April 9, 2020
Author: Dylan Snowdon and Mihai Beschea
On April 8, 2020 Prime Minister Trudeau and the Federal Government of Canada announced the details of the new Canada Emergency Wage Subsidy (“CEWS”) to assist Canadian businesses financially impacted by the COVID-19 health measures. The intention of this program is to provide a 75-percent wage subsidy to eligible employers for a maximum of 12-week, starting retroactively to March 15, 2020. Further details about the application process are anticipated soon. The CEWS program is designed to ease the burden that the COVID-19 health crisis is having on the economy and to prevent job losses.
Who is Eligible for the Canada Emergency Wage Subsidy?
The list of eligible employers is broad and includes: individuals, taxable corporations, partnerships consisting of eligible employers, non-profit organizations, and registered charities. Public bodies are not included in this list. Note, that the Government considers universities and colleges to be public bodies for the purpose of CEWS.
To be able to participate, eligible employers must see a 15% drop in revenues in March 2020 and a 30% drop in revenues for the following months. To apply for CEWS, employers will have to attest to the decline in revenue.
An eligible employee is an individual who is employed in Canada.
Importantly, eligibility for CEWS will be limited to wages paid to employees that have not had 14 consecutive days without pay in the subject eligibility period. The eligibility periods established are:
|Required reduction in revenue
|Reference period for eligibility
|March 2020 over:March 2019 or Average of January and February 2020
|April 2020 over:April 2019 or Average of January and February 2020
|May 2020 over:May 2019 or Average of January and February 2020
The driving factor for CEWS eligibility is employees must be receiving wages, to the minimum requirements of the program, for the business to claim the subsidy. This program is meant to ensure employees remain hired and paid during this crisis. Individuals that have been laid off or are unemployed may apply for the Canada Emergency Response Benefit (“CERB”).
Canada Emergency Wage Subsidy Eligibility Periods
Generally, eligibly is determined by change in an employer’s monthly revenues, year over year, for the calendar month in which the period began, as set out in the table above. An alternative approach is also permitted. Under the alternative approach, employers are permitted to compare their revenue using an average of their revenue earned in January and February 2020. Employers must select either the general or alternative approach for the time period determination of their revenue and must use the same approach for their entire participation in the CEWS program.
It is important to note, the amount of wage subsidy received by the employer in a given month is ignored for the purposes of measuring year-to-year changes in monthly revenue.
Below is an example calculating the eligibility period:
- ABC Inc. is a start-up that started its operations last September.
- It reported revenues of $100,000 in January and $140,000 in February, for a monthly average of $120,000.
- In March, its revenues dropped to $90,000. Because revenues in March are 25 % lower than $120,000, ABC Inc. would be eligible to submit a claim for the CEWS for the first period.
- To be eligible for the following period, ABC Inc. revenues would have to be $84,000 or less for the month of April (that is, 30 % lower than $120,000).
Calculating Revenue Declines
How is revenue calculated for the purposes of CEWS? Normal accounting methods are to be used and revenues from extraordinary items are to be excluded. For CEWS, revenue refers to amounts earned in Canada from arm’s-length sources. Revenue can be calculated using the accrual method or cash method, but not both. Employers must select either the accrual or cash method and apply them for the duration of the CEWS program
Amount of the Subsidy
Between March 15 and June 06, 2020, the subsidy amount for wages paid to a given employee on the eligible remuneration paid would be the greater of:
- 75% of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
- The amount of remuneration paid, up to a maximum benefit of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.
Employers may be eligible for a subsidy of the entire (100%) of the first 75% portion of pre-crisis wages or salaries of existing employees. These employers would be expected where possible to maintain existing employees’ pre-crisis employment earnings.
The pre-crisis remuneration for a given employee would be based on the average weekly remuneration paid between January 1 and March 15, 2020 inclusively, excluding any seven-day periods in respect of which the employee did not receive remuneration.
For new employees, an employer will also be eligible for a subsidy of 75% of their salary.
There would be no overall limit on the subsidy amount that an eligible employer may claim, meaning that an employer’s maximum benefit is determined by the number of employees receiving pay during the eligibility periods.
