Canada: Tax Guidance To The Canada Emergency Wage Subsidy (CEWS) And The Voluntary Repayment Of CEWS

Introduction – The Canada Emergency Wage Subsidy

Many Canadian businesses have been impacted by the ongoing COVID-19 pandemic. While some businesses are experiencing financial hardship, others are unable to pay their employee's wages. In response, the Government of Canada introduced the Canada Emergency Wage Subsidy (CEWS) in April 2020.

The CEWS subsidies a portion of an employee's wages for eligible employers. The purpose of the CEWS is to (1) allow employers to maintain their employees on the payroll during the pandemic; (2) prevent job loss and layoffs; and (3) create new employment opportunities.

The CEWS Eligibility Criteria

Employers that have experienced a decline in revenue due to the COVID-19 pandemic may be eligible for the CEWS to cover a portion of their employee wages, retroactive to March 15, 2020. To be eligible to receive the CEWS, applicants must meet the following criteria:

• Have a CRA payroll account on March 15, 2020:
• • Applicants who did not have a CRA payroll account on March 15, 2020 may still qualify for the CEWS if:
  • 1. Another person or partnership made remittances on their behalf; or,
    2. They purchased all (or almost all) of another person's or partnership's business assets.
• Be one of the following types of employers:
• • Individuals
  • Corporations or Persons (that are not exempt from Part I of the Income Tax Act)
  • Registered charities
  • Partnerships consisting of eligible employers
  • Specific private organizations
• Have experienced a drop in revenue.

Since the introduction of the CEWS in April 2020, the wage subsidy rates have varied. The CEWS rates and top-up calculation are as follows:

• Period 1 to 4: March 14 to July 4, 2020
• • Applications must meet a minimum of 15% (Period 1 – March 14 to April 11, 2020) or 30% (periods 2 to 4 – April 14 to July 4, 2020) revenue drop to qualify for the wage subsidy
  • Applicants who meet the eligibility criteria for a specific period, automatically qualify for the following period
  • The wage subsidy rate is 75% of eligible employee's remuneration, up to a maximum of $847 per week, per eligible employee.
  • Employees who are unpaid for 14 or more consecutive days in the period can not be included in the above-mentioned calculation

In July 2020, the Government of Canada introduced the following changes to the CEWS and top-up calculation:

• The wage subsidy rate varies, depending on how much the applicant's revenue dropped
• Applicants whose revenue drop was less than 30% may qualify for the wage subsidy as employees return to work and their applicant's revenue recovers:
• • For period 5 to 6 (which is from July 5 to August 29, 2020), if an applicant's revenue dropped at least 30%, the applicant's subsidy rate will be at least 75%, up to a maximum of $847 per week, per eligible employee
• Employers who were hardest hit by the COVID-19 pandemic may qualify for a higher amount
• Employees who were unpaid for 14 or more days can be included in the wage subsidy calculation
• Applicants are required to use the current period's revenue drop or the previous period's revenue drop, whichever works in their favor

On October 9, 2020, the Government of Canada announced its plan to continue the existing maximum base subsidy rate at 40% and the maximum top-up rate at 25%, until December 19, 2020. As such, employers that have experienced a decline of 70% or more in revenue, may be eligible to receive up to 65% of wage subsidy. However, for employers that have experienced a decline in revenue of less than 70%, there will be wage subsidy available, on a sliding scale, which is determined using the "revenue decline test". The revenue decline test helps determine an employer's wage subsidy and top up eligibility by examining the changes in the employers' monthly revenue in relation to the average of its January 2020 and February 2020 revenues. Accordingly, effective November 19, 2020, the CEWS rates top-up calculations are as follows:

• The subsidy is extended to June 2021
• The maximum subsidy periods 8 to 10 (which is from September 27 to December 19, 2020) will remain at 65% (40% base rate + 25% top-up)
• Beginning in period 8 (which starts as of September 27, 2020), the top-up rate and base rate are calculated using the same one month revenue drop
• • For periods 8 to 10 (which is from September 27 to December 19, 2020), applications are required to use the above-mentioned top-up calculation or the previous 3 months average drop, whichever works in their favor
• The deadline to apply is January 31, 2021, or 180 days after the end of the claim period, whichever comes later
• Starting period 9 (which starts as of October 25, 2020), the calculation for employees on leave with pay now aligns between with Employment Insurance benefits
• Applicants can now calculate pre-crises pay (baseline remuneration) for employees who were on certain kinds of leave, retroactive to period 5 (which starts as of July 5, 2020)

The CEWS Application Process

There are three ways to apply for the CEWS online:

• My Business Account
• Represent a Client
• The CEWS Web Forms application

Applicants must submit a separate application for each CEWS claim for which they are eligible to apply, and for each payroll account they have with the CRA. Generally, CEWS applicants who are registered for direct deposit through their payroll account with the CRA receive the payment within 3 to 8 business days. However, in certain circumstances, CEWS payments may be delayed if additional review (of a CEWS claim) is required or if the CEWS is paid by cheque. It should be noted that only business representatives authorized at level 2 or 3 will be able to apply online under the Represent a Client option.

