Canada: Canada Emergency Wage Subsidy: Revised Rules For Qualifying Periods August Through December

Bill C-20, An Act respecting further COVID-19 measures ("Bill C-20"), received Royal Assent on July 27, 2020. Bill C-20 enacts amendments to provisions of the Income Tax Act (Canada) that implement the Canada Emergency Wage Subsidy ("CEWS"). These amendments include those announced in a backgrounder released by the Department of Finance on July 17, 2020 (the "Backgrounder") which proposed to, among other things, extend the CEWS program to November 21, 2020, eliminate the 30% qualifying revenue decline threshold and introduce new rules that permit all eligible employers experiencing any level of qualifying revenue decline to qualify for a subsidy.

This newsletter provides a summary of certain amendments to the CEWS enacted by Bill C-20 that are generally applicable to the qualifying periods from July 5, 2020, to November 21, 2020 (these periods are also referred to herein as "Qualifying Periods 5 to 9") and certain transition rules. A further qualifying period may be prescribed by regulation for a period ending no later than December 31, 2020, with modifications as may be prescribed. For details on the CEWS program as generally applicable to earlier qualifying periods (March 15 to July 4 or "Qualifying Periods 1 to 4"), please refer to our previous communiqué, Canada Emergency Wage Subsidy: As enacted, extended and proposed to be amended, which contains a detailed overview of the CEWS as enacted on April 11, 2020, by Bill C-14, A second Act respecting certain measures in response to COVID-19 ("Bill C-14") and certain amendments that were announced on May 15, 2020.

For ease of reference, in this newsletter, the CEWS as amended by Bill C-20 is referred to as the "Revised CEWS".

Under the Revised CEWS, all eligible employers that experience any level of qualifying revenue decline in Qualifying Periods 5 to 9 may be eligible to claim the CEWS; however, the subsidy rate will vary with the level of an eligible employer's decline in "qualifying revenues". In respect of employees who are not on paid leave, the quantum of the subsidy is computed based on two components—the base percentage and the top-up percentage. Each of these components is outlined below.

Computation of the Base Percentage

Generally, the base percentage is determined for Qualifying Periods 5 to 9 as the "revenue reduction percentage" ("RRP") multiplied by a fixed multiple that begins at 1.2 and declines during each qualifying period, except that the base percentage is subject to a fixed percentage where the RRP exceeds 50%. The term "revenue reduction percentage" generally means the amount by which the employer's qualifying revenue in a current reference period has declined from its qualifying revenue in a prior reference period, expressed as a percentage. Under the Revised CEWS, "prior reference period" continues to refer to the prior year's corresponding month in respect of which qualifying revenues are measured, or if elected, refers to the average qualifying revenues for January and February 2020.

In addition, Bill C-20 includes a deeming rule that permits, in respect of Qualifying Periods 5 to 9, the RRP to be the greater of the revenue decline for the current qualifying period or the prior qualifying period in order to compute the base percentage. The Backgrounder indicates that rule is intended to be a proxy for the deeming rule that applies in respect of Qualifying Periods 1 to 4 which permits automatic qualification for each subsequent qualifying period.

This table summarizes the computation of the base percentage and the maximum CEWS limit thereunder, for Qualifying Periods 5 to 9 under the Revised CEWS.

Computation of the "Top-Up Percentage"

In order to provide additional assistance to qualifying employers that have been most adversely impacted by the pandemic, the Revised CEWS introduces a new "top-up percentage" of up to 25% in addition to the base percentage for Qualifying Periods 5 to 9 where, in a particular qualifying period, the entity's revenue decline exceeds 50% of the entity's "top-up reduction percentage", which is essentially, the revenue decline based on a comparison of:

Since a qualifying entity's "top-up percentage" for a particular qualifying period under the Revised CEWS is generally computed as the lesser of: (i) 1.25 times the portion of the entity's "top-up revenue reduction percentage" in excess of 50% and (ii) 25%, the 25% maximum "top-up percentage" for a particular qualifying period is attained when an entity's "top-up revenue reduction percentage" is 70%. The top-up percentage will gradually decline and be nil when the top-up revenue reduction percentage is less than 50%, as is summarized in our computation of “top-up percentage” table.

