Canada: Canada Emergency Wage Subsidy (CEWS) Redesigned: Flexibility And Relief For Employers In The Months Ahead

On July 27, 2020, new federal legislation was enacted that revises the eligibility criteria for the Canada Emergency Wage Subsidy (the "CEWS") in order to support those employers hardest hit by COVID-19. Known as An Act respecting further COVID-19 measures ("the Act"), the Act extends the CEWS to November 21, 2020, with the ability to further extend it by regulation to no later than December 31, 2020. The Act also provides a revised formula for calculating the CEWS for the qualifying periods from July 5 through November 21, 2020, building in a gradual decline in the maximum weekly base subsidy over that period.

Summary of the Key Changes to the Subsidy

Effective July 5, 2020, the CEWS will be divided into two parts:

• a base subsidy available to all eligible employers experiencing a decline in revenues; and
• a top-up subsidy available to those employers that have been most adversely affected by the COVID-19 crisis.

The two-part CEWS described above would apply with respect to the remuneration of active employees, while a separate rate structure would apply to employees who are on leave with pay.

Extension of CEWS through November 21, 2020

The redesigned CEWS program will be available from July 5 through November 21, 2020 (bringing the total number of qualifying periods to 9), with the possibility of extension (by regulation) to no later than December 31, 2020. With respect to Periods 5 and 6 (July 5 through August 29, 2020), employers will have access to a CEWS rate that is at least as generous as what they would have had under the initial CEWS structure, which was the subject of our previous FAQs, linked here.

The CEWS qualifying periods, from the beginning of the program, are summarized as follows:

Eligibility Requirements

Which employers are eligible?

There has been no significant change to the types of entities eligible for the CEWS. The legislation has been amended to extend its application to trusts (excluding trusts which are public institutions, or which are tax-exempt), and to permit employers using payroll service providers to apply for the CEWS.

No threshold revenue decline requirement

As will be set out in greater detail below, employers are no longer required (effective July 5, 2020) to have sustained a 30 per cent revenue decline in order to be eligible for the base subsidy. To be eligible for the top-up subsidy, employers must have experienced a revenue decline of more than 50 per cent. The details of the revenue decline tests applicable to the base subsidy and the top-up subsidy are provided below.

Asset acquisitions: continuity rules

The legislation has also been amended to provide for continuity rules applicable to eligible entities which have, during a particular qualifying period or any time before that period, acquired assets the fair market value of which constituted all or substantially all of the fair market value of the property of the seller used in the course of carrying on business. If the eligible entity elects (or, if the seller is in existence during the relevant qualifying period and the eligible entity and the seller jointly elect) and files with the Minister of National Revenue, then the seller's qualifying revenue that is reasonably attributable to the acquired assets is included in determining the eligible entity's qualifying revenue for the purposes of the revenue decline calculation, and is subtracted from the qualifying revenue of the seller in respect of the same reference period.

Which employees are eligible?

Eligible employees are individuals who are employed in Canada. Effective July 5, 2020, the eligibility criteria no longer exclude employees who are without remuneration in respect of 14 or more consecutive days in an eligibility period.

What is eligible remuneration?

There has been no change to the definition of eligible remuneration, which we outlined in our previous FAQs, linked here.

Change to definition of "baseline remuneration"

The legislation has been amended to expand the options available to eligible entities for the purposes of determining their eligible employees' "baseline remuneration" (a measure of the employees' pre-crisis remuneration- that in certain circumstances is a factor in calculating the subsidy to which the employer is entitled).

Previously, "baseline remuneration" was defined as the average weekly eligible remuneration (excluding any period of seven or more consecutive days for which the employee was not remunerated) paid to the eligible employee by the eligible entity between January 1 and March 15, 2020. The legislative amendments will permit eligible entities to elect the following alternative comparator periods for a particular employee's baseline remuneration:

• in respect of Periods 1 through 3 (i.e. the periods between March 15 and June 6, 2020), the period between March 1, 2019 and May 31, 2019;
• in respect of Period 4 (i.e. the period between June 7 and July 4, 2020), either the period between March 1, 2019 and May 31, 2019 OR the period between March 1, 2019 and June 30, 2019; and
• in respect of Periods 5 and following (i.e., from July 5, 2020 ongoing for the duration of the CEWS program), the period between July 1, 2019 and December 31, 2019.

As will be described in greater detail below, an eligible employee's baseline remuneration is used to calculate the subsidy to which the eligible employer is entitled in Periods 1 through 4 (as well as Periods 5 and 6, if the employer sustains a revenue decline of 30 per cent or more and would receive a greater subsidy if the methodology in Periods 1 through 4 were used). Subject to this exception, the "baseline remuneration" concept will no longer be used in Periods 5 and following in respect of active arm's length employees. It will continue to be used in respect of active non-arm's-length employees (whose maximum subsidy amount will continue to be limited by their baseline remuneration if their remuneration during the qualifying period is higher), and inactive non-arm's length employees (whose subsidy amount will be nil, if their baseline remuneration is nil).

Extension of Application Deadline

The amended legislation has extended the application deadline to February 2021 (from the previous deadline of October 2020).

Base Subsidy

The base CEWS will be available effective July 5, 2020 to all employers experiencing a revenue decline (no matter how small).

What reference periods are used to calculate revenue decline for the purposes of the base subsidy?

Eligible employers may calculate their revenue decline for the purposes of calculating the base subsidy by comparing their revenues in each calendar month from July 2020 to November 2020 over the same calendar month in 2019 (the "General Approach"). Alternatively, they may elect to compare the calendar month's revenue to their average revenue in January and February 2020 (the "Alternative Approach"). Whichever approach the eligible employer selects will have to be used for Periods 5 through 9 and any subsequent periods as may be established by regulation, up to December 31, 2020. The eligible employer does not have to take the same approach as it selected to calculate its revenue declines in respect of Periods 1 through 4.

