Canada: Federal Government Extends COVID-19 Wage Subsidy To September 25

Update: On June 2, 2021, the Honourable Chrystia Freeland (Deputy Prime Minister and Minister of Finance) and the Honourable Mary Ng (Minister of Small Business, Export Promotion and International Trade) detailed the proposed extension of the Canada Emergency Wage Subsidy to September 25, 2021.  The blog post below has been updated to reflect the rules applicable up to September 25, 2021. With different rules now applying to the various benefit periods, MLT Aikins LLP would be pleased to assist you in determining whether you are eligible for this program and the amount of the subsidy that you qualify for. Eligible employers can apply here.

Canadian Emergency Wage Subsidy: Eligible Employers with 2020 Revenue Decreases

First enacted on April 11, 2020, section 125.7 of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) sets out the rules applicable to the Canada Emergency Wage Subsidy ("CEWS"). Several legislative and regulatory amendments over the past several months have modified and extended the program.

Eligibility

The Canada Emergency Wage Subsidy is available to a wide range of employers, including:

• taxable corporations and trusts;
• individuals;
• registered charities;
• non-profit organizations; and
• partnerships, provided that at least 50% of the fair market value ("FMV") of all interests in the partnership are held by partners that would otherwise be eligible for the subsidy.

Regulations expand the definition of "eligible entity" to include certain businesses owned by Indigenous governing bodies, private schools or colleges, registered Canadian amateur athletic associations and registered journalism organizations.

The CEWS is not available to public institutions, which include public schools and school boards, public universities and colleges, hospitals, health authorities, municipalities, First Nations bands or entities owned by the Crown or a municipality.

To qualify, an employer will need to demonstrate a revenue decrease for the relevant qualifying period (each a "Qualifying Period"):

Employers can choose to demonstrate their revenue decline in one of two ways, either by comparing the applicable month to the previous year (e.g. March 2020 to March 2019) or with reference to their average revenue in January and February of 2020. Employers have some flexibility in choosing between these approaches, provided that the same method is used to calculate their reduction in revenues for Periods 1 to 4 (March 15, 2020 to July 4, 2020) and Periods 5 to 20 (July 5, 2020 to September 25, 2021). While employers will have to apply separately for each month, employers who qualify for one Qualifying Period will automatically receive at least some amount of the subsidy in the next Qualifying Period.

Note that both Periods 10 and 11 use December 2020 as the default revenue reference period.  This adjustment addresses the timing mismatch that has resulted from the fact that 28-day claim periods  are shorter than the calendar months used for revenue calculation purposes (e.g. for Period 10, which ended on December 19, 2020, employers were required to know their December 2020 revenues before making a claim).

The reference period also adjusts starting in Period 17. A deeming rule was introduced in the latest legislative update which determines the reference period as the greater of the decline in revenues for the particular qualifying period and the immediately preceding qualifying period.

Calculating Revenue

As a general rule, revenue for the purposes of the CEWS is calculated according to the employer's ordinary accounting practices. Qualifying revenue includes inflows received in the ordinary course of the entity's business and excludes extraordinary items and amounts received from non-arm's length entities. Registered charities and non-profits can elect to exclude government funding from their calculation of revenue.

Most employers will calculate revenue on an accrual basis, that is, by treating revenue as earned when goods are delivered or services are performed, not when they are actually paid for.  However, employers can also elect to calculate revenue on a cash basis, as earned only when payment is actually received.  An employer will have to use the same calculation method for all Qualifying Periods.

For employers who are part of a larger corporate group, revenues can be calculated on a consolidated group-wide basis or for each individual entity, if every member of the group agrees to use the same method. Where an entity's revenues come from non-arm's length payments (e.g. the sales division pays a transfer price to the manufacturing division), the revenue decline may be calculated group-wide (to prevent inter-group payments from being used to manipulate the amount of the revenue decline) in applicable circumstances.

Special rules apply if two corporations have amalgamated or if an employer has acquired the business assets of another person or partnership. In these cases, it may be possible to use the pre-transaction revenues of the other corporation or business to calculate eligibility for the CEWS.

Subsidy Amount and Limits

Original 75% Subsidy

For the period of March 15, 2020 to July 4, 2020, for most employees, the weekly subsidy will equal 75% of the employee's pre-crisis remuneration (average weekly earnings from January 1, 2020 to March 15, 2020), up to a maximum of $847 per week. Eligible remuneration includes salary, wages, fees, commissions and certain taxable benefits to employees. As previously announced by the Finance Minister, the subsidy is intended to cover 75% of an employee's wages, with the employer making its best efforts to pay the other 25%. During this period, if an employee's wages have been cut by more than 25% since March 15, 2020, the subsidy will equal the amount of remuneration paid, up to the weekly maximum of $847. Employees hired after March 15, 2020 are eligible for the 75% subsidy as long as they deal at arm's length with the employer (family members hired after March 15, 2020, who were not employed during 2019, would not be eligible).

