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The Canada Emergency Wage Subsidy (CEWS), enacted on April 11, 2020, is a key measure in the Government of Canada’s COVID-19 Economic Response Plan. The CEWS is designed to provide financial assistance to businesses experiencing substantial decreases in revenue due to the COVID-19 pandemic in order to enable these employers to retain or rehire their employees.
In this bulletin, we discuss the key features of the CEWS and how to determine if your business qualifies for this relief.
The full details of the CEWS are set out below.
The CEWS, a wage subsidy to support Canadian businesses and their employees, is a key part of the Government of Canada’s COVID-19 Economic Response Plan.1 Details of the CEWS were announced by the Government on April 1, 2020 and supplemented on April 8, 2020. The CEWS rules were passed into law on April 11, 2020 by Bill C-14 COVID-19 Emergency Response Act, No. 2 (Bill C-14) and are now contained in section 125.7 of the Income Tax Act (Canada) (Tax Act). Relief under the CEWS will be delivered through, and administered by, the CRA2.
The CEWS program will provide financial relief to a broad range of employers of all sizes and across all industries who experience substantial decreases in revenue as a result of the COVID-19 pandemic. Notably, public institutions, such as government entities, public schools and hospitals, as well as employers who did not have a payroll account with the CRA on March 15, 2020, are not eligible to claim the CEWS.
The wage subsidy under the CEWS program will be available to eligible employers for three claim periods commencing March 15, April 12 and May 10, 2020, respectively3. To qualify for relief in a claim period, an employer must satisfy a “decline in revenue” test, being a specified reduction in the revenues of the employer for the applicable current reference period, as follows:
Decline in Current Reference Period Revenue
March 15 to April 11
At least a 15% decline in March 2020 revenue
April 12 to May 9
At least a 30% decline in April 2020 revenue
May 10 to June 5
At least a 30% decline in May 2020 revenue
The decline in revenue is measured by comparing the current reference period revenue against the revenue of a prior reference period, being, at the employer’s option, either the corresponding calendar month in 2019 (year-over-year method) or the employer’s average revenue for January and February 2020 (alternative benchmark method). Revenue is generally calculated using the employer’s normal accounting practices, however, additional rules apply in certain cases.
The amount of the CEWS is based on the remuneration paid by the employer to eligible employees (including employees rehired retroactively) in the applicable claim period, as well as certain employer-paid payroll contributions. To avoid duplication, the amount of the CEWS is reduced by benefits received by the employer under the TWS and benefits received by an employee under the EI Work Sharing Program.
To claim relief, the employer must apply to the CRA for each relevant claim period prior to October 2020 and attest that it meets the eligibility requirements. The application process for the CEWS program will open on April 27, 2020 and eligible employers can apply using My Business Account or a separate online application form. An employer will be required to repay the CEWS if it does not meet the eligibility requirements. Further, an employer could be subject to penalties and criminal charges if it improperly or fraudulently claims the CEWS.
In a Government backgrounder on the CEWS4 (Backgrounder No. 1), the Government notes that the CEWS is intended to encourage eligible employers to pay employees who are furloughed due to health and safety reasons or lack of work and enable employers to rehire workers who were previously laid off5. Further, Backgrounder No. 1 states that employers are expected to “at least make best efforts to bring employees’ wages to their pre-crisis levels.” This requirement is not contained in the CEWS legislation; however, the CEWS rules permit the Government to publicly disclose the names of employers who apply for relief.
Our comprehensive discussion of the CEWS covers:
The CEWS is generally available to employers, other than non-eligible employers, who meet the basic requirements and satisfy the decline in revenue test in respect of a claim period.
An employer will satisfy the basic requirements, and be an eligible employer, if it is:
The CEWS rules provide flexibility for the Government to expand the list of eligible employers, however to date, no additional organizations have been prescribed.
Under the Tax Act, a partnership is generally not regarded as a “person” or a “taxpayer” and income of the partnership is allocated to partners and subject to tax at that level.
However, under the CEWS rules, a partnership is deemed to be a taxpayer so that it is potentially eligible to claim benefits. In this regard, we note that employment arrangements for partnerships can be structured so that a corporate general partner (GPCo) employs the employees on its own behalf or as general partner of the partnership. In the former case, only the GPCo would need to be an eligible employer, whereas in the latter case, the partnership would need to be an eligible employer. As described above, a partnership will be an eligible employer if all of the members of the partnership are eligible employers. This means that in a tiered partnership structure, in order for a lower-tier partnership to be an eligible employer, any upper-tier partnership must be comprised solely of members who are eligible employers.
There are two types of employers that are not eligible for the CEWS. The first is an employer that is a public institution, which includes:
The second type of employer that is not eligible for the CEWS is one that did not have a payroll account with the CRA on March 15, 2020.
A key requirement to an employer’s eligibility for the CEWS is a decline in the employer’s revenues for March 2020 of at least 15% and for April or May 2020 of at least 30%. Provided the decline in revenue test is satisfied (or deemed to be satisfied) in relation to a current reference period (i.e., March, April or May 2020), an employer will be entitled to apply for the CEWS in respect of eligible remuneration and certain payroll contributions paid during the corresponding claim period, as set out above in the table in the Introduction.
Employers will have the option to calculate the decline in revenue under either of the following methods:
The alternative benchmark method was introduced in recognition that the year-over-year method may not be appropriate in all circumstances, such as for high-growth employers, sectors that faced difficulties in 2019, non-profits and charities, as well as employers established after February 2019. Employers must select one of these methods when first applying for the CEWS and then are required to use the same method for the entire duration of the program.
In addition, in order to provide certainty to employers, if an employer satisfies the decline in revenue test for a given claim period, the employer will be deemed to satisfy this test in the immediately following claim period.
