COVID-19–Wage Subsidy Programs

The 75% CEWS

Eligibility for, and the amount that can be claimed under, the 75% CEWS are dependent on a number of factors. These are discussed below under general categories. This subsidy is a temporary measure. The program will be in place for an in initial 12-week period, from March 15 to June 6, and then for a second twelve-week period ending August 29, 2020.

Eligible entity

• An eligible entity includes individuals, taxable corporations, partnerships consisting of eligible entities, non-profit organizations and registered charities as well as prescribed organizations. Public-sector institutions such as governments, schools, hospitals and public universities and colleges are excluded.
• On May 15, 2020, the government released regulations that defined prescribed entities such that the following entities are now also considered eligible entities:
  1. certain Indigenous-owned corporations;
  2. certain subsidiaries of Indigenous-owned corporations;
  3. a partnership, each member of which is
     1. an eligible entity, or
     2. an Aboriginal government;
  4. a partnership, in respect of a qualifying period, if throughout the qualifying period it is owned up to 50-per-cent by non-eligible members (further information aboutpartnerships with non-eligible partners is included below);
  5. a registered amateur athletic association, or registered journalism organization; and
  6. a private school or private college

Although these regulations were released on May 15, they are considered to have been in force as of April 11, 2020, which means that the changes apply to the first qualifying period starting March 15, 2020 and to subsequent qualifying periods.

Partnerships with non-eligible partners

Until the list of prescribed organizations was announced on May 15, in order for a partnership to be eligible for the CEWS, all of its members were required to be eligible entities (generally, individuals, taxable corporations, non-profit organizations, or registered charities). As a result, partnerships in which non-eligible entities held even a minority interest were precluded from claiming the CEWS. These structures are common in the Private Equity industry or Private-Public Partnerships where entities such as pension corporations or trusts, or municipalities may be investors in the partnership.

As a result of this change, partnerships will be eligible entities for purposes of the CEWS as long as non-eligible members, taken together, do not hold a majority of the interests in the partnership.

Specifically, in order for a partnership to qualify for the CEWS, the fair market value of interests in the partnership held by non-eligible entities must not exceed 50 per cent of the fair market value of all interests in the partnership at any time in the qualifying period.

Further changes to the CEWS Rules

In addition to these regulations, which are now law, certain legislative changes have been proposed, would come into effect upon being enacted. This will require the approval of Parliament and the Senate. Included in the announced changes to eligible entities are relief for amalgamations, and some clarification with respect to tax-exempt trusts.

Amalgamations

Corporations formed on the amalgamation of two or more predecessor corporations (or where one corporation is wound up into another) may not qualify for the CEWS as currently written since they would not have benchmark revenues to prove a revenue decline or their benchmark revenues may not provide a full picture of their pre-crisis revenues.

The government proposes to amend the CEWS to allow corporations formed on an amalgamation of two or more predecessor corporations (or where a corporation is wound up into another), to calculate benchmark revenue for the CEWS revenue-decline test using the combined revenues of the predecessor corporations. This relief will not be available, however, if it is reasonable to conclude that one of the main purposes for the amalgamation (or the winding up) was to qualify for the CEWS.

This change is proposed to be retroactive to April 11, 2020, which means that it would apply to the first qualifying period starting March 15, 2020 and subsequent qualifying periods.

Tax-Exempt Trusts

Under the current rules, trusts are eligible for the CEWS, as they are generally considered individuals for tax purposes. The government proposes to amend the CEWS such that trusts with employees would continue to be eligible for the CEWS, subject to the following added exceptions:

• In cases where the trust is a tax-exempt entity (other than a public institution), it would qualify only if it is a registered charity or one of the other types of eligible tax-exempt entities.
• In cases where the trust is a public institution, it would qualify only if it is a prescribed organization.

This change is proposed to apply in respect of the third qualifying period (May 10 to June 6) and any subsequent qualifying period.

