As part of its response to the COVID-19 outbreak, the Government of Canada has created a number of emergency benefits to assist individuals and businesses through these troubling financial times. For businesses, the centerpiece of the Government's response has been two wage subsidies – the Temporary 10% Wage Subsidy and the Canada Emergency Wage Subsidy (CEWS).
The Government originally pegged the cost of the CEWS at $73 billion and with news that the program will be extended into the summer [see: Emergency wage subsidy extending into summer: PM], it appears that the cost of these wage subsidies will exceed $100 billion.
While the Government has focused its resources to ensuring that these benefits are delivered in a timely fashion, it is inevitable that the Government will pivot and focus its resources to ensuring that these benefits were delivered to those who actually qualified for them. Given the design of the CEWS, any CRA audits into a business' CEWS application could lead to a number of potential audit trails.
The first potential starting point in an audit is a review of the business' revenues. Given that a business is eligible based on a comparison of revenues between two periods – the default comparison being a year-over-year comparison – CRA will look at how a business calculated its qualifying revenue for the two comparison periods. This could raise a number of topics including income suppression, revenue recognition policies, income versus capital gains characterizations, and pricing between non-arm's length entities.
Each of these topics could create further follow-up audit issues. For example, any income suppression detected could raise questions as to whether GST/HST has been remitted correctly. Income versus capital gains characterizations could raise questions as to the kinds of deductions the business was permitted to claim. Pricing issues between non-arm's length entities create issues as to the reasonableness of deductions claimed within the group.
A second potential starting point in an audit could be a review of the business' employees. CRA could look into whether these employees were actually employees and not independent contractors. CRA could also review how employee benefits, allowances, or deductions were administered to determine if they were treated correctly pursuant to the Income Tax Act.
One final note is that both the CEWS and the Temporary 10% Wage Subsidy are administered through a business' payroll account. In the event that an audit creates a liability in the business' payroll account, corporate directors should also be mindful of their exposure to potential director's liability under section 227.1 of the Income Tax Act.
Whether you are seeking proactive assistance in determining if your business qualifies for the CEWS or if you fear that you are potentially exposed to an issue on a CRA audit, the specialists at TaxChambers LLP can help.
Originally published Tax Chambers, May 2020
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