Computation of the CEWS Amount

Bill C-20 amends certain components of the formula which computes the CEWS amount, while certain other components remain unchanged.¹ Under the Revised CEWS, an "eligible employee" no longer excludes an employee that is without remuneration for 14 days. Thus, for Qualifying Periods 5 through 9, the CEWS is available for both employees who are on paid leave (i.e., furloughed) and those who have actively returned to work.

CEWS Amount for Active Arm's Length Employees

The CEWS amount for active arm's length employees for Qualifying Periods 5 to 9 is proportional to the employer's revenue decline for the period. It is computed by the following formula:

CEWS Amount for Active Non-Arm's Length Employees

In respect of Qualifying Periods 5 through 9, the CEWS amount for active non-arm's length employees is computed in the same manner as for actively employees with the only difference being that one of the limits is the baseline remuneration amount, as follows:

Bill C-20 replaces the definition of "baseline remuneration", so that for Qualifying Periods 5 to 9, it means the average weekly remuneration paid, excluding any seven or more consecutive days when no remuneration was paid, to the employee from January 1, 2020, to March 15, 2020, or, if elected, from July 1, 2019, to December 31, 2019.

CEWS Amount for Employees on Leave with Pay

With respect to employees who are on paid leave (i.e., furloughed) the Revised CEWS is available if either the employer's RRP or "top-up percentage" is greater than zero. As a result, any level of revenue decline is sufficient to meet the threshold to claim the revised CEWS for furloughed employees. The quantum of the CEWS will vary depending on the qualifying period.

For Qualifying Periods 5 and 6, the CEWS amount is computed in the same manner as under the CEWS rules applicable to Qualifying Periods 1 to 4, that is, the greater of:

For Qualifying Periods 7 to 9, the CEWS amount is the least of:

In addition, for Qualifying Periods 5 to 9, the employer portion of contributions under various plans (CPP, EI and QPP, and Quebec Parental Insurance Plan) in respect of furloughed employees will continue to be refunded.

Safe Harbour for Qualifying Periods 5 and 6

In order to ensure that a qualifying entity's CEWS amount under the Revised CEWS is not lower than the amount it would otherwise have been entitled to claim under the CEWS rules applicable to Qualifying Periods 1 to 4, the Revised CEWS includes a safe harbour for Qualifying Periods 5 and 6. Pursuant to this safe harbour, a qualifying entity generally will be able to claim the higher of the CEWS amount for Qualifying Periods 5 and 6 as determined under the CEWS rules generally applicable to Qualifying Periods 1 to 4, or under the Revised CEWS rules.

Other Changes

Qualifying Entity

Bill C-20 amends the definition of "qualifying entity" to extend the deadline for filing an application in respect of the Qualifying period to February 2021 and to also incorporate employers who use payroll providers. The new definition also provides for the discretion of the Minister to determine whether an entity meets the new requirements. Formerly, one of the conditions of a "qualifying entity" was that the entity had, on March 15, 2020, a business number in respect of which it was registered with the Minister to make remittances required under section 153 of the Act. As an alternative, an entity will be a "qualifying entity" if, on March 15, 2020, the entity:

1. employed one or more individuals in Canada;
2. the payroll for its employees was administered by another person or partnership, referred to as a "payroll service provider";
3. the payroll service provider had a business number in respect of which it is registered with the Minister to make remittances required under section 153;
4. the payroll service provider used its business number to make the remittances in respect of the employees of the eligible entity; and
5. the Minister is satisfied that the above conditions are met.

