subject to the $847 weekly maximum per eligible employee. Special rules apply for non-arm’s length employees. There is no cap on the aggregate amount of the subsidy. The subsidy will be reduced by payments received by the employer or employee under other COVID‐19 relief measures.
- Eligible employers can claim the subsidy if they have suffered a drop of at least 15% in qualifying revenues in March 2020 and 30% in April and May 2020 (the Required Revenue Reduction).
- All employers may elect to compare their March, April and May 2020 revenue to that of the same month in 2019 or, alternatively, to an average of their revenue earned in January and February of 2020.
- For the purpose of establishing the Required Revenue Reduction, an employer’s qualifying revenue would be its revenue in Canada earned from arm’s length sources. Elective provisions are included in the legislation to allow employers to elect between the accrual or cash method for computing revenue, to calculate revenue on a consolidated basis with other eligible employers within a corporate group or on a stand-alone basis, and to establish eligibility by reference to the revenue of non-arm’s length persons and partnerships in certain circumstances.
- For non-profit organizations and registered charities, such entities will be allowed to choose whether or not to include government assistance in their revenue for purposes of applying the Required Revenue Reduction test.
- Once an employer is determined to be eligible for a specific period, the employer automatically qualifies for the next period of the program.
- For employers with employees on paid leave and for which the employer is otherwise eligible to claim the CEWS, the subsidy is increased by 100% of the employer-paid contributions in respect of these employees to Employment Insurance (EI), the Canada Pension Plan (CPP) and the Québec equivalents.
- The program will take effect retroactively and will be in place for 12 weeks from March 15 to June 6, 2020. The CEWS legislation provides the government with the ability to extend the program until September 30, 2020, and the ability to change the Required Revenue Reduction criteria and subsidy amount during any such extended term.
What employers should be considering
Even though the application process may not begin for several weeks, given the significance of this subsidy program and the impact it could have on how a business manages its workforce (including possible layoff and rehiring decisions), employers should review their eligibility for the CEWS. This review should include consideration of the following:
- The approach to measuring qualifying revenue and establishing the Required Revenue Reduction. This may include choosing between the accrual versus cash method and consolidation versus entity-by-entity qualification, and whether to compare revenues to the corresponding 2019 period or to an average of the January and February 2020 revenues.
- For businesses that operate through corporate groups, the review involves understanding and assessing the qualification requirements and the implications of electing to use one of the consolidated methods for establishing the Required Revenue Reduction and preparing the supporting information to adopt one of those alternative approaches.
- Where salaries have been reduced for existing employees, employers must calculate pre-crisis remuneration.
- Employers must also determine the reductions to the CEWS claim by amounts received by the employer and employees under other COVID-19 relief measures (e.g., Temporary Wage Subsidy and the extended Work-Sharing programs).
Detailed review of the CEWS
Eligible employers (referred to in the legislation as eligible entities) include individuals, taxable corporations and partnerships consisting of eligible employers, as well as non‑profit organizations and registered charities. Public bodies (including municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals) will not be eligible for the subsidy. Eligible entities must establish a drop in qualifying revenues of at least 15% in March and 30% in April and May 2020 as compared to a prior reference period in order to be eligible for the subsidy.
Publicly listed corporations and Canadian subsidiaries of multinational corporations can also be eligible for the subsidy provided they meet the Required Revenue Reduction.
The amount of the subsidy available for an employee will vary depending on whether the employee was employed prior to March 15, 2020, and whether the employee is at arm’s length to the employer. Each category is discussed below. In all cases, the subsidy is capped at $847 per week per eligible employee, with no cap on the employer’s aggregate subsidy under the program.
The subsidy is not available on remuneration paid to employees who have been without remuneration for 14 or more consecutive days in an eligible period. This exclusion is intended to prevent overlap between this subsidy and the Canada Emergency Response Benefits program.
The subsidy is also reduced by the amount of any subsidy received by the employer under the Temporary Wage Subsidy and EI benefits received by eligible employees under the Work-Sharing program.
For existing employees, the amount of the subsidy for an eligible employer will be calculated per employee as the greater of
- 75% of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
- the least of (i) the amount of remuneration paid, (ii) 75% of the employee’s pre-crisis weekly remuneration, and (iii) a maximum benefit of $847 per week.
Therefore, employers may be eligible for a subsidy of up to 75% of pre-crisis wages or salaries of these employees if these employees are paid at least 75% of their pre-crisis wages during the period of the program. For example, assuming that an existing employee earned a salary of $1,000 per week prior to the COVID-19 crisis, and only $750 during the crisis, the employer would still be entitled to a subsidy of $750 per week.
