Canada: Expansion Of The Canada Emergency Wage Subsidy
Tax Law Bulletin

On July 17, 2020, the Canadian Government released draft legislative proposals (the "Amendments" or "Bill C-20") to amend section 125.7 and other provisions of the Income Tax Act (Canada) (the "ITA").¹.The Amendments extend the Canada Emergency Wage Subsidy (the "CEWS") and significantly expand the scope of the program by making it available to any eligible employer that experiences a revenue decline for qualifying periods starting on July 5, 2020.

The original CEWS was implemented for 12 weeks from March 15, 2020 to June 6, 2020. On May 15, 2020, Finance Minister Bill Morneau announced that the Government of Canada would extend the CEWS by an additional 12 weeks to August 29, 2020. The Canadian Government is proposing a further extension of the CEWS to December 19, 2020.

The information below is based on the draft legislation published by the Department of Finance on July 17, 2020. The amendments passed by Parliament may differ considerably from these proposals. Given this uncertainty, in many cases, it would be prudent not to rely on these changes until the amendments are enacted.

The changes to the CEWS include the following:

• The CEWS will now cover at least 9 4-week qualifying periods (each, a "Period") starting from March 15, 2020 and ending on November 21, 2020, with the 10^th Period expected to be proposed by the government at a later date.
• The CEWS continues to be available to taxable corporations and trusts, individuals, non-profit organizations, registered charities, and certain partnerships whose members include eligible employers, and certain other prescribed organizations but is not available to public institutions.
• For the qualifying periods starting on or after July 5, 2020 (i.e. Periods 5 to 9), the CEWS consists of two subsidies: (i) a base subsidy available to all eligible employers that experience a decline in revenue, which will vary depending on the magnitude of the revenue decline; and (ii) a top-up subsidy of up to an additional 25 per cent (of the remuneration paid) for those eligible employers with at least a 50 per cent revenue decline based on a 3-month average.
• The calculation of the base subsidy is intended to provide for a gradual reduction in the wage subsidy as revenues increase, with the base subsidy rate gradually reduced in later Periods to transition into a phase-out by December, 2020.
• The top-up subsidy is intended to provide additional financial support to eligible employers that have been most affected by the pandemic.
• For Periods 5 and 6, a "safe harbour" rule provides that eligible employers may calculate their wage subsidy under the rules currently applicable for Periods 1 to 4 if their revenue decline is at least 30% in June or July 2020 (Period 5) and at least 30% in July or August 2020 (Period 6).
• The CEWS for Periods 1 to 4 remains the same as before with the Amendments enacting previously announced changes to the wage subsidy.
• There continues to be no maximum number of employees for which an eligible entity can claim a subsidy and there is no cap on the total amount of the subsidy that an eligible entity may claim.
• An online application to be filed with the Canada Revenue Agency (the "CRA") for each particular Period has been extended to no later than January 30, 2021.

The Amendments also implement measures previously announced on May 15, 2020. This bulletin summarizes these changes.

Eligible Entities

Entities that were eligible to claim the CEWS during Periods 1 to 4 (e.g., taxable corporations, partnerships consisting primarily of eligible entities, etc.) continue to be eligible for Periods 5 to 9.

Further to the government's announcement on May 15, 2020, the list of eligible entities has been expanded to include the following for the entire duration of the program:

• Partnerships where more than 50 per cent of the fair market value of the interest in the partnerships is held by eligible entities (previously, eligible partnerships only included those whose members consisted entirely of eligible entities).
• Private colleges and schools, including for-profit and not-for-profit institutions such as art schools, language schools, driving schools, flight schools and culinary schools.
• Registered Canadian Amateur Athletic Associations.
• Registered Journalism Organizations.
• Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible employers.

Qualifying for the Subsidy

For Periods 5 to 9, the "all-or-nothing" revenue drop thresholds of 15% or 30% will be eliminated. As discussed below, all eligible entities that experience a revenue decline will qualify for the CEWS, provided that other qualifying conditions continue to be met. These include: (i) the filing of an application before February 2021 (previously October 2020), (ii) the individual who has "principal responsibility" for the financial activities of the entity attests that the application is "complete and accurate in all material respects", and (iii) the eligible entity must either have had a CRA payroll account on March 15, 2020 or engaged a payroll service provider to administer the eligible entity's payroll using a CRA business number on March 15, 2020.

