In unusual Saturday sittings of the House of Commons and the Senate on April 11, 2020, the Government of Canada introduced legislation
amending the Income Tax Act
(Canada) (ITA) to implement the Canada Emergency Wage Subsidy (CEWS), which passed in both chambers and received royal assent the same day.
The CEWS provides a subsidy of up to 75 per cent to eligible employers in respect of remuneration for eligible employees for a 12-week period, which may be extended, beginning March 15, 2020.
While the enacted legislation is generally consistent with the government’s prior announcements, it includes some important new details.
First, in a marked departure from the normal treatment of taxpayer information, the Canada Revenue Agency (CRA) may publish the name of any person or partnership that makes an application for the CEWS. Thus, in determining whether to apply for CEWS, an employer will need to consider any reputational and other commercial impact from the CRA potentially disclosing the employer’s name.
Second, the legislation specifies how the subsidy applies to corporate groups and provides some helpful flexibility to choose to measure revenue on a group or entity-by-entity basis.
ELIGIBLE ENTITIES AND EMPLOYEES
The CEWS is available to an “eligible entity”, which includes a corporation that is not tax-exempt, an individual, a registered charity or non-profit organization (other than a public institution), and a partnership consisting of eligible entities. Unlike the 10% Temporary Wage Subsidy that was first announced by the federal government on March 18, 2020
, public corporations, corporations that are, or are controlled by, non-residents of Canada, and larger Canadian-controlled private corporations are eligible for the CEWS (provided that they meet the qualification criteria, described below).
Public institutions, including municipalities and local governments, Crown corporations, wholly owned municipal corporations, public universities, colleges, schools and hospitals, are not eligible.
Employees whose remuneration is eligible for the subsidy (eligible employees) include individuals employed in Canada by the eligible entity in the qualifying period, other than those who are without remuneration by the eligible entity in respect of 14 or more consecutive days in the qualifying period. Such employees may be eligible to receive the Canada Emergency Response Benefit or “CERB”
in respect of that period.
To avail itself of the CEWS, an eligible entity must file an application with the CRA before October 2020. The individual with the primary responsibility for the financial activities of the entity must attest to the completeness and accuracy of its application. We would expect that in most cases such individual would be the chief financial officer. This contrasts with most other tax filings which can typically be signed by any authorized person of the taxpayer.
There are three four-week periods in which an eligible entity may claim the subsidy (each, a claim period), beginning March 15, 2020. The legislation contemplates that subsequent claim periods, ending no later than September 30, 2020, may be prescribed by regulation. This suggests that the Department of Finance may be anticipating the subsidy to apply to claim periods after the initially announced end date of June 6, 2020.
To qualify for the first claim period (March 15 to April 11, 2020), eligible entities must have a reduction by at least 15 per cent of their qualifying revenues in March 2020 as compared to one of two reference periods, being March 2019 or the average of January and February 2020. For the two subsequent four-week claim periods, eligible entities must either
have qualified in the immediately prior claim period, or
show a revenue reduction of 30 per cent, as compared to the applicable month (April or May) in 2019 or the average of January and February 2020.
The availability of January and February 2020 as a reference period is intended to allow fast-growing businesses, which might not have been able to demonstrate the requisite revenue reduction if measured year-over-year, to benefit from the CEWS. If an entity elects to use January and February 2020 as its reference period, it must do so for all three of the four-week claim periods. The use of a lower, 15 per cent benchmark for loss of revenues in March 2020 is intended to reflect the fact that most businesses did not see an impact from the pandemic until mid-March.
COMPUTATION OF REVENUE
An entity’s revenue for purposes of determining its qualification for any claim period (its qualifying revenue) means its inflow of cash, receivables or other consideration arising in the course of its ordinary activities, excluding extraordinary items, amounts derived from non-arm’s length persons or partnerships, and amounts received under the CEWS. Such revenue is to be determined in accordance with its normal accounting practices; however, an election is available to use the cash-basis method of accounting provided that such method is used consistently for purposes of the subsidy. This test may give rise to some uncertainty in its application to particular fact situations, and it is hoped that the CRA will provide further guidance in this regard.
In the case of registered charities, qualifying revenues include revenues from related businesses, gifts and other amounts received in the course of their ordinary activities. In the case of other tax-exempt entities, qualifying revenues include membership fees and other amounts received in the course of their ordinary activities. Charities and non-profit organizations may, on an elective basis, exclude funding received from government sources from their qualifying revenues.
