Final details announced for the Canada Emergency Wage Subsidy Program

The Canada Emergency Wage Subsidy (CEWS) program was introduced in March 2020 for an initial period of twelve weeks. Since then, the federal government has made adjustments to extend the reach of the program, and has most recently extended the program to June 5, 2021. On March 3, 2021, the Deputy Prime Minister and Minister of Finance Chrystia Freeland announced that there would be no changes to the rates used to calculate benefits under the CEWS program for the remaining periods of the program.

The final three periods will be from March 14 to April 10, April 11 to May 8 and May 9 to June 5, 2021. The maximum wage subsidy rate for active employees will remain at 75% for those entities with a revenue decline of at least 70%. The calculation of the CEWS rate for entities with a revenue drop of less than 70% remain the same for the six qualifying periods that end in 2021.

Background

The CEWS is a wage subsidy, calculated on a per-employee, per-week basis, based on a maximum weekly wage of $1,129. The maximum subsidy that can be received varies by qualifying period, or claim period, with the periods beginning in March 2020. The maximum that can be received was $847 for the first four qualifying periods of the program; $960 per week for the next two qualifying periods; $847 for the qualifying period that ended in September; $734 for the qualifying periods that ended in October to December, 2020, and $847 for the qualifying periods that end in January to June 2021. Table 1 in the Appendix shows the dates of the 16 qualifying periods that apply for this program.

In many cases, the subsidy will be less than the maximum amount, because the employee's weekly wages are less than $1,129 per week or, for periods from July 5 and onwards, the employer did not experience a revenue drop that results in the highest CEWS rate.

The amount of subsidy that can be received is determined by the CEWS rate, which in turn is generally determined by the rate of revenue drop in a given month in 2020 or 2021 when compared to the:

• same month in 2019 (or 2020 for some months); or
• average of revenue arising in January and February of 2020.

The exception to this general rule is the qualifying period that ends in January 2021 as its current reference month is December 2020 and its prior reference period is December 2019. These reference months are therefore the same for both the December 2020 and January 2021 claim periods. This anomaly is due to each of the claim periods being four weeks long, rather than a calendar month.

For qualifying revenues in March 2020, there must have been a comparative decline in revenue of at least 15% in order to be eligible for CEWS. This was increased to 30% for comparative revenue declines in each of April, May, and June of 2020. For these four periods, the CEWS rate was fixed at 75%. For the remainder of the qualifying periods, from July 2020 through June 2021, there is no minimum revenue decline required to qualify for CEWS, but the amount of CEWS is dependent on the comparative revenue decline in those qualifying periods.

As the government has tried to make the program accessible to a wider range of taxpayers, and to be sensitive to varying rates of revenue drop, it has become a complex program. If the Canada Revenue Agency's “Frequently asked questions - CEWS” webpage was printed, it would be more than 100 pages long.

The first stage of the CEWS program applies to four qualifying periods between March 15 and July 4, 2020. The CEWS program was expanded for qualifying periods starting July 5, 2020, also known as CEWS 2.0.

A transitional stage applies to qualifying periods in July and August. Starting with the September qualifying period, the transitional rates no longer apply, and CEWS 2.0 rates apply for qualifying periods from September 27 to June 5 (qualifying periods 8 -16).

Each qualifying period is four weeks long.

Table 1 in the Appendix shows the 16 qualifying periods defined in the legislation.

Table 2 in the Appendix shows the significant characteristics of the program in each of the stages described above.

Table 3 in the Appendix shows the maximum weekly CEWS claims in the different claim periods for three different revenue drop rates.

Certain key concepts for CEWS are outlined in our earlier Tax Alert COVID-19–Wage Subsidy Programs. Please see this alert for an understanding of the following concepts:

• Eligible entity
• Qualifying revenue (Revenue eligibility requirements)
• Comparative reference period
• Eligible employees
• Eligible remuneration

Rate changes during the program

Changes in base CEWS rate for Periods 9-16

When CEWS 2.0 was introduced in July, the legislation provided a ‘safe harbour' CEWS rate of 75% in Periods 5 and 6 if there was a minimum revenue drop of 30% in either the qualifying period or the immediately preceding qualifying period. Starting in Period 7 (September 2020), the CEWS base rate was to decline for each qualifying period. However, subsequent legislative changes froze the base CEWS rate at the rates that applied in October (Period 8) for the remaining periods in 2020 and for the 6 periods that end in 2021.