Calculating the Subsidy

For Periods 5 to 9, the subsidy amount per eligible employee will depend on whether the employee is active or on paid leave.

For active employees, all eligible employers that have a revenue decline will generally receive at least a base subsidy which will be directly proportional to the magnitude of the revenue decline, subject to a maximum base percentage (described below). The base subsidy will gradually be reduced in order to transition to a phase out in December. In addition, a top-up subsidy is available to those eligible employers that suffer at least a 50 per cent revenue decline based on a 3-month average, up to a maximum of 25 per cent.

For employees on paid leave, eligible employers with a revenue decline greater than 0% will generally be able to claim a subsidy during Periods 5 and 6 on the same basis as Periods 1 to 4. However, beginning in Period 7, an eligible employer with a revenue decline will generally be able to claim a subsidy equal to the lesser of (i) 100% of the eligible remuneration paid, and (ii) an amount to be prescribed by regulation, which has not yet been published.

Employer premiums and contributions paid on account of Employment Insurance ("EI"), the Canada Pension Plan ("CPP"), the Quebec Pension Plan ("QPP") and the Quebec Parental Insurance Plan (the "QPIP") for employees on paid leave will continue to be refundable.

In both cases:

• special rules apply for non-arm's length employees; and
• an eligible employer may calculate its subsidy under the old rules for Periods 5 and 6 if it experiences a revenue decline of at least 30% in June or July 2020 (Period 5) and at least 30% in July or August 2020 (Period 6). This "safe harbour" is being provided for fairness to those who made business decisions based on current rules.

The CEWS for Periods 5 to 9 (July 5 to November 21)

The amount of the subsidy available for an eligible employer with a revenue decline in Periods 5 to 9, for each week in the relevant Period, is equal to:

1. The aggregate of, for each active eligible employee (subject to the safe harbour rule for Periods 5 and 6 described below):

(a) the applicable base subsidy rate plus the applicable top-up subsidy rate for the Period; multiplied by

(b) the least of: (i) total amount of eligible remuneration paid to the employee, (ii) $1,129, and (iii) the employee's "baseline remuneration" (in the case of an employee who does not deal at arm's length with the eligible employer); plus

2. The aggregate of, for each eligible employee on leave with pay:

(a) For Periods 5 and 6: on the same basis as Periods 1 to 4; or

(b) For Periods 7 to 9: the lesser of: (i) total amount of eligible remuneration paid to the employee, (ii) an amount to be determined by regulation, and (iii) $0 (in the case of a non-arm's length employee who has a "baseline remuneration" of $0); plus

3. The total amount of employer premiums and contributions paid on account of EI, CPP, QPP and QPIP in respect of eligible employees who are on leave with pay during the qualifying period; minus

4. The total amount received under the 10% temporary wage subsidy under subsection 153(1.02) (the "10% Temporary Subsidy") in the Period; minus

5. The total amount of work-sharing benefits received by eligible employees for the qualifying period.

For Periods 5 and 6, a "safe harbour rule" is provided that allows an eligible employer to claim a wage subsidy rate not lower than the rate applicable under the CEWS rules that were in place for Periods 1 to 4. The result is that, for Periods 5 and 6, an eligible employer with a revenue decline of 30 per cent or more in June or July 2020 (Period 5) or in July or August 2020 (Period 6) could receive the greater of: (i) a wage subsidy under the old rules equal to 75 per cent of eligible remuneration paid (up to a weekly maximum of $847 per employee), or (ii) a wage subsidy rate under the new rules (which could, with the top-up subsidy, attain 85 per cent or a weekly maximum of $960 per employee).

The following is a description of the new rules applicable to active employees and paid leave employees.