Employers are expected, where possible, to make their best effort to top-up employees’ salaries to bring them to pre-crisis levels.
Eligible remuneration includes salary, wages, and other remuneration such as tips, personal vehicle allowances, and life insurance premiums paid. These are amounts for which employers would generally be required to withhold account of the employee’s income tax obligation. However, it does not include severance pay, or items such as stock option benefits or the personal use of a corporate vehicle.
A special rule will apply to employees that do not deal at arm’s length with the employer. The subsidy amount for non-arm’s length wages will be limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, up to a maximum benefit of the lesser of (as opposed to the greater-of for arm’s length employees):
- $847 per week; and
- 75% of the employee’s pre-crisis weekly remuneration. The subsidy would only be available in respect of non-arm’s length employees employed prior to March 15, 2020.
How to Apply?
Eligible employers can apply online through the Canada Revenue Agency My Business Account portal. Employers should keep records to demonstrate arm’s-length revenues and remunerations paid to employees.
The Federal Government has repeatedly warned the public against abusing or defrauding economic relief programs. Strict compliance measures are being implemented and we expect the Federal Government will prosecute any fraud of CEWS aggressively.
If employers do not meet the eligibility requirements of CEWS, they will be expected to repay any amounts received. Penalties may apply in cases of fraudulent claims, these penalties may include fines or imprisonment.
Employers engaged in artificial transactions to reduce revenue, to make themselves eligible for CEWS will be subject to a penalty of 25% of the value of the subsidy claimed in addition to the requirement to repay the improperly claimed subsidy amount in full.
Interaction with Other Government Subsidies and Programs
Wage Subsidy Program
A temporary 10% wage subsidy was enacted on March 25, 2020. For employers who are eligible for CEWS and the 10% wage subsidy, any benefit received from the 10% wage subsidy will generally reduce the amount available to be claimed under CEWS.
The Work-Share Program was extended from 38-weeks to 76-weeks for employers affected by COVID-19 (announced on March 18, 2020 by Prime Minister Trudeau). The Work-Share Program is intended to provide income support to employees eligible for Employment Insurance who agree to reduce their normal working hours because of circumstances outside the control of their employers.
Employees and employers that are participating in the Work-Share Program will have a reduction in the benefit they are entitled to receive under CEWS. The reduction will correspond to the EI benefits received by the employee.
General Government Assistance
The usual treatment of tax credits and other benefits provided by the government continue to apply. Wage subsidies received by an employer are considered government assistance and must be included in the employer’s taxable income.
Assistance received under a wage subsidy would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
Refund for Certain Payroll Contributions
CEWS has been expanded by the federal Government by introducing a 100% refund for employer-paid contributions to Employment Insurance and the Canada Pension Plan. This refund covers 100% of employer-paid contributions for eligible employees, for each week those employees are:
- Are on leave with pay, and
- The employer is eligible to claim the CEWS for those employees
An employee is 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 in that week. This refund is not available for eligible employees that are on leave with pay for only a portion of the week.
This refund is not subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the CEWS. There is no overall limit on the refund amount that an eligible employer may claim. Employers are required to continue to collect and remit employer and employee contributions to CPP and EI as usual. Eligible employers can apply for a CPP and EI refund at the same time that they apply for the CEWS.
Can I get Canadian Emergency Wage Subsity for an employee previously on a lay-off?
Yes, but you will need to return the employee to a status of receiving wages, either by being back at work or by being placed on a paid leave of absence.
Can I reduce an employee’s salary while they are on a paid leave?
If your employment contract with an employee allows a wage adjustment, or if the employee agrees with the change, then yes, salary can be reduced on either a temporary or permanent basis. Employers will want to examine the qualifying criteria for CEWS payments to ensure they are creating the maximum benefit possible for both the business and the affected individuals.
Can I implement back-pay to some employees currently on a temporary lay-off now in order to qualify for the March designated period subsidy?
While it is possible to implement retroactive pay, an employee currently receiving EI or an alternate benefit such as CERB would likely face a repayment obligation and the employer could potentially be sanctioned for issuing a payment improperly. Therefore, until further direction is provided by the federal government it appears that retroactive pay should only be considered for employees who have not received any benefit payments for the time applicable.