If the employee is paid less than 75% of their pre-crisis wages, the subsidy will be capped at the greater of the actual wages paid and $847 per week. For example, assuming that an existing employee earns a salary of $1,000 per week prior to the crisis and, only $600 during the crisis, the employer would only be entitled to a subsidy of $600.
The “pre-crisis remuneration” for an employee is referred to in the legislation as the “baseline remuneration” and is defined as the average weekly remuneration paid between January 1 and March 15, inclusive, excluding any seven-day period in respect of which the employee did not receive remuneration. The federal government notes that employers are expected to make best efforts to top-up employees’ salaries to bring them to pre-crisis levels. No specific guidance, however, has been given in the published statements from the government or the CEWS legislation as to what would be considered “best efforts” or the consequences (if any) for the failure to do so.
For new employees hired during the term of this program, employers will be eligible for a subsidy of up to 75% of salaries and wages actually paid to new employees.
Non-arm’s length employees
For employees who are non-arm’s length to their employer (for example, individuals operating through professional corporations), the subsidy will only be available to such non-arm’s length employees who were employed prior to March 15, 2020. For these employees the amount of the subsidy will be limited to the lesser of (i) 75% of the pre-crisis remuneration and (ii) a maximum subsidy of $847 per week. These measures are intended to prevent businesses from hiring or increasing salary for non-arm’s length individuals in order to increase entitlements under the CEWS.
Eligible remuneration may include salary, wages and other remuneration. Remuneration in the form of severance pay and stock option benefits are expressly stated not to be eligible for the subsidy.
The legislation also contains certain restrictions to prevent employers from entering into arrangements to increase their subsidy amount. As a result, remuneration that can reasonably be expected to be repaid or returned directly or indirectly to the employer and remuneration paid in excess of an employee’s “pre-crisis remuneration” for the main purpose of increasing the subsidy are expressly excluded from the subsidy calculation.
Employees on paid leave
For employers with employees on paid leave and for which the employer is otherwise eligible to claim the CEWS, the subsidy is increased by 100% of the employer-paid contributions in respect of these employees to EI, CPP and the Québec equivalents of these programs. This additional subsidy will not be available for employees who are on leave with pay for only a portion of the week.
Required revenue reduction
Employers can claim the subsidy if they have suffered a drop of at least 15% in their qualifying revenues in March 2020 and 30% in April and May as compared to the prior reference period.
An eligible entity’s qualifying revenue for a prior reference period or a current reference period will be its revenue in Canada earned from arm’s length sources, arising from ordinary course activities such as the sale of goods, the rendering of services and the use by others of resources of the employer. Revenue will be calculated using the employer’s normal accounting method although an eligible entity may elect to determine its revenues on a cash or accrual basis and must adopt this method for all qualifying periods of the program. Revenues from extraordinary items are expressly excluded, as are the subsidies received under the CEWS and Temporary Wage Subsidy programs.
The Required Revenue Reduction can be established through a comparison to the revenue from the corresponding month in 2019 or a comparison to the average revenue earned in January and February 2020. An employer must select one of these approaches when first applying for the program, and the selected prior reference period will apply for the duration of the program.
To further increase access to this program, the legislation provides that if an employer qualifies for the subsidy in an eligible period, it will automatically qualify for the subsidiary in the immediately following eligible 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. An employer that has a revenue drop of 30% in April would qualify for the second and third periods of the program covering remuneration paid between April 12 to June 6.
Even though the Required Revenue Reduction is measured on a monthly basis, the claims are made based on eligible remuneration paid in defined eligible periods that begin on March 15.
The following table summarizes the eligible periods and the relevant reference periods for establishing the Required Revenue Reduction:
Eligibility Period (period used to compute subsidy)
Required Reduction in Revenue
Reference Period for Establishing Revenue Reduction
March 15 – April 11
March 2020 over
- March 2019; or
- Average of January and February 2020
April 12 – May 9
30% or if eligibility is established for Period 1
April 2020 over
- April 2019; or
- Average of January and February 2020
May 10 – June 6
30% or if eligibility is established for Period 2
May 2020 over
- May 2019; or
- Average of January and February 2020
Relief for consolidated and affiliated groups
The program details provide special (elective) rules for calculating revenue and establishing the Required Revenue Reduction for employers that operate within larger corporate groups or in joint ventures. Employers must decide whether they want to use these alternative measures for revenue at the start of the program and they will be required to follow the selected approach for the duration of the program. Each of these are described in more detail below.
While these special rules are welcomed relief measures, there remains significant questions on how they are intended to operate in practice.
Eligible employers can (together with each member of an affiliated group of eligible employers) jointly elect to calculate revenue on a consolidated basis in accordance with relevant accounting principles. The effect of this rule is that a corporate group will generally be required (if they select the consolidated method) to consolidate across all affiliated entities. There is no ability to apply consolidation on a selective basis.
