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Updated April 14th, 2020

On April 11, 2020, the legislation implementing the Federal
Government’s new Canada Emergency Wage Subsidy
(“CEWS”) was enacted. The CEWS is a $73 billion subsidy
intended to support the well-being of workers, maintain employment
relationships and reduce claims on the employment insurance
regime.

The CEWS is Different from the Previous 10% Wage Subsidy

Although they both relate to the wages paid to employees, the
CEWS is different from the previously enacted wage subsidy of 10
per cent of remuneration, which is described in our
earlier bulletin that can be found here
. In particular, the
CEWS is a cash subsidy paid by the government to employers based on
the amount of wages paid to employees, rather than a reduction
(i.e., a deemed remittance) of the payroll remittances that an
employer is required to make to the government on wages paid.
Eligible employers can benefit from both the CEWS as well as the
previously enacted 10% subsidy, although assistance received under
the 10% subsidy will reduce the amount that the eligible employer
can receive under the CEWS. Read more about the 10% Wage Subsidy here.

Amount of the 75% Subsidy

The subsidy takes the form of a deemed overpayment of income tax
by an eligible employer, which is then refunded to the employer.
The amount of the subsidy for each eligible employee will be the
greater of:

  1. the least of

    1. 75% of eligible remuneration paid to the eligible employee in
      the week,

    2. $847, and

    3. If the eligible employee does not deal at arm’s length with
      the employer, nil, and


  2. the least of

    1. the eligible remuneration paid to the eligible employee in the
      week,

    2. 75% of baseline remuneration in respect of the eligible
      employee for the week, and

    3. $847,



    less


  3. the amounts received by the eligible employer under the 10%
    wage subsidy,

    less

  4. amounts received by the eligible employee for the week as a
    work-sharing benefit under the Employment Insurance
    Act
    ,

    plus

  5. the amount payable by the eligible employer as employer
    premiums or contributions under the Canada Pension Plan, a
    provincial pension plan, the Employment Insurance Act or
    Quebec’s Act respecting parental insurance, in respect
    of the eligible employee if the employee was on leave with pay for
    the week.1

As a result of this formula, the CEWS may actually cover 100% of
the eligible remuneration paid to an eligible employee, if that
remuneration has dropped from the pre-crisis level. To illustrate,
consider a hypothetical example involving an employee with an
annual salary of $58,700 (weekly salary of $1,129). If the employer
continues to pay the weekly salary of $1,129, the employer will be
entitled to a benefit of $847 (i.e. 75% x $1,129). If the
employee’s weekly post-crisis salary has been reduced to 75% of
her weekly pre-crisis salary (i.e. $847), then the subsidy would
cover the greater of:

  1. 75% of the eligible remuneration paid, being $635 (i.e. 75% x
    $847), and

  2. $847, which is equal to both the employee’s post-crisis
    salary and 75% of the eligible employee’s baseline
    remuneration.

As the example demonstrates, in circumstances where an
employee’s pre-crisis income is $58,700 or less and that income
is reduced by 25%, an employer can be subsidized for the
employee’s entire reduced remuneration for the duration of the
CEWS program (subject to the employer’s ability to demonstrate
best efforts were made to top up the employee’s salary to
pre-crisis levels).

Eligible Employee, Eligible Remuneration and Baseline
Remuneration

For an individual to be an “eligible
employee”
, the individual must (i) be employed in
Canada, and (ii) not have been without remuneration by the eligible
employer for more than 14 consecutive days in the Claim Period (see
“Applying for the CEWS” below) for which the employer is
claiming the CEWS.

“Eligible remuneration” means salary,
wages and other remuneration such as taxable benefits but will
exclude a retiring allowance and stock option benefits. There are
rules to prevent the artificial inflation of remuneration paid
during a claim period, such as (i) amounts that can reasonably be
expected to be paid or returned to the eligible employer or a
person not dealing at arm’s length with the employer (such as
loans or advances for the “extra” 25% of normal salary
that is not covered by the subsidy), and (ii) temporary increases
in salary above the employee’s baseline remuneration as part of
an arrangement one of the main purposes of which was to increase
the employer’s subsidy claim. Arguably, these anti-avoidance
rules should not apply to prevent the employer from claiming the
subsidy in circumstances where the wage increase is due to
industry-wide pay increases in the form of hazard pay.

An eligible employee’s “baseline
remuneration”
is the average weekly eligible
remuneration paid to the employee by the particular employer during
the period beginning on January 1, 2020 and ending on March 15,
2020, excluding any period of seven or more consecutive days for
which the employee was not remunerated. The legislation does not
specifically address the potential for commission-based employees
to have a lower baseline remuneration due to the timing of payments
of commissions.

There is no overall cap on the amount of subsidy that an
eligible employer may claim for all of its eligible employees. In
addition, an eligible employer may claim the subsidy in respect of
remuneration paid to new employees provided that such employees are
dealing at arm’s length with the employer and subject to the
“14 consecutive days” requirement discussed above.