We have prepared a chart, below, which summarizes the reference periods for the base CEWS as well as the top-up CEWS (discussed further below).

How will the base subsidy be calculated?

Effective July 5, 2020, the base CEWS is a specified rate applied to the eligible remuneration (up to a maximum of $1,129 per week) paid by the eligible employer to each of its eligible arm's-length employees actively at work (employees on leave with pay are subject to a different rate structure which is summarized below, and a modified formula applies in respect of non-arm's length active employees, as described above). The rate will be determined on the basis of the eligible employer's revenue decline and will gradually diminish from a maximum of 60 per cent (in Periods 5 and 6) to 20 per cent (in Period 9). Employers sustaining a revenue decline of at least 50 per cent will be eligible for the maximum base subsidy, and those with a revenue decline of less than 50 per cent may calculate their subsidy rate based on a multiplier (1.2 in Periods 5 and 6, diminishing to 0.4 in Period 9) applied to the percentage of their revenue decline in the qualifying period.

This chart summarizes the base CEWS rate structure.

Rate structure of the base CEWS

Top-up Subsidy

The top-up CEWS is intended to provide additional financial support to employers who have been hardest hit by the COVID-19 crisis.

What reference periods are used to calculate revenue decline for the purposes of the top-up subsidy?

Eligible employers must calculate their revenue decline for the purposes of calculating the top-up subsidy by comparing their average revenues in the three calendar months preceding the qualifying period to the same three-month period in 2019, unless they have elected to use the Alternative Approach to the calculation of the base subsidy rate (i.e., a comparison to their average revenues in January and February 2020), in which case they must also compare their average revenues in the three calendar months preceding the qualifying period to their average revenues in January and February 2020.

We have prepared a chart, below, which summarizes the reference periods for the top-up CEWS as well as the base CEWS (discussed above).

How will the top-up subsidy be calculated?

Eligible employers whose revenue declines outlined above exceed 50 per cent will receive a top-up percentage equal to 1.25 times the revenue decline in excess of 50 per cent, up to a maximum of 25 per cent. The top-up subsidy would apply to eligible employees' eligible remuneration up to $1,129 per week (special rules apply in respect of non-arm's-length employees, discussed above). The top-up subsidy is available in respect of actively employed employees only (those employees who are on leave with pay are subject to different rules, outlined below).

The below chart illustrates the top-up CEWS rate structure.

Top-up CEWS rates for selected levels of average revenue drop over the preceding three months

CEWS reference periods

Subsidy Available in Respect of Employees on Leave with Pay

For Periods 5 and 6 (i.e., from July 5 to August 29, 2020), employees on leave with pay (often referred to as "furloughed" employees) will, as long as their employer sustains a revenue decline greater than 0% for either the base CEWS or the top-up CEWS, continue to have their eligible remuneration qualify for a subsidy, calculated in accordance with the formula applicable in Periods 1 through 4, being the greater of:

• 75%of the amount of remuneration paid, up to a maximum benefit of $847 per week, or, in the case of non-arm's-length employees, nil; and
• the amount of remuneration paid, up to a maximum benefit of $847 per week or 75%of the employee's weekly "baseline remuneration" (the definition of which has been expanded as described above), whichever is less.

Put another way, in Periods 5 and 6, an employer can calculate the subsidy for its furloughed arm's-length employees using the following rules:

For Periods 7 and following (i.e., from August 30, 2020 onward), eligible entities sustaining a revenue decline greater than 0 per cent for either the base CEWS or the top-up CEWS will qualify for CEWS in respect of eligible remuneration paid to eligible employees on leave with pay according to criteria that will be established in part by regulation, and intended to align with the manner in which the Canada Emergency Response Benefit (CERB) and/or Employment Insurance (EI) are adjusted.

The employer portion of contributions made in respect of the Canada Pension Plan (CPP), Employment Insurance (EI), the Quebec Pension Plan (QPP), and the Quebec Parental Insurance Plan (QPIP) will continue to be refunded to the employer, with respect to eligible remuneration paid to employees on leave with pay.

Deeming Rules

Eligible entities were subject to a deeming rule under the initial CEWS program which provided that if the eligible entity met the revenue decline test for eligibility for the CEWS in respect of a particular qualifying period, the entity would be deemed to meet the eligibility test in respect of the immediately following qualifying period as well. This rule continues to apply in respect of Periods 1 through 3.

The legislative amendments have introduced a new deeming rule which provides that if an eligible entity sustains a revenue reduction percentage in any particular qualifying period(s) in Periods 5 through 9, which revenue reduction percentage is lower than the entity's revenue reduction percentage in the immediately preceding qualifying period, then the eligible entity will be deemed, in the particular qualifying period, to have sustained the revenue reduction percentage from the immediately preceding qualifying period. For example, if an eligible entity's revenue reduction percentage in Period 4 was 25 per cent, and the eligible entity's revenue reduction percentage in Period 5 is determined to be 20 per cent, then the eligible entity will be deemed to have sustained a revenue reduction, in Period 5, equivalent to 25 per cent for the purposes of calculating the subsidy to which it is entitled.

Other Changes

The legislation has been amended to specify that either the cash method or the accrual method (in accordance with generally accepted accounting principles) may be used to determine the eligible entity's qualifying revenues, but that the eligible entity's election as to the accounting method used must apply to all qualifying periods over the course of the CEWS program.

The legislation has also been amended to provide a mechanism for appeal to the Tax Court of Canada, based on the existing procedure for notices of determination.

There have been further amendments to permit 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. Certain technical amendments have also been made in respect of corporate amalgamations.

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.