On Saturday April 11, Parliament passed Bill C-14 which is the legislation to implement the CEWS. The legislation is complex and due to its hastiness has some unknown parts, unintended and intended consequences, and gaps yet to be addressed. Due to its complexity, it will take a while to fully analyze its implementation.

The intent is to grant a taxable subsidy to employers whose revenues are impacted by COVID-19 and who are still able to continue to pay employees including the “owners” who are also employees (or hire new employees or re-hire ex-employees) during the period of March 15 to August 29, 2020 (now extended to December, 2020). There is also no subsidy based on dividends paid to the owners, only salaries. We would hope that the government addresses this gap in the near future.

Overview

Just about any employer, except for public institutions, are eligible. This includes corporations, partnerships, individuals, and non-profit organizations. Even though initially thought to be denied, Individuals who operate as proprietorships and have employees can now be eligible.

The employer must have a valid Payroll account as of March 15 to qualify.

Any amount received under the previous 10% Temporary Wage Subsidy Program as well as amounts received by the employee as a work-sharing benefit under the EI Act will reduce the amount of CEWS.

The benefits may be paid over 3 qualifying 4 week periods (the “qualifying periods”) of:

  1. March 15 to April 11 (qualifying period 1) – Using calendar March revenue test (below)
  2. April 12 to May 9 (qualifying period 2) – Using calendar April revenue test (below)
  3. May 10 to June 6 (qualifying period 3) – Using calendar May revenue test (below)
  4. June 7 to July 4 (qualifying period 4) – Using calendar June revenue test (below)
  5. July 5 to August 1 (qualifying period 5) – Using calendar July revenue test (below)
  6. August 2 to August 29 (qualifying period 6) – Using calendar August revenue test (below)
  7. August 30 to September 26 – Using calendar September revenue test (below)
  8. September 27 to October 24 – Using calendar October revenue test (below)
  9. October 25 to November 21 – Using calendar November revenue test (below)
  10. November 22 to December 19 – Using calendar December revenue test (below)
  11. Further extensions are at the discretion of the government

If the employer thinks they qualify in any of the above periods, then they make an application to CRA through the My Business Account for that period. For those who have not signed up for a My Business Account it is probably best to expedite that process now.

An individual responsible for the finances of the employer must “attest” to the completeness and accuracy of the application. There are two administrative penalties that apply if benefits received exceed the benefits that the employer was entitled to. First, if the benefits claimed from gross negligence, the responsible person will be liable to a penalty of 50% of the excluded benefit. Second, if there is revenue manipulation (for the revenue test below), the responsible person will be liable for a penalty of 25% of the excluded benefit. In addition, any excluded benefit will also have to be repaid. If, after application, the employer determines that an application was made in error, then the error should be rectified in a timely manner to mitigate any penalties. In addition, the legislation gives the Minister the power to make public the name of any persons who applied for CEWS, presumably to punish those who the government think did not put the CEWS money to its intended use.

The Revenue Test

There must be a reduction in revenue for the employer to make a subsidy claim. There are two ways to calculate this and once one method is chosen it must be consistently applied in each qualifying period:

  1. Compare revenues to the corresponding month last year. For each of the qualifying periods, normal operating gross revenues is compared to the same month in the previous year. For the March period, If there is at least a 15% decrease, then the first qualifying period test is met. For each subsequent qualifying period, the test increases to 30%.
  2. Or Elect to use January and February 2020 average revenues. In this case, take the total revenues in those two months X ½ to obtain the average. Compare this average to each of March, April, May, June, July, and August as in 1 above for the same percentage change.

If the employer elects to use method 2 above but did not carry on business throughout all of January and February, then some proration method based on days must be used to determine the average.

If the employer meets a revenue test in a particular qualifying period, the employer is automatically deemed to have met the test in the subsequent period.

If a Partnership is a qualified employer for the CEWS and that Partnership has partners that would also qualify as “employers” as they have employees separate from the Partnership, then these partners may also qualify for the CEWS.

Here is a chart which summarizes the Revenue Test. Periods of June onwards just an extension of Period 3:
Eligibility period

for wages paid

Required

Revenue

Reduction

Periods for Comparing Revenue Reduction*
Qualifying Period 1 March 15 – April 11 15% March 2020 vs.