The CEWS is for remuneration paid to employees and does not
extend to payments to independent contractors. Contractors may
consider applying for the Canada Emergency Response Benefit
(“CERB“).

The eligible remuneration paid to an eligible employee is
subject to regular income tax withholdings and employee and
employer contributions to the Canada Pension Plan
(“CPP“), Employment Insurance
(“EI“), Québec Pension Plan
(“QPP“), and Québec Parental
Insurance Plan (“QPIP“).

Types of Eligible Employers

The CEWS is available to an employer that is an
“eligible entity” meaning:

  1. a corporation (other than a corporation that is tax-exempt(but
    see (d) below) or that is a public institution),

  2. an individual,

  3. a registered charity (other than a public institution),

  4. a person that is exempt from tax because of s. 149(1)(e)
    (agricultural organization, board of trade or chamber of commerce),
    (j) non-profit corporation for SR&ED), (k) (labour
    organization) or (l) (non-profit organization) (other than a public
    institution),

  5. a partnership all of the members of which are described this
    paragraph or in any of (a) to (d) above, or

  6. a prescribed organization.2

A public institution will not qualify for the CEWS. For these
purposes, a public institution is defined to mean:

  1. an organization described in any of s. 149(1)(a) to (d.6) (e.g.
    municipalities, First Nations bands, local governments, crown
    corporations, municipal corporations, band-owned corporations),
    or

  2. a school, school board, hospital, health authority, public
    university or college.

Qualifying Periods

There are currently three “qualifying
periods
” for which an eligible employer can apply for
the CEWS:

  1. March 15 – April 11, 2020;

  2. April 12 – May 9, 2020; and

  3. May 10, 2020 to June 6, 2020.

The legislation contains the flexibility to prescribe by
regulation additional qualifying periods that end no later than
September 30, 2020, but no additional qualifying periods have yet
been prescribed.

Qualifying for the CEWS

Four Criteria

In order to qualify for the CEWS in respect of any particular
qualifying period, an eligible employer must meet four conditions
with respect to that period. Three of those conditions are
administrative in nature – the employer must file an
application for the qualifying period before October 2020; an
individual with principal responsibility for the employer’s
financial activities must attest that the application is correct
and complete in all material respects; and the employer must have
been registered for a Canada Revenue Agency
(“CRA“) payroll account on March 15,
2020. Consequently, new employers (and potentially certain
successor employers) would not qualify for the CEWS.

The fourth condition is substantive and requires that the
employer have suffered a reduction in qualifying revenue for the
current reference period that relates to the relevant qualifying
period as compared to qualifying revenue for the prior reference
period.

The current reference period and prior reference period for each
of the three qualifying periods currently contained in the
legislation is set out below:









Qualifying
Period
Current Reference
Period
Prior Reference
Period


Note: Once an option is chosen, it cannot be changed.
Required
Reduction in Qualifying Revenue
Period 1 March 15 – April 11 March 2020 At election of employer, either (i)
March 2019, or (ii) average of January and February, 2020.
At least 15%
Period 2 April 12 – May 9 April 2020 At election of employer, either (i)
April 2019, or (ii) average of January and February, 2020.
At least 30%
Period 3 May 10 – June 6 May 2020 At election of employer, either (i)
May 2019, or (ii) average of January and February, 2020.
At least 30 %

To illustrate by way of example, in order to be eligible for the
CEWS for Period 1, an eligible employer must be able to show that
its qualifying revenue for March 2020 was at least 15% less than
either (i) its qualifying revenue for March 2019, or (ii) the
average of its qualifying revenue for January and February 2020.
Once the employer elects, in its first CEWS application, to use
either the same month in 2019 or the January/February 2020 average
as its prior reference period, it must use that same prior
reference period for all subsequent CEWS applications.

Deeming Rule

The revenue reduction condition must be met separately for each
qualifying period. However, a deeming rule provides that if the
qualifying employer meets this condition for one qualifying period,
it is deemed to have met the condition in respect of the
immediately following period.

This is a welcome solution to the issue that the qualifying
periods do not match the current reference periods. Consequently,
an employer paying its employees qualifying remuneration in the
second or third qualifying period would not know at the time of the
payment if it has suffered the required reduction in qualifying
revenue to qualify for the CEWS.

Meaning of “Qualifying Revenue”

Qualifying revenue” for a reference
period means the in-flow of cash, receivables or other
consideration arising in the course of the ordinary activities of
the eligible employer, subject to certain additional rules:

  1. A registered charity is required to include revenue from
    businesses unrelated to the purposes of the charity if
    substantially all persons employed by the charity in the carrying
    on of that business are not remunerated for that employment, but
    may elect to exclude funding received from government sources. Once
    a registered charity has elected to include or exclude funding
    received from government sources, the chosen method must be applied
    consistently throughout the duration of the CEWS program.

  2. Eligible employers exempt from tax under s. 149(1)(e), (j), (k)
    or (l) are required to include membership fees and other amounts
    received in the course of their ordinary activities, but may elect
    to exclude funding received from government sources. Once such an
    employer has elected to include or exclude funding received from
    government sources, the chosen method must be applied consistently
    throughout the duration of the CEWS program.