Asset Sales

Purchasers and vendors entering into an asset sale transaction should attend to the new rules for calculating revenues in circumstances where an eligible entity purchases "all or substantially all" of the assets used by the vendor in the course of carrying on a business in Canada. Generally, the Canada Revenue Agency interprets "all or substantially all" to mean 90% or more. Bill C-20 introduces the following conditions for the application of the calculation of revenues (in subsection 127(4.1)) in respect of asset sales transactions:

1. the eligible entity acquired assets of a person or partnership (the "Seller") during the qualifying period or at any time before that period;
2. immediately prior to the acquisition, the fair market value of the acquired assets constituted all or substantially all of the fair market value of the property of the Seller used in the course of carrying on a business;
3. the acquired assets were used by the Seller in the course of a business carried on in Canada by the Seller;
4. it must be reasonable to conclude that none of the main purposes of the acquisition was to increase the amount of the CEWS; and
5. the eligible entity files an election with the Minister of National Revenue (the "Minister"), or, if the Seller is in existence during the qualifying period, the eligible entity and the Seller must elect jointly in respect of that period and so file with the Minister.

If the conditions above are satisfied, the following rules should apply to the eligible entity in respect of the qualifying period:

1. the amount of the qualifying revenue of the Seller for the prior reference period, or the current reference period, for the qualifying period that is reasonably attributable to the acquired assets (the "Assigned Revenue") is to be included in determining the qualifying revenue of the eligible entity for its prior reference period or current reference period for the qualifying period;
2. the Assigned Revenue is to be subtracted from the qualifying revenue of the Seller for its prior reference period or current reference period, as the case may be, for the qualifying period;
3. if a portion of the Assigned Revenue is from a person or partnership that did not deal at arm's length with the Seller and that person or partnership deals at arm's length with the eligible entity throughout the current reference period, then that portion of the assigned revenue is deemed to not be derived from persons or partnerships not dealing at arm's length for the purposes of paragraph (d) of the definition of qualifying revenue in subsection 127(1); and
4. if the Seller meets either of the conditions in paragraph (d) of the definition of qualifying entity in subsection 127(1), the eligible entity is deemed to meet that condition.

It is noteworthy that the relevant conditions in (subsection 127(4.1)) do not require the Seller to be a person resident in Canada for income tax purposes. Rather, the assets must be used by the Seller in the course of a business carried on in Canada. In addition, the conditions in subsection 127(4.1) impose a combination of reasonableness tests and "main purpose" tests that both the Seller and the purchaser should be mindful of when assessing their compliance with the new provisions. Finally, the alternatives for filing the election subsequent to the asset sale may also impose an additional burden on parties in asset sales. The purchaser will need to ascertain whether the Seller intends to remain in existence during the qualifying period in order to file the election properly.

Notice of Determination

Bill C-20 introduces a mechanism whereby an eligible entity has access to an appeal process for amounts relating to the CEWS. The rules now provide that the Minister may, at any time, determine a CEWS amount (as computed under subsection 125.7(2)) to be an overpayment on account of a taxpayer's liability under Part I of the Act during a qualifying period, or determine that there is no such amount, and send a notice of determination to the taxpayer.

Upon receipt of a notice of determination, an employer may file a Notice of Objection and appeal from the notice of determination to the Tax Court of Canada. The phrase "at any time" provides that there is no limitation on the time period for the Minister to issue such a notice of determination.

Concluding Comments

Bill C-20 provides some welcomed changes to the CEWS program. The elimination of the 30% revenue reduction criteria significantly improves accessibility to the CEWS to a larger number of employers. However, the amendments also introduce significant complexity. It has become increasingly difficult for prospective applicants to evaluate whether the eligibility criteria have been met and the merits of the various elective provisions. Computing the potential CEWS amount that is available has also been made more difficult. In short, a significant amount of effort needs to be undertaken to evaluate the potential benefit of making an application under the Revised CEWS. Prudent employers should seek support of their tax advisors and the resources made available by the Canada Revenue Agency to assist with the process.

Footnote

1 Under the Revised CEWS the CEWS amount continues to be reduced by the 10% wage subsidy and the total of employment insurance and work-sharing benefits received by the eligible under the Employment Insurance Act and other similar programs.

Originally published by Miller Thomson, August 2020

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.