Active Employees

Base Subsidy

The base subsidy is generally equal to the entity's base subsidy rate multiplied by the amount of eligible remuneration paid to an eligible employee, subject to a weekly maximum that is gradually reduced from $677 in Periods 5 and 6 (July 5 to August 29) to $226 in Period 9 (October 25 to November 21).

The base subsidy rate varies depending on the level of the eligible entity's revenue decline. It is subject to a maximum percentage (achieved when the revenue drop is 50 per cent or more) that is gradually reduced from 60 per cent in Periods 5 and 6 (July 5 to August 29) to 20 per cent in Period 9 (October 25 to November 21).

The following table sets out the base subsidy calculation for Periods 5 to 9:

Eligibility for the base subsidy would generally be determined by the change in an eligible employer's monthly revenues, year-over-year, for the applicable reference period (e.g. June 2020 vs June 2019). An eligible employer could instead elect to calculate its revenue decline under an alternative approach by comparing its revenue in the applicable reference period to the average revenue earned in January and February 2020 (e.g. June 2020 vs average revenue in January and February 2020).

Employers that have elected to use the alternative approach for the first 4 Periods would be able to either maintain that election for Period 5 and onward or revert to the general approach. Similarly, employers that have used the general approach for the first 4 Periods would be able to either continue with the general approach or elect to use the alternative approach for Period 5 and onward. However, this selection will apply for the remaining periods and for both the calculation of the base subsidy and the top-up subsidy.

For Periods 5 and following, an eligible employer can use the greater of its percentage revenue decline in the current period and that in the previous period to determine its base subsidy rate in the current period. This is similar to the deeming rule in Periods 1 to 4 that allowed an eligible employer that met the revenue test in one period to automatically qualify for the following period.

The conditions described above with respect to the base subsidy reference periods may be summarized as follows:

Top-up Subsidy

A top-up subsidy is available for eligible entities that experience a revenue decline of at least 50% over a specified 3-month period.

The top-up subsidy is generally equal to the entity's top-up subsidy rate multiplied by the amount of eligible remuneration paid to an eligible employee, subject to a weekly maximum of $283.

A top-up subsidy rate of up to 25 per cent would be available to employers based on the revenue drop experienced compared to either the same months in the prior year, or alternatively, by comparing the average monthly revenue in the preceding three months to the average monthly revenue in January 2020 and February 2020.

The top-up rate is generally equal to 1.25 times the amount by which the revenue drop percentage for a specified 3-month period exceeds 50 per cent, up to a maximum top-up rate of 25 per cent (which is available when an eligible entity experiences a 70 per cent revenue decline over the specified 3-month period). The following examples illustrate the calculation of the top-up rate:

Two methods may be used to calculate the change in an eligible employer's revenues for a 3-month period. Under the general approach, the comparison is between the average monthly qualifying revenue for the 3-month period ending before the current reference period and the same 3 months in the previous year. Under the alternative approach, the comparison is between the average monthly qualifying revenue for the 3-month period ending before the current reference period and the average of the months of January and February 2020. The approach chosen for the base subsidy rate must also be used in determining the prior reference period for the top-up subsidy for Period 5 and onwards. In other words, if the average revenue in January and February 2020 is used as the benchmark revenue for the base subsidy, it must also be used for the top-up subsidy.

The reference periods for the 3-month revenue decline may be summarized as follows:

Employees On Leave With Pay

Under the new rules, eligible employers must calculate their wage subsidy differently for employees who are on paid leave for an entire week during a particular Period.

The subsidy will generally be equal to the lesser of (i) the eligible employee's eligible remuneration for the week, and (ii) an amount to be determined by regulation (to be released at a later date). It is expected that the amount fixed by regulation will align with the benefits provided through the CERB and EI.

As previously mentioned, the subsidy calculation for an employee that is on leave with pay during Periods 5 and 6 would remain the same as for Periods 1 to 4 (if greater than the subsidy obtained under the new rules). In other words, an eligible entity may receive a 75% wage subsidy for paid leave employees (up to a weekly maximum of $847) in Periods 5 and 6, assuming its revenue decline for the base subsidy (i.e., its revenue decline over a calendar month) or top-up subsidy (i.e., its revenue decline over a 3-month period) is greater than 0%. The 0% threshold is noteworthy and stands in contrast to the 30% threshold an employer is required to meet to receive a 75% wage subsidy for active employees.