  3. In all cases, extraordinary items, amounts derived from
    non-arm’s length persons or partnerships, amounts eligible for
    refund under the CEWS, and amounts deemed to have been remitted by
    the employer under the 10% Wage Subsidy are to be excluded.

Special rules are available for corporate groups in an effort to
allow them to meet the reduction in revenue condition as
follow:

  1. where a group of eligible employers normally prepares
    consolidated financial statements, each member of the group may
    choose to each determine its qualifying revenue separately,
    provided that each member of the group uses the same basis;

  2. if an affiliated group of eligible employers jointly elect, the
    consolidated qualifying revenue of the group determined in
    accordance with relevant accounting principles is to be used for
    each member of the group;

  3. an eligible employer that is wholly owned by the joint venture
    participants and receives 90% or more of its qualifying revenue is
    in respect of the joint venture may use the qualifying revenues of
    the joint venture instead of its own qualifying revenues;

  4. if 90% or more of the eligible employer’s revenue for a
    qualifying period is from one or more non-arm’s length
    entities, and a joint election is made, then the eligible
    employer’s qualifying revenue for the current reference period
    is calculated by reference to the reduction in the non-arm’s
    length entities’ worldwide qualifying revenues from arm’s
    length sources.

Cash or Accrual Method

For purposes of performing the gross revenue calculation, a
qualifying employer may choose between the cash or accrual method
(i.e. is not restricted to using its normal accounting method) but
must do so consistently throughout the duration of the CEWS
program.

The employer will also have to make its best efforts to top up
an employee’s salary to the pre-crisis level. This criterion
appears to be subject to flexibility.

Expanded Application

The measures introduced may assist the following Canadian
employers to qualify for the CEWS:

  • employers who are acting as central paymasters in their
    corporate group;

  • employers who only provide goods and or services to related
    corporations (e.g., fulfilling an R&D or manufacturing
    function);

  • employers who are partnerships (by deeming them to be a
    taxpayer); and

  • employer corporations that second employees to a joint
    venture.

However, since entitlement to the CEWS is contingent on a
reduction in gross revenues, it does not appear that a start-up
business, operating on seed capital but without any revenues, can
benefit from the CEWS. Start-ups who have had revenues from at
least February of 2020 may however qualify if their qualifying
revenues have suffered a reduction that meets the reduction
criterion.

Applying for the CEWS

Employers, and not the employees, will need to apply for the
wage subsidy for each of the qualifying periods. The CRA My
Business Account
portal will be modified to accept
applications. The modified portal is anticipated to be on line
within 3 to 6 weeks from April 1, 2020, with payments to follow.
Applications may be made as late as September 30, 2020.

The apparent purpose of the CEWS is that employers maintain
current levels of employment, or re-hire laid-off employees, pay
their eligible remuneration and receive the CEWS in due course.
However, in light of the time lag between payment of remuneration
and receipt of the CEWS, employers will have to finance the amount
of the subsidy, either through their own resources, commercial
borrowings or government programs such as the Canada Emergency
Business Account.

The CEWS is Taxable to Employers

The amount of the CEWS received by an employer for a qualifying
period will be considered government assistance and be included in
the employer’s income for the taxation year that includes that
qualifying period. The employer will be entitled to a deduction for
the amount of remuneration paid to employees. In addition, the
amount of the CEWS received will reduce the employer’s
remuneration expenses eligible for tax credits calculated on the
same remuneration, such as SR&ED credits.

Compliance and Penalties

An employer will be required to repay amounts received under the
CEWS if the employer does not meet the eligibility requirements and
pay its employees accordingly. Where artificial transactions have
been undertaken to reduce revenues in an attempt to qualify for the
CEWS, the government has indicated a penalty equal to 25% of the
subsidy claimed would be imposed. More generally, in cases of
fraudulent claims or other abuse of the CEWS, the government has
indicated potential penalties of up to 225% of the CEWS benefits
received and up to 5 years in prison. The legislation also provides
that the Minister may publicly disclose the names of anyone who has
applied for the CEWS, potentially impacting the “brand”
of the applicant, even if the applicant has not been successfully
assessed or charged.

Next Steps for Employers

Employers should ensure that they are registered with the CRA
for direct deposit and should also assemble records so that, when
the application portal opens in 3-6 weeks, they will be in a
position to demonstrate the 15% reduction in gross revenues for
March and the amount of the pre-crisis remuneration paid to
employees. Preparatory work in connection with showing a 30%
reduction in revenues for April and May should also be undertaken,
to the extent possible. Employers should also seek legal advice in
light of their particular circumstances, as certain of the rules
are complex.

Footnotes

1. Of interest, the Federal Government would be
compensating the eligible employer for contributions of QPP and
QPIP made to the Québec Government.

2. No organizations have yet been prescribed for purposes
of the definition of “eligible entity” but this paragraph
preserves the ability of the government to broaden the scope of the
eligible employers, without the need to amend the
legislation.

Read the original article on
GowlingWLG.com

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.

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