Canadian tax - The 75% wage subsidy

Updated June 5, 2020

On April 11, 2020, the legislation implementing the Federal Government's new Canada Emergency Wage Subsidy ("CEWS") was enacted. The CEWS is intended to support the well-being of workers, maintain employment relationships and reduce claims on the employment insurance regime. Since April 11th, the government has released administrative guidance on the mechanics of the CEWS and on May 15th the government announced an extension of the CEWS until the end of August, 2020, as well as an expansion of the CEWS to additional types of employers.

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.

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 deemed to have been remitted by the employer under the 10% Wage Subsidy (whether or not the employer has reduced its actual payroll remittances accordingly),

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.

The Federal Government has recognized that, in certain circumstances (e.g. parental, disability or unpaid leaves between January 1 and March 15, 2020, or seasonal employees), the determination of baseline remuneration by looking to the January 1 – March 15, 2020 period can be problematic. Accordingly, on May 15, 2020, the Federal Government announced its intention to amend the CEWS Legislation to allow an employer to choose, on an employee-by-employee basis, one of the following two approaches in calculating an employee's baseline revenue:

1. the employer can calculate an employee's baseline remuneration as the average weekly remuneration paid to the employee from January 1 to March 25, 2020 (i.e. the method included in the originally enacted version of the CEWS Legislation); or
2. the employer can calculate an employee's baseline remuneration as the average weekly remuneration paid to the employee from March 1 to May 31, 2019
   
   in each case excluding any period of 7 or more consecutive days without remuneration.

The specific language of the proposed legislative amendment has not yet been released but will be retroactive to April 11, 2020.

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 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, provided that the fair market value of interests in the partnership held by members that are not eligible entities at all times in the qualifying period does not exceed 50% of the fair market value of all interests in the partnership, or
6. a prescribed organization.

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) of the Income Tax Act (e.g. municipalities, First Nations bands, local governments, crown corporations, municipal corporations), or
2. a school, school board, hospital, health authority, public university or college.

Notwithstanding the general ineligibility of tax-exempt corporations and public institutions for the CEWS, on May 15, 2020, the Federal Government announced that the following entities would be eligible entities for purposes of the CEWS, retroactive to April 11, 2020:

1. Indigenous government-owned corporations that carry on a business and are tax-exempt under paragraphs 149(1)(d.5) or (d.6) of the Income Tax Act, as well as partnerships where each partner of the partnership is either an Indigenous government or an eligible employer;
2. national level Registered Canadian Amateur Athletic Associations (RCAAAs) that are tax-exempt under paragraph 149(1)(g) of the Income Tax Act (provincial, regional and local members of an RCAAA were already considered eligible as non-profit organizations);
3. registered journalism organizations that are tax-exempt under paragraph 149(1)(h) of the Income Tax Act; and
4. non-public educational and training institutions, including for-profit and not-for-profit institutions such as private colleges and private schools, as well as arts schools, language schools, driving schools, flight schools and culinary schools.
5. Also on May 15, 2020, the Federal Government announced its intention to amend the CEWS legislation as it relates to the qualification of trusts (generally considered to be individuals for purposes of the Income Tax Act) for qualifying periods (see discussion below) beginning on or after May 10, 2020, as follows: 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; and in cases where the trust is a public institution, it would qualify only if it is a prescribed organization. It is unclear at this time what types of entities will be prescribed for this purpose.

Qualifying Periods

In the version originally enacted on April 11, the CEWS Legislation provided for three "qualifying periods" for which an eligible employer could 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 contained the flexibility to prescribe by regulation additional qualifying periods that end no later than September 30, 2020. On May 15, 2020, the Federal Government announced that the CEWS program would be extended to August 29, 2020, effectively doubling the duration of the program from 12 weeks to 24 weeks. We expect the extension period to comprise three additional 4-week qualifying periods, consistent with the approach taken during the first 12 weeks of the CEWS program, but clarity on that point should be forthcoming when the regulations prescribing the extension are released.

In conjunction with the announced extension of the CEWS program, the Federal Government signaled its intention to "consult with key business and labour representatives over the next month on potential adjustments to the program to incent jobs and growth, including the 30 per cent revenue decline threshold."

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. As noted in the discussion above, the Federal Government has announced that the CEWS program will be extended until August 29, 2020, but the current and prior reference periods have not yet been released for any qualifying periods following the May 10-June 6 qualifying period. Accordingly, the following table does not yet contain information for such additional qualifying period(s).

Period	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.

On May 15, 2020, the Federal Government announced its intention to amend the CEWS Legislation to address the revenue reduction measurement in the context of amalgamations and wind-ups. Specifically, under the original version of the CEWS Legislation, a corporation formed on the amalgamation of two or more predecessor corporations might not qualify for the CEWS since, as a new corporation, it would not have benchmark revenues from a prior reference period to prove the requisite revenue reduction. Further, following a wind-up, the prior reference period earnings of the surviving corporation might not provide an accurate picture of the pre-crisis revenue of the combined venture in all circumstances. To address these situations, the CEWS Legislation will be amended to allow corporations formed on an amalgamation, and the corporation into which another corporation has been wound up, to calculate prior reference period revenue using the combined revenue of the relevant pre-amalgamation or pre-wind-up corporations, as applicable, "unless it is reasonable to consider that one of the main purposes for the amalgamation (or the winding up) was to qualify for the CEWS." The amendment is proposed to be retroactive to April 11, 2020. The specific language of the amendment has not yet been released.

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 available starting Monday April 27, 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.

Québec health services fund contributions

Québec will offer a tax credit equivalent to the contribution to the Québec Health Services Fund (HSF) payable on the remuneration of an employee on paid leave provided the employer qualifies for the CEWS with respect to that remuneration. The credit applies until August 29, 2020.

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 they may apply for the CEWS here. Employers should also seek legal advice in light of their particular circumstances, as certain of the rules are complex.

Footnote

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