The employer portion of premiums and contributions in respect of CPP, EI, QPP and QPIP in respect of employees on leave with pay would continue to be refunded to the employer.

The CEWS for Periods 1 to 4 (March 15 to July 4)

The CEWS for Periods 1 to 4 remains the same as before with the Amendments enacting previously announced changes to the wage subsidy. In summary, for Periods 1 to 4, eligible entities who suffer a decline in "qualifying revenue" of at least 15% in Period 1 or 30% in Periods 2 to 4 may claim a wage subsidy as described below. If an eligible entity meets the revenue drop test for Period 1, Period 2, or Period 3, it automatically qualifies for the subsidy for the immediately following Period.

The amount of the subsidy applicable to Periods 1 to 4 is equal to:

1. The aggregate of, for each eligible employee, the greater of the following amounts:

(a) 75 per cent of eligible remuneration paid to the employee, up to a maximum of $847 per week; and

(b) the total amount of eligible remuneration paid to the employee, up to a maximum of $847 per week or 75 per cent of the employee's "baseline remuneration", whichever is less; plus

2. The total amount of employer premiums and contributions paid on account of EI, CPP, QPP and QPIP in respect of eligible employees who are on leave with pay during the qualifying period; minus

3. The total amount received under the 10% Temporary Subsidy for the qualifying period; minus

4. The total amount of work-sharing benefits received by eligible employees for the qualifying period.

The revenue reduction is determined by reference to either: (i) the revenue earned in the same month in 2019, or (ii) the average revenue earned in January and February 2020. The same approach must be used for the first four Periods. The conditions described above may be summarized as follows:

Additional Rules for Calculating Qualifying Revenue

Amalgamated corporations may not be in a position to qualify for the CEWS since they may not have the required revenue decline or the revenue drop may not provide a full picture of their pre-crisis revenues. Further to the government's announcement on May 15, 2020, the Amendments will allow corporations formed by amalgamation to calculate the revenue for the applicable reference periods using the combined revenue of the predecessor corporations unless it is reasonable to consider that one of the main purposes for the amalgamation (or the winding up) was to qualify for the CEWS or to increase the amount of the CEWS otherwise available.

An eligible entity that acquires all or substantially all of the assets of a business carried on in Canada can elect (jointly with the seller) to include the qualifying revenue that is reasonably attributable to the acquired assets in the qualifying revenue of the eligible entity (and not the seller) for the purposes of determining the eligible entity's qualifying revenue under the CEWS.

Amendment to Eligible Employee Definition

A wage subsidy may only be claimed in respect of eligible remuneration paid to eligible employees.

For Periods 1 to 4, an eligible employee was defined as an individual who is employed in Canada and who has not been without remuneration for 14 or more consecutive days in the relevant qualifying period.

Effective July 5, 2020 (i.e., for Periods 5 and following), the eligibility criteria would no longer exclude employees that are without remuneration in respect of 14 or more consecutive days in an eligibility period, meaning that employees who are paid, for example, 1 week out of 4 will qualify as eligible employees. This amendment is being introduced to help transition workers from the CERB to the CEWS.

Amendment to Baseline Remuneration Definition

Baseline remuneration refers to the average weekly eligible remuneration paid to eligible employees from January 1, 2020 to March 15, 2020. To accommodate seasonal employees, in particular, an eligible employer may elect one of the following alternative periods on an employee-by-employee basis:

• Periods 1 to 3: March 1, 2019 to May 31, 2019.
• Period 4: March 1, 2019 to May 31, 2019 or March 1, 2019 to June 30, 2019.
• Period 5 and following: July 1, 2019 to December 31, 2019.

In all cases, the calculation of average weekly remuneration would exclude any period of 7 or more consecutive days without remuneration.