The starting point for determining the revenue of an eligible entity that is part of a corporate group is to look only at the eligible entity’s own income. In particular, if an eligible entity is part of a group of eligible entities that normally prepares consolidated financial statements, it may determine its qualifying revenue separately, provided that each member of the group also determines its revenue on that basis. An election is available for affiliated groups of eligible entities to determine revenue on a consolidated basis in accordance with relevant accounting principles. This flexibility may provide a significant advantage for corporate groups that structure their affairs using multiple subsidiary corporations for various lines of business rather than using divisions within the same legal entity.
The legislation includes an anti-avoidance rule aimed at transactions or series of transactions undertaken (or failed to be taken) with a “main purpose” of reducing qualifying revenues in respect of a qualifying period. Where the anti-avoidance rule applies, the eligible entity is liable to a penalty that is generally equal to 25 per cent of the amount of the subsidy claimed for the relevant period (in addition to being required to repay the subsidy).
AMOUNT AND TREATMENT OF SUBSIDY
Amounts under the CEWS are deemed to give rise to an overpayment on account of the qualifying entity’s income tax liability under the ITA. Typically, the amount of the overpayment is a weekly wage subsidy as described below. In addition, in respect of employees on paid leave, the overpayment also includes an effective refund of employer contributions under the Employment Insurance Act
, the Canada Pension Plan
, certain provincial pension plans, and Quebec’s Act respecting parental insurance
. The overpayment is refundable at any time in the taxation year. It is reduced by amounts received under the 10% Temporary Wage Subsidy as well as by amounts received by eligible employees as work-sharing benefits under the Employment Insurance Act
The amount of the weekly wage subsidy in respect of each eligible employee that dealt at arm’s-length with the eligible entity during the qualifying period is effectively is the greater of:
- 75 per cent of the amount of remuneration paid, up to a maximum benefit of C$847 per week; and
- The least of (a) the amount of remuneration paid, (b) 75 per cent of the average weekly eligible remuneration paid to such employee during the period between January 1 and March 15, 2020 (referred to as the employee’s baseline remuneration), and (c) C$847.
Generally, in respect of employees that receive the same weekly remuneration both before and after the beginning of the COVID-19 crisis, the amount of the subsidy is simply 75 per cent of eligible remuneration paid to the employee for that week, up to a maximum subsidy of C$847 per employee per week. However, in respect of employees whose remuneration was decreased after the beginning of the COVID-19 crisis, the formula provides that the subsidy may be as high as 100 per cent of the eligible remuneration paid to the employee for a week, subject to the maximum subsidy of C$847 per employee per week.
A subsidy may also be claimed in respect of eligible remuneration paid to non-arm’s-length employees, but in such a case the weekly subsidy is the lesser of (i) the actual amount of eligible remuneration paid for that week, and (ii) 75 per cent of the employee’s baseline remuneration, in each case up to a maximum subsidy of C$847 per employee per week.
If an eligible employee is employed in a week by two or more entities that do not deal with each other at arm’s-length, the aggregate amount that may be claimed by the two entities in respect of that employee is limited to the amount that would arise if all of its eligible remuneration were paid by one entity.
The Department of Finance continues to state in press releases that employers are expected to make best efforts to bring employees’ wages to their pre-crisis levels. However, the legislation does not include a requirement to do so.
Eligible remuneration includes most amounts paid as remuneration for employment, but does not include retiring allowances or stock option benefits. Eligible remuneration also does not include (i) amounts reasonably expected to be repaid to the eligible entity, a non-arm’s-length person, or a person at the direction of the eligible entity, or (ii) amounts in excess of the employee’s baseline remuneration, if it is reasonably expected that, after the qualifying period, the employee will be paid an amount that is lower than his or her baseline remuneration, and if one of the main purposes for the arrangement is to increase the amount of the wage subsidy.
The amount of the deemed CEWS overpayment is included in the eligible entity’s income for purposes of the ITA (as assistance received from a government), though this inclusion should normally be offset by a deduction for the corresponding employment expenses incurred.
For additional information, please reach out to a member of our Tax
group or your usual Blakes contact.
Please visit our COVID-19 Resource Centre
to learn more about how COVID-19 may impact your business.