Revenue eligibility requirements

• Eligible entities will be able to access the subsidy if they have suffered a drop in gross revenues of at least 15% in March 2020, 30% in April 2020, and/or 30% in May 2020 as compared to the same timeframe in 2019 or to the average monthly revenue for January and February 2020. Presumably, similar reference periods will be introduced for the extension of the program. The government has indicated, however, that it will consult with business groups to determine if the percentage declines in revenue to qualify for the CEWS should be adjusted.
• Two benchmarks have been provided to measure the revenue decline. First, as a general year-over-year approach, the revenue decline can be measured by comparing the applicable month in 2020 to the same month in 2019 - for example, comparing March 2020 to March 2019. Alternatively, the revenue of the applicable month in 2020 can be compared to the average of January and February 2020 revenue. The employer can choose only one approach to use throughout the program period.
• In addition, where an eligible entity qualifies under one of the revenue benchmarks in the first period (March), it will automatically qualify for the second period (April), but will need to perform the revenue decline test for May and re-apply for the wage subsidy in the third period. Similarly, if an eligible entity does not qualify for the first period (March), but does qualify for the second period (April), it will automatically qualify for the third period (May). This new rule was put in place to provide more certainty to eligible entities for decision-making in the first period, and for speed of access to subsequent-period funds.
• For purposes of determining the revenue decline, an entity's qualifying revenue means the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity – generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entities – in Canada, subject to conditions. Qualifying revenue will exclude amounts earned from non-arm's-length sources, extraordinary items and amounts on account of capital. In addition, the amount of wage subsidy received by the employer in a given month will be ignored for measuring changes in monthly revenues. Special rules have been put in place to take into account non-arm's length sales within the revenue eligibility tests.
• Revenue can be calculated using the accrual method of accounting or the cash method. Employers will need to select one method when first applying and must use that method for the duration of the program.
• Registered charities and non-profit organizations will be allowed to choose whether to include revenue from government sources as part of the calculation provided the same approach is used throughout the program period. For registered charities, revenues from related businesses will be included in qualifying revenue.

Computation of revenue

Consolidated basis of reporting revenue

• Qualifying revenue can be determined on an entity basis or on a consolidated basis. If a group of entities is affiliated and each member of the group of eligible entities jointly elect, the qualifying revenue of the consolidated group can be used by each member of the group to measure eligibility for the wage subsidy program.
• In very simple terms, this means that where one entity in an affiliated group has seen a significant decline in arm's length revenues, but another has not, they can determine on a consolidated basis if there has been a sufficient drop in arm's length revenues for both entities to be able to claim the subsidy.
• Very generally, affiliated persons include spouses, common-law partners and persons under common control. There are special rules for partnerships and trusts. It is important to note that the joint election to compute qualifying revenue on a consolidated basis is only available to groups that are affiliated.
• In addition, a group of eligible entities that normally prepare consolidated financial statements can determine qualifying revenues separately, provided each member of the group determines qualifying revenue on that basis.

Exceptions to excluding non-arm's length revenue

• The legislation provides that qualifying revenue does not include amounts from non-arm's length persons or partnerships. However, in the situation where one person receives all or substantially all of their revenue from one or more non-arm's length entities, then a special rule applies.

Eligible employees

• An eligible employee is an individual employed in Canada by the eligible employer in the claim period, e.g., from March 15 to April 11, from April 12 to May 9 etc. However, it does not include an employee who has been without remuneration from the eligible employer in respect of a period of 14 or more consecutive days in the claim period.
• Where an employee does not meet this test in one claim period, for example because they were hired toward the end of the claim period, they could still be eligible in the next claim period.

Quantification of the subsidy

• The subsidy will be available to eligible employers at a rate of 75% of weekly remuneration paid to a maximum of $847 per employee. This is equivalent to 75% of an annual salary of $58,700. However, determining the amount of the subsidy will take into account pre-crisis or baseline weekly remuneration. More specifically, the following will apply with respect to each eligible employee in respect of each week in the claim period:
  • The subsidy amount for a given employee on eligible remuneration paid in a qualifying period is be the greater of:
    • 75% of the amount of eligible remuneration paid in respect of that week, up to a maximum benefit of $847 per week; and
    • The amount of eligible remuneration paid to the employee in respect of that week, up to a maximum benefit of $847 per week or 75% of the employee's pre-crisis weekly remuneration, whichever is less.
• The pre-crisis remuneration, also referred to as baseline remuneration, for a given employee is the average weekly remuneration paid between January 1 and March 15 inclusive, excluding any seven-day periods in respect of which the employee did not receive remuneration.
• The government has proposed to introduce a second baseline remuneration period of March 1 to May 31, 2019. This is to accommodate seasonal workers, and those who may have been on leave at the start of 2020.
• Eligible remuneration may include salary, wages, and other remuneration for which income tax withholdings are generally required. However, it does not include severance pay, or items such as stock-option benefits.
• Keeping in mind the per-employee limits (above), there will be no overall limit on the subsidy amount that an eligible employer may claim.
• All employers will be expected to make best efforts to top up salaries to pre-crisis levels but there is no requirement to do so or to hire back all employees who were previously laid off.