Under the new rules for Periods 5 to 9, the concept of baseline remuneration is only relevant to non-arm's length employees (discussed below). For arm's-length employees, the subsidy would be based solely on actual remuneration paid for the qualifying period.

Non-Arm's Length Employees

A wage subsidy may only be claimed in respect of non-arm's length employees (such as owner-managers) provided that they have a baseline remuneration greater than $0 (see above for the baseline remuneration periods that may be used for calculation purposes).

The amount of the subsidy for active non-arm's length employees for Periods 5 to 9 will generally be equal to the sum of the base subsidy rate and the top-up rate multiplied by the lesser of (i) 100% of the eligible remuneration paid, (ii) $1,129, and (iii) the non-arm's length employee's baseline remuneration.

Amendment to Certain Anti-avoidance Rules

Certain anti-avoidance rules were enacted under the original CEWS legislation to deny a wage subsidy if an action was taken to effectively reduce the employer's qualifying revenue for the purpose of qualifying for the wage subsidy. These rules will be amended to apply in situations where not only actions were taken to qualify for the wage subsidy, but also to increase the amount of the wage subsidy.

This amendment adapts the anti-avoidance rules to the new wage subsidy rules, which provide a subsidy on a sliding scale depending on the amount of an eligible entity's revenue decline.

Objection and Appeal

After reviewing a CEWS application, the CRA will now issue a "notice of determination" accepting, varying or denying the subsidy claimed. If an eligible employer disagrees with the notice of determination, it may file a notice of objection under the usual dispute resolution process set out in the ITA.

Commentary

The estimated total fiscal cost for the expanded CEWS program is $83.6 billion. This amount will be offset by income taxes collected on salary and wages paid to employees under the program and an anticipated reduction of benefits paid under the CERB and EI programs. Although the CEWS will be considered taxable government assistance for taxable employers, the income inclusion should generally be offset by a deduction for employee remuneration.

The expansion of the CEWS to a greater number of eligible employers starting in Period 5 has significantly increased the complexity of the program. Furthermore, the fact that the new subsidy will generally be directly proportional to an eligible employer's revenue decline percentage means that the entity will have to carefully calculate its qualifying revenue to avoid excessive claims and keep supporting records documenting all calculations. Under the previous rules, certain eligible employers may have been comfortable claiming the CEWS based on estimated revenue because of the all-or-nothing 15% or 30% threshold. This approach is not possible or advisable here.

Overestimating a revenue drop may result in a tax assessment for the amount of the excess subsidy claimed and the related interest, including possible penalties. Eligible employers should also bear in mind that certain anti-avoidance rules will be expanded to apply to actions that may "increase" the amount of the subsidy (rather than just "qualify" under the prior version), which further underscores the importance of precisely calculating their revenue drop.

While we understand the Canadian government's concern for the potential abuse of this generous program, there will be many instances of confusion and/or honest mistakes. There will be genuine disagreements regarding, for example, the computation of the qualifying revenue drop, as well as eligible remuneration and baseline remuneration, the application of the anti-abuse provisions, among others.

While the changes to the CEWS are intended to broaden the availability of the program to a greater number of employers as they begin to recover from the pandemic, employers will need to consider the impact of the new rules on their staffing decisions. For example, the subsidy available for employees on paid leave for Periods 5 to 6 will remain the same as the prior Periods, but will be adjusted starting in Period 7 to take into account changes to the CERB and EI. What steps an employer will want to take as a result of these changes will vary from organization to organization and will require a detailed assessment of each organization's current financial position and its short and medium term business prospects.

As this is a CRA-administered program, we suggest that all best practices normally followed by taxpayers to comply with our self-assessment system be equally applied here, including seeking help interpreting the most up-to-date legislation and CRA guidance, completing the proper due diligence, and keeping contemporaneous records and documentation. We are committed to helping employers navigate the CEWS and available to provide further guidance and explanations as requested.

Footnotes

1 Unless otherwise indicated, all statutory references are to the ITA.

2 This maximum does not include the top-up wage subsidy if applicable.

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.