The Federal government recently announced a number of measures to assist Canadians during the current COVID-19 crisis. Two measures were introduced to assist businesses with retaining, rather than laying off, employees.
The 10% Temporary Wage Subsidy (“TWS”) is a three-month measure that will allow eligible employers to reduce the amount of payroll deductions required to be remitted to the Canada Revenue Agency (the “CRA”). The subsidy is 10% of remuneration paid by eligible employers (from March 18, 2020 to June 19, 2020) of up to $1,375 per employee, and a maximum of $25,000 per employer. Given its limited value, Canadians were disappointed with this support program.
In response, the government subsequently announced The Canadian Emergency Wage Subsidy (“CEWS”). This is a more meaningful subsidy which, when implemented, is intended to subsidize 75% of wages paid by eligible employers (a trust may be an eligible employer for the CEWS but is not, for TWS purposes) for up to 12 weeks, retroactive to March 15, 2020, to a maximum of $847 per week per employee (including new employees). This means the government will subsidize up to 75% of wages for any employee, but based on a maximum annualized wage of $58,725. The subsidy for employees earning less than this amount would be based on the actual earnings whereas the subsidy for employees earning more than this amount would capped at this amount (yielding $847 per week).
The devil will be in the details but here is what we know about the CEWS, so far.
WHO IS ELIGIBLE
To qualify, an employer must meet the following conditions:
- The employer pays remuneration to an employee between March 15, 2020 and June 6, 2020. Remuneration here refers to amounts which the employer would generally be required to withhold deductions at source. Basic salaries and wages are included but severance pay is not. Neither are items such as stock option benefits or the taxable benefit for personal use of a corporate vehicle.
- Eligible employers include individuals, taxable corporations, and partnerships consisting of only eligible employers as well as non-profit organizations and registered charities. Public bodies such as municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals are not eligible for the CEWS.
- The employer must experience at least a 30% drop in arm’s length monthly revenue year-over-year (for the calendar month in which the period began) from business carried on in Canada. Revenue is to be calculated using the employer’s normal accounting method, and excludes revenues from extraordinary items and amounts on account of capital. The subsidy will be taxable to the employer but will not be considered to be revenue for the purpose of measuring year-over-year changes in monthly revenue.
The claim period and the reference revenue period are outlined as follows:
| Claim Period | Reference Revenue Period | |
| Period 1 | March 15 to April 11 | March 2020 over March 2019 |
| Period 2 | April 12 to May 9 | April 2020 over April 2019 |
| Period 3 | May 10 to June 16 | May 2020 over May 2019 |
SUBSIDY LIMITATIONS
The maximum subsidy for an arm’s length employee on salary, wages, and other remuneration paid between March 15, 2020 and June 6, 2020 would be the greater of:
- 75% of remuneration paid, up to a maximum of $847 per week; and
- the amount of remuneration paid, up to a maximum of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.
For a non-arm’s length employee, the subsidy amount for the employee is the amount of salary, wages, and other remuneration paid between March 15, 2020 and June 6, 2020, up to a maximum of $847 per week or 75% of the employee’s pre-crisis weekly remuneration.
According to the government’s news release, employers may be eligible for a subsidy of up to 100 per cent of the first 75 per cent of pre-crisis wages or salaries of existing employees. These employers would be expected where possible to maintain existing employees’ pre-crisis employment earnings.
Employers will also be eligible for a subsidy of up to 75 per cent of salaries and wages paid to new employees.
This subsidy has no overall limits per employer, unlike the TWS.
INTERACTION WITH OTHER RELIEF MEASURES
Employers can be eligible for both the CEWS and TWS, but any benefit from the TWS for a specific period will reduce the amount available under the CEWS for the same period. The CEWS will also reduce an employer’s federal tax credits that are based on the same remuneration (e.g., SRE&D credits).
The CEWS is not available to an employer for remuneration paid to an employee in a week that falls within a 4-week period for which the employee is eligible for the Canadian Emergency Response Benefit (“CERB”).
TAXATION OF CEWS PAYMENTS
The CEWS subsidy, like the TWS, is considered to be government assistance and will be fully taxable as income to the employer.
OBSERVATIONS
First and foremost, legislation to implement the CEWS has yet to be released as there are a number of issues the government has to work out before taking any meaningful steps forward. The problems we believe are being addressed include;
- How to define “arm’s length”. If it follows the meaning for income tax purposes, then related entities will not be arm’s length. This could make some employers ineligible for the CEWS. For example, if all employees of a related group of companies are centralized through a related management company, the revenues earned by the management company (the fee to administer payroll) would not be arm’s length, and the subsidy would not be available.
- How will revenue be calculated? For many employers, accounting adjustments are processed at the year end, as opposed to monthly. It is unclear whether employers will be required to make special adjustments in computing revenue for this claim.
- Only revenue from a business carried on in Canada is included in the revenue computation. Will the revenue from sales to customers outside of Canada be eligible? There may be some ambiguity as to whether this is a revenue from a business carried on in We suspect in this case it should still be a business carried on in Canada if the activities giving rise to the sale are performed in Canada (e.g., negotiating, etc.).
- Since the CEWS is based on remuneration paid, an employer cannot reduce remuneration first and apply for the CEWS for a top-up.
- Will the CEWS be available to companies that remunerate employees with dividends rather than salary?
The Canadian Tax Foundation and CPA Canada have published their observations in a document dated April 6, 2020.
CONCLUSION
The CEWS was announced on March 18, 2020 and requires legislative approval. However, it is now April 7th and the government has yet to release draft legislation. The most recent government comments tell eligible employers to expect to be able to apply for the CEWS within 3 to 6 weeks, with the funding coming some time after that. This could be a case of too little too late. The cavalry is not yet on its way.
