Finance Minister Bill Morneau announced details with respect to both an extension and expansion of the Canada Emergency Wage Subsidy (CEWS) program on July 17, 2020. The CEWS program was scheduled to end on August 29 and provided a 75% wage subsidy on eligible remuneration for qualifying businesses.
The announcement on July 17 indicated the following extension and expansion of the program:
- Extends the CEWS to December 19. Details on how it will be implemented were provided to November 21.
- Expands the program to more employers as of July 5. As of this date, any employer with a revenue decline will be eligible for the CEWS, the amount of which will be calculated based on the decline in qualifying revenue. This eliminates the restriction that employers with less than a 30% decline in qualifying revenue do not qualify for the CEWS. This also means that for many employers the maximum wage subsidy that they will receive for periods 7-9 (September – November), will be less than what they were receiving in the first six qualifying periods.
- Enhances the wage subsidy for employers with more than a 50% decline in qualifying revenue with a subsidy of up to 85% of eligible remuneration.
- Addresses other concerns raised by stakeholders during a recently concluded consultation process with the government.
Expansion of the base CEWS to more employers
The proposed changes will make the calculation of the wage subsidy more complex and more sensitive to the changes in revenue between the current and prior reference periods. The percentage drop in revenue between reference periods will directly determine the wage subsidy rate as the wage subsidy rate is no longer fixed. For a business with less than a 50% drop in revenue, the wage subsidy rate will directly vary with the drop in revenue percentage. Please see Table 1 in the Appendix for an example of the rate that will apply where revenue drops 40% in each qualifying period.
Wage subsidy rate top-up for businesses with a revenue decline 50% or more
The wage subsidy rate has been divided into two pieces for businesses with a 50% or greater revenue decline. These businesses will have a flat base rate (60% in periods 5 and 6, 50% in period 7, 40% in period 8 and 20% in period 9). They will also have a top-up rate of up to 25%, depending on a rate decline using a three-month average period.
The top-up CEWS rate for selected average revenue drop levels is illustrated in Table 2 in the Appendix.
The overall CEWS rate would be equal to the top-up CEWS rate plus the base CEWS rate. Please refer to Table 3 in the Appendix.
Reference periods for the drop-in-revenues test
Starting with Period 5 (July) qualifying entities can chose the prior reference period to be the corresponding prior year calendar month (the general method) or the average of January and February of 2020 (the alternative method). If a CEWS claim was made in periods 1-4, the entity already had to make a choice of using one of these methods consistently. However, the choice made in period 5 is a new choice, and is independent of the choice of reference periods made for the claims in Periods 1-4. The choice made in period 5 must be used in all subsequent claim periods.
Beginning with the qualifying period that began on July 5, the reference period to determine the drop in revenue can be a comparison of the current month to the same month in 2019, or businesses can use the immediately previous month compared to the corresponding month in 2019. Using the alternate approach, the comparison of revenue will be the current month or the immediately preceding month to the average of qualifying revenues in January and February 2020.
This is illustrated in Table 4 in the Appendix.
Other concerns addressed in the announcement
The government released draft legislation to amend the CEWS legislation for the announcement. There are additional proposed changes to the legislation based on the recently concluded consultation the government had with businesses and other stakeholders. As stated on the Government of Canada website, these include:
- providing an appeal process to the Tax Court of Canada;
- providing continuity rules for the calculation of an employer's drop in revenues where the employer purchased all or substantially all the assets used in carrying on business by the seller;
- allowing prescribed organizations that are registered charities or non-profit organizations to choose whether to include government-source revenue for the purpose of computing their reductions in qualifying revenue; and
- allowing entities that use the cash method of accounting to elect to use accrual based accounting to compute their revenues for the purpose of the CEWS.
According to the Government of Canada, the documents also note that “[t]he government is also proposing to move forward with previously released legislative changes, including relieving changes for calculating pre-crisis baseline remuneration, for corporations that have amalgamated and for eligible entities that use payroll service providers [PayMasters]. The government is also proposing to move forward with the amendment that would align the treatment of trusts and corporations for the purposes of the CEWS.”
The application deadline for any CEWS claims has been extended to January 31, 2021 from the previous deadline of September 30, 2020.
How BDO can help
Our BDO Tax professionals understand the uncertainty and challenges your business is facing during the COVID-19 crisis. We can help you assess how the new extensions and enhancements of the government relief programs will impact your organization and determine next steps. Read our alert COVID-19 – Wage Subsidy Programs for further information on wage subsidy programs as it applies prior to July 4.