•        March 2019; or

•        average of Jan/Feb 2020

Qualifying Period 2 April 12 – May 9 30%

(or qualified in Period 1)

April 2020 vs.

•        April 2019; or

•        average of Jan/Feb 2020

Qualifying Period 3 May 10 – June 6 30%

(or qualified in Period 2)

May 2020 vs.

•        May 2019; or

•        average of Jan/Feb 2020

*Must use same method (e.g. 2019 vs. 2020 or average of January/February 2020) for all periods

What is Qualifying Revenue?

An employer may elect to use either cash inflows (cash basis accounting) or accrued revenue (normal accounting revenue) to determine “revenue”. If the employer elects to use cash inflows, then it must use that method for all qualifying periods and is used in the comparison for the revenue decline test discussed above.

Qualifying revenue excludes extraordinary items and amounts from non-arm’s length entities.

Complex Entities – Consolidation Options

For those entities who are non-arm’s length and in consolidated groups, may elect on how qualifying revenues are determined. It appears that the election can be changed in each period (you are not obligated to always use the same method). The choices are:

  1. If a group of eligible entities normally prepares consolidated financial statements, each member elects to compute its qualifying revenues separately, excluding non-arm’s length revenues. Each member must use this method.
  2. If an eligible entity and each member of an affiliated group of eligible entities, jointly elect, the qualifying revenue of the group determined on a consolidated basis is to be used for each member of the group – again this excludes non-arm’s length revenues. Each member must use this method.
  3. If all or substantially all (90% or more) of an eligible entity’s revenue is from a non-arm’s length source and each member jointly elects, then a complex calculation is used to determine qualifying revenue. This is to enable the entity with these substantial non-arm’s length revenues to sometimes qualify.

How Much is the Subsidy?

An employee is an eligible employee for a particular week during the qualifying period unless the employee was not remunerated for 14 or more consecutive days during the qualifying period. In this case the Canada Emergency Response Benefit (CERB) would be available to the employee. Subsidies are paid directly by CRA to the employers.

To avoid manipulation to maximize the CEWS, there is a calculation of “baseline remuneration” (BR). BR is the employee’s average weekly remuneration for the period between January 1, 2020 and March 15, 2020 excluding any period of 7 or more days in which the employee was not remunerated.

If the Employee is Arm’s Length to the Employer:

The benefit is the greater of A or B (for either new arm’s length or existing arm’s length employees):

A = The lesser of:

    1. 75% of the remuneration paid in respect for the week for each week in the qualifying period
    2. Or $847 for each week in the qualifying period

B = The lesser of:

    1. The full amount (100%) of the remuneration paid in respect for for the week for each week in the qualifying period.
    2. Or 75% of the BR (discussed above) per week
    3. Or $847 for each week in the qualifying period.
If the Employee is Non-Arm’s Length to the Employer:

The benefit is the Just B (for existing non-arm’s length employees at March 15 – new non-arm’s length employees are disqualified):

B = The lesser of:

    1. The full amount (100%) of the remuneration paid in respect for the week for each week in the qualifying period.
    2. Or 75% of the BR (discussed above) per week
    3. Or $847 for each week in the qualifying period.
Here is a chart calculating the subsidy for various scenarios:
If Wages Remain the Same If Non-Arm’s Length Employees If Wages Decrease Type 1 If Wages Decrease Type 2
Pre-crisis weekly wages (BR) $900 $500 $900 $1200
Weekly wages paid Qualifying Period $900 $900 $675 (25% cut) $900 (25% cut)

(A) Least of:

75% of wages paid $675 $675 $506 $675
$847 $847 $847 $847 $847
$0, if non-arm’s length $0

(B) Least of:

Wages paid $900 $900 $675 $900
75% of pre-crisis wages $675 $375 $675 $900
$847 $847 $847 $847 $847
Eligible subsidy: Greater of (A) and (B) $675 $375 $675 $847
Employer Pays: $225 $525 $0 $113
Once the subsidy is calculated, there are final subsidy adjustments as follows:
  1. Deduct benefits received by the employee from Employment Insurance work- sharing program
  2. Deduct any amount of the 10% Temporary Wage Subsidy previously claimed in respect of the employee for the week
  3. Add the employer’s EI and CPP contributions for employees on paid leave (employees who did not report for duties for the week). This is for employees who are still being paid but are not working. The employer does not have to make the matching EI and CPP payments.

