Canada: The Proposed Canada Emergency Wage Subsidy Takes Another Turn

On April 8, 2020, the federal government disclosed updated eligibility and coverage information on its proposed Canada Emergency Wage Subsidy (CEWS), the preliminary details of which were introduced in announcements made on March 27, 2020, March 30, 2020, and April 1, 2020. The details of this program are continuing to evolve as the minority Liberal government consults with opposition parties on draft legislation that will need to be approved by Parliament in order to give the CEWS legal effect. Below is a summary of the details for the proposed CEWS as of April 8, 2020.

Employer Eligibility

The CEWS would be available to a broad swath of employers, including individuals, taxable corporations, and partnerships consisting of eligible employers as well as non‑profit organizations and registered charities. However, the CEWS will not be available to public bodies, including municipalities, Crown corporations, public universities, colleges, schools and hospitals.

When the eligibility conditions were originally announced, the proposal was that employers would have to attest that they have experienced a drop in revenue of at least 30 percent for March, April or May, when compared to the same month in 2019. On April 8, the government announced that the eligibility criteria would be eased for the month of March such that employers will only need to demonstrate a 15% drop in March revenues. This change for the March revenue threshold has been proposed since many Canadian businesses did not begin to experience the impacts of the COVID-19 pandemic until the middle of that month. Significantly, the 30% revenue reduction threshold remains in place for April and May.

The government's April 8 announcement also indicated that employers would be allowed to calculate changes in revenue by comparing revenues in each of March, April and May to an average of their revenues earned in January and February 2020. This change is to provide greater flexibility to employers for which the general year-over-year approach may not be appropriate. As modified, employers would be required to select either the general year-over-year approach or this alternative approach when first applying for the CEWS, and for any future eligibility periods.

As modified, the claim periods and available approaches to measuring revenue changes would be as follows:

Revenue for this purpose would be the revenue from the employer's business carried on in Canada, earned from arm's-length sources. The April 8 announcement clarifies that employers would be allowed to calculate their revenues under the accrual method or the cash method, but not a combination of both. Employers would select an accounting method when first applying for the CEWS and would be required to use that method for the duration of the program.

The April 8 announcement also provides that charities and non-profit organizations will be allowed to include or exclude government funding in their revenues for the purpose of applying the revenue reduction test. Once selected, the same approach would apply for the duration of the program.

Scope and Duration

For eligible employers, the CEWS will cover up to 75 percent of salaries and wages paid to new hires (up to up to a maximum benefit of $847 per week). For current employees, the amount of the CEWS for a given employee would be the greater of:

• 75 percent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
• the amount of remuneration paid, up to a maximum benefit of $847 per week or 75 percent of the employee's pre-crisis weekly remuneration, whichever is less.

For non-arm's length employees, the subsidy amount will be limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, to a maximum benefit of $847 per week and 75 percent of the employee's pre-crisis weekly remuneration (whichever is lower), and will only be payable in respect of non-arm's length employees employed prior to March 15, 2020.

Employers would be expected where possible to maintain employees' remuneration at pre-crisis levels. However, the process by which an employer might be required to demonstrate an ability (or inability) to maintain employees' remuneration at pre-crisis levels is presently unclear.

The pre-crisis weekly remuneration for a given employee would be based on the average weekly remuneration paid between January 1 and March 15 inclusively (but excluding any seven-day periods in respect of which the employee did not receive remuneration).

Eligible remuneration may include salary, wages, and other remuneration like taxable benefits that employers would normally be required to withhold or deduct amounts to remit to the Receiver General on account of the employee's income tax, but would exclude severance pay and items such as stock option benefits or the personal use of a corporate vehicle.

The CEWS would be in place and provide subsidy payments covering a period of up to 12 weeks, from March 15 to June 6, 2020.

Refund for Certain Payroll Contributions

Included in the April 8 announcement, the government introduced a new 100% refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund would cover 100 percent of employer-paid contributions for eligible employees for each week throughout which those employees are on leave (i.e., not performing any work) with pay and for which the employer is eligible for the CEWS for those employees.

Employers would be required to continue collecting and remitting employer and employee contributions to each program as usual and apply for a refund in the same manner and at the same time that they apply for the CEWS.

It does not appear that the employer will be eligible for any refund on employer-paid contributions for employees who are actually working during the period that the employer is eligible to claim the CEWS.

Interactions with Other Programs

• 10% Wage Subsidy: Employers that do not qualify for the CEWS may continue to qualify for the previously announced wage subsidy of 10 percent of remuneration paid (from March 18 to before June 20) up to a maximum subsidy of $1,375 per employee and $25,000 per employer. For employers that are eligible for both the CEWS and the 10 percent wage subsidy for a period, the CEWS would generally be reduced by any amount paid through the 10 percent wage subsidy.
• Canada Emergency Response Benefit (CERB): Eligibility for the CEWS in respect of an employee's remuneration will be limited to those employees who have not been without remuneration for more than 14 consecutive days in the eligibility period (i.e., from March 15 to April 11, from April 12 to May 9, and from May 10 to June 6). This rule replaces the previously announced restriction which would have prevented an employer from being eligible to claim the CEWS for remuneration paid to an employee in a week that falls within a four-week period for which the employee is eligible for the CERB.
  
  As modified, if an employee has been laid off for 14 or more consecutive days within an eligibility period, the employer is likely not able to receive the CEWS for that same eligibility period. The objective is to avoid an overlap between payments under the CEWS and the CERB, for same period of time and for the same employee. However, the government indicated that it is still considering other approaches that might limit duplication, including a process to allow individuals rehired by their employer during the same eligibility period to cancel their CERB claim and repay that amount. Unless further changes are implemented, it appears that if an employer recalls an employee who had been laid off for 14 or more consecutive days within a particular eligibility period (e.g., March 15 to April 11) the employer would not be eligible for the CEWS in respect of the employee for that particular eligibility period, and that this would be the case even if the employer makes a retroactive payment of wages in respect of the employee's layoff.
• Work-Sharing Program: For employers and employees that are participating in a Work-Sharing program, EI benefits received by employees through the Work-Sharing program will reduce the benefit that their employer is entitled to receive under the CEWS.

How to Apply

• Eligible employers would be able to apply for the CEWS through the Canada Revenue Agency's My Business Account portal as well as a web-based application (to be established).

Tax Treatment

• The CEWS or 10% subsidy would be considered government assistance and included in the employer's taxable income. Either subsidy would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.

Compliance Considerations

• Employers receiving the CEWS that are determined to be ineligible would be required to repay CEWS amounts received. Penalties may apply in cases of fraudulent claims, including fines or even imprisonment.
• Employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 percent of the value of the subsidy claimed. This would be in addition to the requirement to repay in full the subsidy that was improperly claimed.

Anticipated Cost

The government has now estimate that the CEWS will cost $73 billion.

We will be monitoring for additional updates on the CEWS and will update you as more information is made available.

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.