The CEWS Claim Period

The time frame for each CEWS claim is 4 weeks, beginning on a Sunday. Applicants must confirm their eligibility according to the specific period for which they are applying. The CEWS was introduced in April 2020 with the following claim period:

• Period 1: March 14 to April 11, 2020
• Period 2: April 12 to May 9, 2020
• Period 3: May 10 to June 6, 2020
• Period 4: June 7 to July 4, 2020
• Period 5: July 5 to August 1, 2020
• Period 6: August 2 to August 29, 2020
• Period 7: August 30 to September 26, 2020

On October 9, 2020, the Government of Canada announced its plan to introduce legislation targeted at providing support to Canadian businesses and to help them (1) survive the second wave of the COVID-19 pandemic; (2) cover their overhead costs so they can continue serving their communities; and (3) align them for a strong recovery post-pandemic. In addition, the Government of Canada announced its plan to extend the CEWS until June 2021, as part of its measures to create new jobs and restore employment levels to pre-pandemic. Accordingly, businesses, charities and not-for-profit organizations that have experienced a decline in revenue due to the COVID-19 pandemic may be eligible for the CEWS to cover a portion of their employee wages, retroactive to March 15, 2020. Consequently, the following claim periods were introduced:

• Period 8: September 27 to October 24, 2020
• Period 9: October 25 to November 21, 2020
• Period 10: November 22 to December 19, 2020

The new CEWS claim periods were:

• Period 11: December 20, 2020 to January 16, 2021
• Period 12: January 17 to February 13, 2021
• Period 13: February 14 to March 13, 2021
• Period 14: March 14 to April 10, 2021
• Period 15: April 11 to May 8, 2021
• Period 16: May 9 to June 5, 2021
• Period 17: June 6 to July 3, 2021
• Period 18: July 4 to July 31, 2021
• Period 19: August 1 to August 28, 2021
• Period 20: August 29 to September 25, 2021
• Period 21: September 26 to October 23, 2021

In August 2020, the Canada Revenue Agency (CRA) announced that it is launching a post-payment tax audit program that is focused on CEWS applications made between March 15th, 2020 and July 4th, 2020. The purpose of the post-payment tax audit program is for the CRA to identify the various measures of non-compliance with the CEWS legislation and to ensure that the wage subsidy is paid to employers who are eligible for it. In September 2020, the CRA issued letters to many employers regarding the tax audit of their CEWS claims.

Deemed Overpayment of CEWS

Effective April 11, 2020, Canada's Income Tax Act was amended to introduce the CEWS. The CEWS rules apply by "deeming qualified entities to have overpaid tax and then giving the Minister discretion to refund them [all or part of] the deemed amount." To be a qualifying entity under subsection 125.7(1) of the Income Tax Act, a Canadian employer must have experienced a reduction in revenues from the average of its revenues in January and February 2020 or from revenues for the same month in the prior calendar year. The deemed overpayment amount is determined using the formula set out in subsection 125.7(2) of the Income Tax Act. Subsection 152.7(3.4) of the Income Tax Act grants the Minister power to, at any time, determine the amount deemed by subsection 125.7(2) of the Act to constitute an overpayment and issue a notice of determination to the employer. Further, subsection 164(1.6) of the Income Tax Act grants the Minister the discretion to refund all or part of the deemed overpayment.

Voluntary Repayment of the CEWS

Amounts received under the CEWS is required to be included in the recipient's income, pursuant to under subsection 9(1) or paragraph 12(1)(x) of the Income Tax Act. In October 2021, the CRA confirmed that for an amount received in respect of the CEWS, which has been included in the taxpayer's income, and has been voluntarily repaid, a deduction is permitted pursuant to subsection 9(1) or paragraph 20(1)(hh) of the Income Tax Act. Accordingly, taxpayers who received the CEWS, who then decide to voluntarily repay the CEWS received are required to formally cancel their CEWS application(s). Upon cancellation of a CEWS application, the taxpayer will be issued a notice of determination, pursuant to subsection 152(3.4) of the Income Tax Act, which provides the amount of CEWS that must be repaid. Therefore, the cancellation of a CEWS application triggers a legal obligation to repay the CEWS, per the notice of determination, and the taxpayer will incur an expense, pursuant to paragraph 18(1)(a) of the Income Tax Act. Further, where an amount in respect of the CEWS was included in a taxpayer's income, pursuant to subsection 9(1), a deduction would occur subsection 9(1) and paragraph 18(1)(a) in respect of the voluntary repayment of the CEWS, in the taxation year in which the legal obligation to repay the CEWS arose (i.e., the time when the CEW application was cancelled).

Similarly, where an amount in respect of CEWS has been included in the taxpayer's income tax, pursuant to paragraph 12(1)(x) of the Income Tax Act, a deduction would be permitted, pursuant to paragraph 20(1)(hh), in respect of CEWS amount repaid in the year.

Concerns Associated with the CEWS and its Repayment

There are ongoing concerns regarding CEWS repayments. CEWS recipients may have to repay the CEWS if they (i) amend or cancel an application (ii) made a calculation error in their application (iii) receive a notice from the CRA indicating that following a review of their CEWS, their claim has been reduced or denied. An excess CEWS amount received that is not returned to the CRA may be subject to interest. Potential penalties and imprisonment may also apply in circumstances of fraudulent CEWS claims. Further, CEWS recipients who reduce their revenue for the purpose of claiming the CEWS will be required to repay the wage subsidy amount in full, plus a penalty equal to 25% of the total value. Moreover, the cancellation of CEWS applications triggers a repayment obligation and some businesses may not have the funds to repay CEWS amounts received.

Given the ongoing concerns associated with the CEWS, businesses and organizations should bear in mind that any CRA tax audit, including an audit into a CEWS application, can result in the CRA requesting access to details, including corporate and financial records, that may not be relevant to the CEWS claim as part of a broader tax audit. As such, CEWS applicants should review the relevant eligibility criteria, posted on CRA's website, prior to submitting their claim. Applicants who notice an error in their CEWS application or in any payment received should contact the CRA immediately to address the error and to confirm their eligibility.

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.