What is “Remuneration for the Week”?

The Qualifying Periods are on 4 week periods, but the benefit is calculated on a weekly basis and on a per employee basis. In addition, the Qualifying Periods begin on a Sunday – a day many employees do not “work” and a lot of employees are paid bi-monthly (15th and the last day of the month) which conflicts with the 4 week Qualifying Period dates. Adding to the confusion, consider a situation where during the Qualifying Periods, an employee’s wage changes (wage cut back or even a wage increase). In the legislation, the words are “eligible remuneration paid to the eligible employee in respect of that week”. In our opinion, that means that the amount paid refers to some calculation of the work performed in that week, notwithstanding that the employee receives payment at a later date. To reconcile all of this in a calculation of “remuneration for the week”, it will require some thought.

A possible example:

Assuming the employee is salaried, there was no pay variance within any bi-monthly pay period (but could include wage cut backs or increases at the beginning of a bi-monthly pay period), and works Monday to Friday for the same amount of hours each day, for the first qualifying period of March 15 to April 11:

  1. The March 15 day would only include 1 day of the March 1 to 15th pay period amount. Since March 15 is a Sunday, there is nothing to calculate for this day.
  2. The week of March 16 to 20th is then 5/12 of the March 31 payroll amount paid.
  3. The week of March 23 to 27th is then 5/12 of the March 31 payroll amount paid.
  4. The week of March 30 to April 3 is then 2/12 of the March 31 payroll amount paid + 3/11 of the April 15 payroll amount paid.
  5. The week of April 6 to 10 is then 5/11 of the April 15 payroll amount paid.

The above is a possible example and, if circumstances are different, then another possible calculation would be used possibly using a daily equivalent wage applied to each week. Spreadsheets and a Calendar would be required to keep track of all of this.

Less Than Clear Situations

The legislation is specific on qualified claims and is silent on those situations which do not fit exactly in the wording of the legislation. We do know that CRA is sympathetic to those situations which may be in the grey areas (within the intent of the legislation but is not expressly allowed by the legislation). The Canadian Tax Foundation (CTF) which is comprised of tax lawyers and tax accountants have already submitted to CRA a list of clarifying questions. To date, CRA has not responded. Over the coming weeks, we anticipate that CRA will announce their administrative position on allowable situations. Therefore, if your organization has some situations which may fall into these grey areas, you may, if cash flow permits, delay your claim until some clarity from CRA emerges. CEWS claims can be made as late as September 30, 2020.

Next Steps

  1. Register for the CRA’s My Business Account
  2. Set up direct deposit to receive subsidy payments
  3. Gather monthly revenue and weekly payroll data
  4. Apply online once portal opens
  5. Continuing paying wages and salaries
  6. Upon approval, the CRA to pay subsidy directly to employers

ANDERSONBRONSCH TEAM
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS


Keith M.J. Anderson* BCom, CPA, CA-IT, CITP

Chartered Professional Accountant and Chartered Accountant (Canada)
CA-Designated Information Technology Specialist (Canada)
Certified Information Technology Professional (US)
* Professional Corporation

Web: www.AlbertaCPA.com
Email: keith@albertacpa.com
Phone: 780 447 5830
Fax: 780 451 6291
Cell: 780 906 2223

Disclaimer:
This information is provided for general information purposes only. As legislation changes frequently, certain information may be out of date periodically. The complexity of the Law and the varied circumstances of each taxpayer dictates that the information provided may not be suitable in all circumstances. Readers must not rely on any information provided without first obtaining direct and competent professional advice. The information provided is not intended to replace or serve as substitute for any audit, advisory, tax or other professional advice, consultation or service. Therefore, the information is provided “as is” without warranties of any kind, express or implied, including accuracy, timeliness and completeness. In no event shall and associated parties to this information be liable for any direct, indirect, incidental, special, exemplary, punitive, consequential or other damages whatsoever.

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