In response to the financial hardship caused by the COVID-19 pandemic, the Government of Canada introduced the Canada Emergency Wage Subsidy ("CEWS") in April 2020, one of the largest tax programs in the country's history, to help companies retain or recall their employees.
In the summer of 2020, the Canada Revenue Agency ("CRA") announced that significant resources would be devoted to audit employers that have claimed the CEWS, leaving no doubt that the CRA was getting serious about enforcement. In September 2020, the CRA moved from words to actions as the first of these audits have already started, as may be seen from a copy of such CRA CEWS audit letter here.
What documents are requested by the CRA in a CEWS audit?
The audit letter informs the employer of a "limited scope audit" on their CEWS application and requests a substantial list of documents under subsection 231.1(1) of the Income Tax Act, such as:
- Documents from the minute books, including governance documents and resolutions relating to the CEWS claim, the shareholder register, information regarding all entities and businesses of the corporate group, and the agreements with respect of inter-company and employee loans/advances;
- Revenue details in respect of the 2019 and 2020 taxation years, including monthly sales report, sales and cash receipts journals, bank statements, adjusting entries, reconciliation of revenues and working papers detailing how qualifying revenues for CEWS were determined;
- Revenue information for purposes of computing the CEWS revenue decline percentages, including detailed working papers for the current and prior reference periods, the revenue recognition policy for all items included in revenues and supporting information with respect to qualifying period that were deemed to meet the revenue decline test;
- General payroll information, including a detailed version of the payroll journal by pay period and by employee and working papers reconciling payroll data on the CEWS application, manual calculation data for irregular pay periods, list of furloughed employees and dates, employment contracts for all employees and proof of payment to employees;
- Information relating to other subsidies and other government programs that impact the CEWS claim, namely the 10% Temporary Wage Subsidy and Work-sharing amount along with all supporting documentation related to amounts claimed;
- A signed copy of the Attestation filed with the CEWS
- Various information and documents regarding elections made on the CEWS application;
- Information on employees not getting paid for more than 14 days, on non-resident employees, on employees dealing at non-arm's length with the employer and on independent contractors; and
- Exclusions from qualifying revenues with a detailed breakdown of the extraordinary items, revenues from non-resident related parties, revenues from non-arm's length persons and government subsidies.
In addition, the turnaround time to provide the information and supporting documentation listed in the "initial contact letter" should be "not more than 10 business days" according to the CRA, which is a tight deadline to meet considering all the work required to prepare a complete reply.
It should be noted that an inaccurate, incomplete or poorly documented application may have significant consequences. An employer who is determined to not have met the eligibility requirements following the audit will have to reimburse the amounts paid under the CEWS, plus interest. Furthermore, any employer who has made a false or misleading statement in its application could be subject to fines and penalties totalling up to 275% of the amounts claimed. In addition, the person who certified the accuracy of an application that proves to be ineligible could personally incur a penalty of up to $100,000.
Given these financial implications, it is strongly recommended that employers who have applied for the CEWS review their application package in order to prepare an upcoming CRA audit.
How to be prepared for a CEWS audit
Employers who have applied for the CEWS will be audited by the CRA. Proper legal advice should be sought in order to:
- clarify the grey areas regarding the employer's eligibility for CEWS;
- properly substantiate the CEWS claim, which involves documenting every element listed in the CRA audit letter, including the more at-risk portions or positions of the application;
- benefit from the protection offered by the solicitor-client privilege on all communications with your legal advisor;
- be in a better position to raise a due diligence defence in the event that the CRA wishes to impose penalties.
Whether you are currently under audit or not, proper legal advice is imperative to identify and limit the negative effects of a CEWS claim and to help prepare the books and records for a possible CEWS audit.
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.