Changes in top-up CEWS rate starting in Period 8

An organization's CEWS rate for Period 5 and subsequent periods can include a top-up CEWS rate if an organization's revenue has declined more than 50%.

When the top-up percentage was first introduced with CEWS 2.0, the top-up was calculated by reference to the average drop in revenue in the three months prior to the relevant qualifying period as compared to either the:

• three corresponding months in 2019; or
• average revenue in January and February 2020.

For example, for August 2020, the average qualifying revenue for May, June, and July 2020 would be compared to the average qualifying revenue for May, June, and July 2019 or to the average qualifying revenue in January and February 2020. The comparison period used for the top-up calculation must be the same as for the base calculation. If the top-up percentage was more than 50%, the amount in excess of 50% is multiplied by 1.25% to arrive at the top-up rate.

Legislation passed in November 2020 revised the calculation of the top-up so that for October through December (Periods 8-10), the top-up percentage is the greater of the three-month average calculation described above and the revenue reduction percentage used in the base CEWS calculation. For qualifying periods after Period 10 (i.e., after December 19, and extending into 2021), the top-up reduction percentage will be the same as the revenue reduction percentage used in the base CEWS calculation.

In addition, the November 2020 legislation contains changes that allows the top-up percentage to be changed by regulation, and setting it at a maximum of 25% if not determined by regulation or formula. The maximum top-up percentage was changed to 35% for the six periods that end in 2021.

Baseline remuneration

The concept of baseline remuneration is relevant in some cases when determining CEWS. It is particularly important for non-arm's length employees in benchmarking wages paid prior to the beginning of the CEWS period of March 15, 2020. Where a non-arm's length employee does not have remuneration in one of the baseline periods, no CEWS can be claimed for that individual.

There is one main period of baseline remuneration period from January 1 to March 15, 2020. Several other baseline remuneration periods have been added to accommodate seasonal workers. These additional baseline remuneration periods can also benefit non-arm's length employees who did not draw a regular salary in early 2020.

Application deadline and amendments

The first 5 CEWS qualifying periods had the same filing deadline of January 31, 2021. Claims for subsequent periods must be filed within 180 days after the end of the qualifying period to which they relate.

There is legislative support for amending or revoking elections made under the CEWS rules. Elections may be amended or revoked on or before the date that the application is due for the first qualifying period for which the election is made. Certain elections, once made, must be made in some or all subsequent claims as well. Consequently, it will be necessary to change the election in the first qualifying period that the election was made in order to also change subsequent periods. The due date for changing an election is the same as the filing deadline. This provides a way to change elections on applications that were filed before the deadline.

Taxation of CEWS claims

CEWS assistance is taxable, and as government assistance, it would generally be included in income when the subsidy is received. However, the Income Tax Act contains a specific provision and generally states that the subsidy is considered to be received on the last day of the qualifying period to which it relates. Therefore, when filing a tax return that includes a period for which a CEWS claim was made and not yet received, or includes a period for which a CEWS claim will be made, the anticipated amount of the CEWS claim must be included in taxable income for that taxation year.

This could be particularly problematic where a claim has been delayed in order to minimize uncertainty about elections that can be made with a claim. This also may mean that a tax return that was filed prior to making a claim will need to be amended for the amount of any claims made after filing that are deemed to have accrued prior to the tax year-end.

The qualifying claim periods are four weeks long, and do not coincide with the calendar months. For example, claim period 10 started on November 22 and ended on December 19, 2020. For accounting purposes, this claim may have been accrued, plus a portion of the claim for period 11, which ran from December 20, 2020 to January 16, 2021. For income tax purposes, all claims for periods 1 through 10 will need to be recognized as income in a tax year ended December 31, 2020, even if the claim has not yet been made by year-end.