Canada: CEWS Eligibility: Who Qualifies?

On April 11, 2020 the House of Commons reconvened to unanimously pass legislation to implement the Canada Emergency Wage Subsidy (“CEWS”). As a result, there are new details on which employers and employees are eligible, the benchmarks of revenue loss used to qualify, and the operation of the program.

The portal to apply for the CEWS is expected to open in four weeks.

Details of the CEWS

Eligibility criteria for employers:

• Eligible employers include:
  • individuals;
  • taxable corporations;
  • partnerships consisting of eligible employers;
  • non-profit organizations and registered charities.
• The legislation also provides clarification on what will be considered “public bodies” (which are excluded from the CEWS): municipalities and local governments, Crown corporations, wholly owned municipal corporations, public universities, colleges, schools, and hospitals.
• Employers are eligible for the CEWS for three, month-long qualifying periods starting March 15 and ending June 6, 2020. There is a possibility of adding more qualifying periods until September 30, 2020.
• Once an employer is found eligible for a specific period, the employer automatically qualifies for the immediate next period. However, the employer will have to reapply and meet the required revenue drop for the period after the first two for which it qualified.
• The Government clarified that employees retained and paid with the help of the CEWS need not to be working. They can be on paid leave of absence.
• Eligible employers must demonstrate a drop in revenues for the eligible period.

Calculating Revenues in order to Qualify:

• In order to receive the CEWS, eligible employers must show a reduction of revenues in a particular qualifying period. The required reduction in revenue has been set at 15% for March 2020 and at 30% for April and May of 2020.
• The required reduction in revenue for each qualifying period can be calculated in one of two ways:
  • 2020 reference period against the same month in 2019; or
  • Reference period against the average of January and February of 2020.

Currently, the three Qualifying Periods are:

*may use an average of January and February 2020 revenue instead

• Whichever prior reference period the employer chooses on application must be the same for subsequent periods.
• Employers are allowed to calculate their revenues under their normal method (usually the accrual method) or the cash method but must be consistent as to the method used for all periods.
  • Accrual accounting would treat an issued invoice as revenue upon it being issued. Cash accounting would only consider an invoice as revenue once cash has been received to pay for it.
• Charities and not-for-profits are allowed to choose whether or not to include revenue from government sources as part of the calculation. Once chosen, the same approach applies throughout the program period.
• There are special rules for calculating revenue that groups which normally prepare consolidated financial statements, affiliated groups, joint ventures, and entities which receive 90% or more of the revenue from non-arm's length persons or partnerships may take advantage of.
• Extraordinary items and non-arm's length revenues are excluded from the calculations of revenue.
• What will be considered “Arm's length” is a question of fact. However, where there is relation by blood or marriage and common control, persons and corporations will be deemed to be non-arm's length pursuant to the Income Tax Act. Common control occurs when two or more corporations are controlled by the same person or group of persons.

Eligibility criteria for employees:

• An eligible employee is an individual who is employed in Canada and has not been without remuneration for 14 or more consecutive days in the qualifying period.
  • Previously, the rule was that an employer could not claim CEWS for remuneration paid to an employee in a week that falls within a 4-week period for which the employee was eligible for the Canada Emergency Response Benefit.
  • This was in place to avoid duplication. The new rule appears to mean that employees laid-off without pay between March 15 and April 11 would not be eligible for CEWS. Those who continued working or were on reduced hours may be eligible. Those on paid leaves may also be eligible. Employees laid off between March 15 and April 11, and who accessed either EI or the CERB may be rehired. Wages paid after being rehired are eligible for the CEWS.

Though not yet in place, the Government is considering implementing an approach whereby individuals rehired by their employer during the same eligibility period can repay their CERB amount.

Amount of the subsidy:

• There is no overall limit on the subsidy amount that an eligible employer may claim.
• The prescribed maximum per employee is $847/week or 75% of the employee's baseline weekly remuneration, whichever is less, or, for arm's length employees, 75% of their current remuneration up to a maximum of $847.
• Remuneration means the 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.
  • it does not include severance pay, stock option benefits, or personal use of corporate vehicle.
• Note, this means arm's length employees can be hired or given raises during the subsidy period – though employers must beware of anti-avoidance provisions which will apply to artificial changes in remuneration for the purpose of claiming the subsidy.
• Employees who are not at arm's length from the employer may qualify for the CEWS. For example, owners who paid themselves a regular salary between January 1, 2020 and March 15, 2020 will qualify as employees eligible for the CEWS. However, business owners that have not paid themselves a salary - because they normally pay themselves dividends, for example - will not qualify if they start paying themselves employment remuneration only after March 15, 2020.
• “Baseline remuneration” means the average weekly remuneration paid to the employee between January 1 and March 15, excluding any 7-day period when the employee did not receive remuneration.
• This definition, and the associated test, means any employees hired before March 15, 2020 will be eligible for the subsidy, even non-arm's length employees.
• Further, while employers are expected to make best efforts to pay the final 25% of such employees' baseline remuneration, at this time there are no guidelines about what would constitute best efforts. However, depending on their circumstances, employers may be able to use the subsidy to pay up to 100% of an existing employee's remuneration provided their remuneration is only 75%. That being said, given the attestation, we would recommend employers pay the final 25% unless doing so would be reasonably likely to threaten their financial viability. Even if the employer is not in a financial position to pay the final 25% now, they should plan to pay that final 25% as soon as they are able to do so.
• Where an employee is employed by two or more eligible employers that do not deal with each other at arm's length, the amount of the CEWS that they may receive is capped at the amount they would receive if they were paid by only one of those employers.

Additional Details

• There is a new 100% refund for employer-paid contributions to EI, CPP, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This applies to each full week for employees who are on leave with pay while subsidized by the CEWS.
• The CEWS is considered government assistance and is included in the employer's taxable income. It reduces the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
• For employers and employees that are participating in a Work-Sharing Program, EI benefits received by employees through the Work-Sharing Program reduce the benefit that their employer is entitled to receive under the CEWS.
• Employers must apply using Canada Revenue Agency's My Business Account portal. Employers must have an existing business number and payroll program account with the CRA on March 15, 2020.
• Employers that engage in “artificial transactions” to reduce revenue for the purpose of claiming the CEWS may be subject to a penalty equal to 25% of the value claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed.
• The Temporary Wage Subsidy – which was the first wage subsidy program announced in the economic response to COVID-19 – is a subsidy that covers up to 10% of the employee's remuneration. Employer can still apply to both, but any benefit from the 10% wage subsidy for remuneration paid in a specific period would generally reduce the amount available to be claimed under the Canada Emergency Wage Subsidy.

Recommendations

The CEWS is a significant economic measure. The eligibility criteria, in particular the calculation of revenue loss and determination of what constitutes arm's length, will depend on each employer's particular circumstances and corporate structure. The lawyers at McLennan Ross LLP would be pleased to assist you with navigating this benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.