Variable Subsidy Rate

For CEWS periods beginning after July 4, 2020, the CEWS consists of two parts: a base subsidy and a top-up subsidy. The base subsidy is available to all employers who have experienced any revenue reduction, with the subsidy amount varying based on the scale of revenue decline. The CEWS is available for both active employees as well as those on leave.

The amount of the base subsidy for an employer in a given period is tied to the changes in the employer's monthly revenues, with the maximum subsidy being provided to employers with a revenue reduction of at least 50%. As set out in the following table, the base rate for a particular Qualifying Period will decrease during the remaining 2021 claim periods until it is phased out entirely.

For wages paid after July 4, 2020, an additional top-up subsidy is available to employers who have experienced a revenue reduction of more than 50%. For wages paid from July 5, 2020 to September 26, 2020, eligibility for the top-up subsidy is determined by looking at the employer's average revenue drop over the three prior months. For Qualifying Periods beginning after September 26, 2020, employers may choose to use their revenue decrease in the current month to determine their eligibility for the top-up subsidy (e.g. using the same revenue reduction number as their base subsidy calculations). The top-up subsidy rates are outlined in the table below:

For qualifying employers, the top-up subsidy rate equals 1.25 times their applicable revenue drop exceeding 50%, with a maximum top-up of 25% of remuneration paid for Periods 5 to 10 (applies to remuneration of up to $1,129 per employee per week). For Periods 11 to 17, the maximum top-up is 35% of remuneration paid. The top up rate then decreases as the periods increase in number.  For example, an employer with a revenue drop of 60% in Period 5 would qualify for a top-up of 12.5% of remuneration paid (1.25 x (60% – 50%) = 12.5%).  If this employer paid its employee at least $1,129 per week, the employer would receive a top-up of $141.13 in addition to their base subsidy amount.

Included in the recent legislative update is a change to the baseline remuneration calculation. As previously mentioned, the baseline remuneration was the average weekly earnings paid to an employee during the period of January 1, 2020 to March 15, 2020. An eligible employer can now elect an alternative baseline period. For the qualifying period between June 6, 2021 to July 3, 2021, employers can elect to use the average weekly earnings paid between March 1, 2019 to June 30, 2019 or between July 1, 2019 to December 31, 2019. For qualifying periods beginning after July 3, 2021, employers can elect to use the average weekly earnings paid between July 1, 2019 to December 31, 2019. Special rules apply in calculating CEWS amounts payable in respect of employees who are on paid leave for a given week (they do not report for any duties that week) during a Qualifying Period.

While there is no limit on the total benefit that an employer may receive from the CEWS, employers are required to include CEWS benefits received in their taxable income. Under the original program rules, if an employee was eligible for the Canada Emergency Response Benefit (a $2,000 payment for those who do not earn remuneration for 14 or more consecutive days during a Qualifying Period), the employer could not claim the CEWS in respect of that employee for that period. For the Qualifying Periods beginning after July 4, 2020 the CEWS eligibility criteria no longer excludes employees who do not earn remuneration for 14 or more consecutive days.

Delivery Mechanism

The amount of the CEWS that an employer qualifies for will be paid directly to the employer by the Canada Revenue Agency (the "CRA"). Once an employer applies for the CEWS and provides the CRA with proof that the qualifying remuneration has been paid to eligible employees, the CRA will pay the subsidy amount to the employer.

The legislation also sets out a series of rules that will apply to employers who take steps to reduce their qualifying revenue if one of the main purposes of the transaction or event is to qualify for, or increase the employer's claim for, the CEWS. Such employers will be required to repay any amount of the subsidy received and will be subject to an additional 25% penalty.

The latest legislative update also included repayment requirements for publicly listed corporations that have claimed the CEWS for a qualifying period beginning after June 5, 2021. Repayment will be required if the aggregate compensation for specified executives during the 2021 calendar year is greater than the aggregate compensation for specified executives during the 2019 calendar year. Specified executives are defined as named executive officers whose compensation is required to be disclosed under Canadian securities law in the corporation's annual information circular provided to shareholders. This would include Chief Executive Officers, Chief Financial Officers, and three other highly compensated executives. If the threshold is met, the corporation will be required to repay the lesser of the total of all wage subsidy amounts received in respect of active employees for qualifying periods beginning after June 5, 2021, and the amount by which the aggregate specified executives' compensation for 2021 exceeds the aggregate specified executives' compensation for 2019. This new repayment requirement is applied at the group level and would apply to subsidy amounts paid to any entity in the group.

Next Steps

Employers can apply for the CEWS via their CRA My Business Account  or through an online portal on the CRA's website. The CRA's goal is to process CEWS applications within seven to ten business days. Employers are encouraged to ensure they are able to receive direct deposits from the CRA to speed up the delivery of payments.  Employers have 180 days from the end of a Qualifying Period to apply for the CEWS (June 17, 2021 is the last day to apply for CEWS Qualifying Period 10).

As you evaluate your employee compensation policies during this difficult time, you should consider the subsidies that may be available to your organization. In making these decisions, MLT Aikins LLP would be pleased to assist with determining whether your business structure is eligible for, and how to optimize your benefit from, this emergency relief program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.