Owner-Manager and related party remuneration

• Special rules have been put in place to prevent manipulation of related party remuneration. For purposes of the wage subsidy, a related person is an eligible employee who does not deal at arm's length with the qualifying entity in the qualifying period. These rules include:
  • Ensuring that the wage subsidy only applies if there was a wage paid prior to the start of the program (referred to as baseline remuneration)
  • Limiting the subsidy to 75% of baseline remuneration where this is less than the current period wages, and $847. This ensures that remuneration cannot be increased in the qualifying period to maximize the benefit.
  • Note that the proposal to introduce a second baseline remuneration period of March 1 to May 31, 2019 could help non-arm's length employees who did not receive baseline remuneration in the period from January 1, 2020- March 15, 2020.

Dividends are not remuneration, and do not qualify as remuneration for purposes of the subsidy.

Refund for certain payroll contributions

• As a further incentive for employers to re-hire employees for whom they currently do not have work, or to retain such employees to save the cost of re-hiring them at a later date, the legislation provides an addition to the wage subsidy. A 100% refund will be available for certain employer contributions to EI, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. Where the employer is eligible to claim the 75% CEWS for an eligible employee, this refund will cover the full amount of employer contributions to these plans for the employee for each week throughout which the employee is on leave with pay.
• In general, an employee will be considered to be on leave with pay throughout a week if that employee is remunerated by the employer for that week, but does not perform any work for the employer that week. Employees who are on leave with pay for only a portion of a week will not qualify.
• This refund will not be subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the 75% CEWS. Eligible employers will not be subject to an overall limit on the refund amount.
• Employers will continue to be required to collect and remit employer and employee contributions. Eligible employers will then apply for a refund at the same time that they apply for the 75% CEWS. The refund of employer contributions to these plans is only available in respect of employees on leave with pay.

Application for the 75% CEWS

• Applications through the CRA website opened on April 27. There are three ways to apply:
  • Using My Business Account;
  • Business representatives may apply using Represent a Client; or
  • Web Forms application with your web access code.
• Further details are provided on the CRA website.
• Eligible entities must apply before October 2020, attest that the application is complete and accurate, and have a business number for purposes of payroll withholding remittances on March 15, 2020 to qualify.
• Entitlement to the subsidy will be based entirely on the salary or wages actually paid to employees. Therefore, employers will need to pay the salary or wages to their employees and, if eligible, will be repaid for those salaries or wages by the government through this subsidy program.
• For those employers not currently signed up for direct deposit, it will be beneficial to sign up for quicker access to funds through this program.

Interaction of the Wage Subsidy programs

If an organization or business is eligible for both the 75% CEWS and the 10% TWS, and has claimed a subsidy under the TWS, the eligible entity must reduce the CEWS claim by the claim made in that qualifying period for the 10% TWS.

For each four-week CEWS period, it is necessary to determine the TWS deemed remittance for that same period.

With the release of the regulations to support the TWS on May 15, 2020, and clarifying comments in the updated FAQs on May 19, 2020, one key aspect of the TWS program was changed. It is now possible for employers to elect the wage subsidy rate to be 10% or a lower percentage.

In practical terms, this means that an employer who is eligible to claim both subsidies, now can just claim the 75% CEWS, and does not need to apply for the 10% wage subsidy. However, this may only help those who have not yet applied for the TWS wage subsidy. It may be that by making an application for the subsidy (by reducing their withholding tax remittance) employers have already elected at 10%.

Interaction with the Work-Sharing program

The Work-Sharing program provides income support to employees eligible for EI who agree to reduce their normal working hours because of developments beyond the control of their employers.

For employers and employees that are participating in a Work-Sharing program, EI benefits received by employees through the Work-Sharing program will reduce the benefit that their employer is entitled to receive under the 75% CEWS.

Final comments

The assistance received under either wage-subsidy program will be taxable to the recipient employer. Assistance received will also reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration, such as Scientific Research & Experimental Development (SR&ED) investment tax credits.

The government has stressed that there will be serious consequences for employers that file fraudulent claims or inappropriately obtain benefits under either program.

BDO can help

BDO is here to help you navigate the CEWS application process, avoiding potentially costly errors. Among the many steps of the application process that we can assist with are:

• Analyzing legislation and determining whether you are an eligible business to apply for the CEWS.
• Analyzing the choices you have to make in determining whether you have a sufficient revenue reduction to qualify for the CEWS and the amount of CEWS you will receive.
• Analyzing revenue using a cash-basis versus accrual basis.
• Determining employees for which you are able to claim a CEWS and eligible remuneration.
• Maintaining up-to-date books and records.
• Analyzing remuneration paid and eligible costs.

After your application is complete, we can provide ongoing guidance and review of your entity's claim. We can also prepare special reports to provide some comfort to management on the amounts included in the CEWS calculation.

If you have any questions as to how either wage-subsidy program applies to your organization, contact your BDO advisor.