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The ongoing wage subsidy saga is a perfect case study of the dilemma faced by drafters of tax legislation: Should tax legislation be drafted broadly so as to impact everyone equally despite the fact that it may not be fair, or should tax legislation be drafted in a bespoke manner that is carefully targeted to achieve a perceived fair and progressive outcome but that inevitably comes with complexity? With the COVID-19 wage subsidy regime, we have witnessed the full spectrum.

The first wage subsidy introduced in response to Covid was the Temporary Wage Subsidy (TWS) announced on March 18, 2020 - see our blog on this. Although the subsidy was not substantial (10% of wages paid, up to $1,375 per employee to a maximum of $25,000 total per employer), it was spectacularly simple. Many employers in Canada qualified for the TWS. It was not progressive because businesses that did not suffer under the crisis got the same TWS amount as the businesses that were completely closed down. Everyone was treated equally, but it was not necessarily fair.

Then, with great interest, came the Canada Emergency Wage Subsidy (CEWS) on April 1, 2020. The CEWS can be a very substantial amount to an employer (up to $847 per week, no maximum limit, with a refund of the employer's portion CCP and EI for a furloughed employee). Unlike the TWS, CEWS 1.0 is targeted: only employers who suffered a 30% decline in revenue can benefit and it came with a heap of rules to siphon out those who do not truly qualify (which is understandable given the potential for abuse of the program). As a result, the CEWS legislation was quite complex. Yet, at the same time, the 30% all-or-nothing cut off was a clear attempt to balance this targeted approach with simplicity. The legislation could have included a phase-out mechanism based on the exact revenue decline, but it chose not to do so for ease of administration and so that a layperson can somewhat grasp the overall concept of CEWS.

It is now more than three months after the first introduction of CEWS. Many businesses have started re-opening (while many businesses, very sadly, did not survive). The Government's priority has shifted from "Holy Guacamole, Just Push Cash Out the Door Already!" to providing the right economic incentives to businesses and workers for the recovery. The result is a completely overhauled CEWS subsidy released by the Government on July 17, 2020 (almost exactly 3 years to the day of the release of the complex and now famous July 18, 2017 private corporation tax proposals). Some have called this "CEWS 2.0", and we'll use this term too.

CEWS 2.0 no longer uses an "all-or-nothing" approach. Instead it uses multiple sliding scales that adjust the amount of CEWS support based on the exact revenue decline. In circumstances of severe business decline, it may even result in CEWS being higher than under the current mechanics. As you will see, CEWS 2.0 attempts to employ a very bespoke mechanic that should deliver the perceived 'right' amount of CEWS in various different circumstances - and we certainly appreciate the Government and particularly the legislation drafter at the Department of Finance for the tremendous thought that went into this new piece of legislation. Unfortunately, this bespoke-ness brings immense complexity that many will struggle to understand. Even the Government Backgrounder, which is supposed to be a non-technical briefing document, needed 22 pages and six elaborate tables to illustrate the formulas behind new CEWS mechanics.

Critics have described CEWS 2.0 as "massively complicated" and "a cobweb of complexity". These are accurate descriptions of the new rules, but complexity is sometimes a necessity when the policy goal is to accurately assess needs and to selectively scale subsidies based on those needs. Of course, if the policy were to implement some type of universal basic wage subsidies where all employers qualify for the same amount, then the rules could have been simple - all they need is to reuse the TWS legislation and slap a high subsidy rate on it. This, however, was not the route chosen by the government and since we are not economists, we will decline to comment on which is a better policy choice.

In a short span of three and a half months, we have three versions of wage subsidy rules that ran this full spectrum of broad vs targeted. For tax geeks like us, it is amazing to see classroom theories on legislative principles put into practice like this. But, enough with our babbling, let's see what's under the hood of CEWS 2.0.

A FlowChart is Worth A Thousand Words

We said CEWS 2.0 is complex and we weren't kidding. The combined original and draft legislation on CEWS is a 26-page word salad with many circular references. Rather than attempting to explain the entire CEWS mechanics with words, we decided that the CEWS 2.0 mechanics is best explained with a FlowChart. The FlowChart is divided into active versus "furloughed" eligible employees. Furloughed employees are those who are paid wages by the employer but are on leave (i.e. not performing any work). The government's goal was to provide further incentives for employers who are suffering under Covid to hire back employees and have them furloughed, rather than the employees receiving CERB benefits.

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