If a group of eligible entities normally prepares consolidated financial statements, each member of the group may determine its qualifying revenue separately provided that every member of the group determines its qualifying revenue on that basis.
For corporate groups with multiple business divisions, it is not obvious that the consolidated approach will allow the greatest access to the CEWS. For example, if some business divisions have suffered significant revenue reductions as a result of the current circumstances, but some divisions have not suffered similar reductions or have in fact seen increases in revenues, the consolidation method could deny access to the subsidy for the affected divisions. Conversely, if some business units have suffered dramatically (in excess of the 15% or 30% threshold) and others have only seen mild reductions below the eligibility thresholds, the consolidation method could allow all business units that might otherwise not qualify to access the subsidy.
Whether the consolidation approach will be beneficial to a corporate group will depend on the operating structure (including the level of integration between the business units) and the impact of the current circumstances on the revenues of each affiliate.
Revenue established by reference to non-arm’s length parties
Eligible entities that earn all or substantially all of their revenue from one or more non-arm’s length persons or partnerships, can jointly elect to determine the Required Revenue Reduction by reference to the qualifying revenue of the non-arm’s length persons or partnerships from whom they earn the income. This relief measure is presumably intended to accommodate corporate structures that separate the work force into a separate entity (e.g., in a service or management company) from the revenue generating activities or where there is a central marketing entity that buys the goods or services from affiliates and sells them into the market.
A few observations about this provision:
- The legislation does not define what constitutes “all or substantially all,” but this term is used in several other provisions in the Income Tax Act (Canada), and the Canada Revenue Agency’s longstanding position is that “all or substantially all” means 90% or more (even though the case law has accepted a lower threshold).
- Where the eligible entity earns income from multiple non-arm’s length parties, the calculation is done using a weighted averaged of the non-arm’s length party’s qualifying revenue based on qualifying revenues actually earned by the eligible entity from that party relative to qualifying revenue earned from all non-arm’s length parties included in the calculation.
- For the purpose of this calculation, the non-arm’s length parties’ qualifying revenue is not limited to Canadian-sourced revenue.
- While there are long established rules in the Income Tax Act (Canada) to determine whether a person and a partnership are affiliated with each other, lack of material guidance on whether a person and a partnership are non-arm’s length to each other may create significant uncertainty where a partnership includes members that are outside the corporate group.
It is common in joint ventures for employees to be engaged by a special purpose entity (the JV Employer). If the JV Employer only has employees and revenues of the joint operations are earned directly by the venture participants or through another entity, the employer may not otherwise be eligible for the subsidy. The legislation provides a relieving rule for this scenario by allowing the JV Employer to use the qualifying revenue of the joint venture to establish the Required Revenue Reduction. This provision is only available to a JV Employer if all the interests in the employer are owned by the venture participants and all or substantially all of the JV Employer’s income is in respect of the joint venture.
Tax treatment of subsidy amounts
The CEWS is structured as a deemed overpayment and refund of taxes paid by the eligible employers. The amount of the subsidy will be treated as government assistance and, as a result, taxable income to the employer in the year it is received.
Anti-avoidance measures and penalties
If an employer is subsequently determined to be ineligible for the CEWS, the employer will be required to repay all overpayments received under the program and, in circumstances amounting to gross negligence, may be liable to a penalty equal to 50% of the overpayment.
More punitive provisions apply to employers that enter into transactions or participate in events (or a series of transactions or events) or take action (or fail to take action) that has the effect of reducing their revenue and it is reasonable to conclude that one of the main purposes of the transaction, event or action is to meet the Required Revenue Reduction. In these circumstances, the employer will be required to repay the subsidy amount received and will be liable for a penalty equal to 25% of the subsidy received.
Applying for the subsidy
Qualifying entities that had a business number registered with the Minister of Finance allowing them to make employment withholding remittances as of March 15, 2020, will be able to access the CEWS by applying through their Canada Revenue Agency “My Business Account” or through a web-based application platform. The government indicated that the online application process is expected to be open within 2 to 5 weeks and the application in respect of the qualifying period must be filed before October 2020.
At the time of application, the individual with principal responsibility for the financial activities of the eligible entity will have to attest that the application is complete and accurate in all material respects and that the eligible entity has realized the required decrease in revenues to qualify for the subsidy. Applicants will be required to keep records demonstrating the reduction in revenues and the remuneration paid to employees.
The CEWS legislation provides the Minister of Finance with the authority to disclose to the public the names of the businesses that apply for the subsidy.
Additional information on the Canada Emergency Wage Subsidy can be found at the following links on the Department of Finance's website:
Canada Emergency Wage Subsidy – Press release
Canada Emergency Wage Subsidy – Backgrounder
Canada Emergency Wage Subsidy – Legislation