A Government backgrounder on details of the CEWS7 (Backgrounder No. 2) provides the following example to illustrate these rules:
ABC Inc. is a start-up that started its operations last September. It reported revenues of $100,000 in January and $140,000 in February, for a monthly average of $120,000. In March, its revenues dropped to $90,000. Because revenues in March are 25% lower than $120,000, ABC Inc. would be eligible for the CEWS for the first and second claim periods. To be eligible for the third claim period, ABC Inc. revenues would have to be $84,000 or less for the month of April or May (that is, 30% lower than $120,000).
For ease of reference, the following table sets out the claim periods, the required percentage decline in revenue and the elements for determining the employer’s decline in revenue:
Required Revenue Decline
Reference Period Revenue for Eligibility
Alternative Benchmark Method
March 15 to April 11
March 2020 over March 2019
March 2020 over average of January and February 2020
April 12 to May 9
(1) Eligible for Period 1
(1) Eligible for Period 1
May 10 to June 6
(1) Eligible for Period 2
(1) Eligible for Period 2
As discussed above, the decline in revenue test looks at the decline in the employer’s “qualifying revenues” for a current reference period, as compared to those in the applicable prior reference period. There are a number of rules in the CEWS legislation that apply for purposes of determining these qualifying revenues. In addition, the CEWS rules rely on several existing rules and concepts currently in the Tax Act, such as determining “non-arm’s length” status and the meaning of phrases such as “affiliate group” and “all or substantially all”, which are explained below.
For purposes of applying the decline in revenue test, an employer’s “qualifying revenue” is defined to mean the inflow of cash, receivables or other consideration arising in the course of ordinary activities of the employer – generally from the sale of goods, the rendering of services and the use by others of resources of the employer – in Canada.
Specifically excluded are:
Subject to certain special rules that are discussed below, the employer’s qualifying revenue is to be calculated using the employer’s normal accounting practices.
Accrual versus cash basis
Employers who typically determine their revenue on an accrual basis can instead elect to determine it on a cash basis. If selected, the employer must use the cash basis to determine its qualifying revenues for all claim periods.
Registered charities and Qualifying Tax-Exempts
Special rules apply in determining qualifying revenues for registered charities and Qualifying Tax-Exempts in addition to the general rules described above.
For registered charities, qualifying revenue specifically includes revenue from a related business, gifts and other amounts received in the course of its ordinary activities. Registered charities can also elect to exclude funding received from government sources in determining qualifying revenues for all current and prior reference periods. Thus, once a decision is made to include or exclude revenue from government sources, it must be used throughout the CEWS program.
For Qualifying Tax-Exempts, qualifying revenue specifically includes membership fees and other amounts received in the course of its ordinary activities. Qualifying Tax-Exempts can also elect to exclude funding received from government sources in determining qualifying revenues, with the same consistency requirements as for registered charities.
Special rules also apply for employers that are part of a group of eligible employers:
Employers operating within a group or affiliated group of eligible employers should consider which method provides the greatest accessibility to the CEWS. For example, if only one member in an employer group has experienced a significant revenue decline, that member may qualify for the CEWS if its unconsolidated revenue were to be used in applying the decline in revenue test, but it may not qualify if an election is made to have each member of the group use the group’s consolidated revenue in applying that test.
A special rule also applies for employers that are involved in a joint venture. If all of the interests in an employer are owned by participants in a joint venture and all or substantially all of the employer’s qualifying revenue for a claim period is in respect of the joint venture, then the employer can use the qualifying revenue of the joint venture (determined as if the joint venture were an eligible employer) instead of the employer’s qualifying revenue for purposes of the decline in revenue test.
There is no definition of a “joint venture” in the Tax Act, creating uncertainty as to the types of business relationships that would qualify. As well, for this rule to apply, all or substantially all of the employer’s revenue determined in accordance with normal accounting principles must be in respect of the joint venture. Thus, as a practical matter, the special rule for joint ventures may only be available where the employer is structured as a special purpose entity whose only activity is participating in the joint venture.
Non-arm’s length revenues
Although amounts derived from persons or partnerships that do not deal at arm’s length with the employer are excluded in determining the employer’s qualifying revenue, a special rule applies if all of substantially all of the employer’s qualifying revenue (determined without reference to the non-arm’s length exclusion) for a claim period is derived from one or more non-arm’s length persons or partnerships.
More specifically, if the foregoing all or substantially all test is met, and the employer and each non-arm’s length person or partnership jointly elect, then, for purposes of the decline in revenue test in respect of a claim period:
The employer’s qualifying revenue (determined without reference to the exclusion for revenue derived from non-arm’s length persons) for the current reference period attributable to the non-arm’s length person or partnership
The non-arm’s length person or partnership’s worldwide qualifying revenue for the current reference period
The employer’s qualifying revenue (determined without reference to the exclusion for revenue derived from non-arm’s length persons) for the current reference period attributable to all non-arm’s length persons or partnerships
The non-arm’s length person or partnership’s worldwide qualifying revenue for the prior reference period
In effect, this election permits an employer to assess whether it satisfies the decline in revenue test based on the decline in the worldwide revenue of the non-arm’s length persons or partnerships and attributable to the employer. Accordingly, this election will be helpful for employers that derive all or substantially all of their Canadian revenues from intercompany transactions in circumstances where the non-arm’s length persons or partnerships from which the revenues are derived experience the requisite decline in their worldwide revenues.
The CEWS rules rely on a number of existing rules and concepts currently in the Tax Act, such as determining “non-arm’s length” status and the meaning of phrases such as “affiliate group” and “all or substantially all”, which are explained below.
An “affiliated group” is defined in the Tax Act as a group of persons each member of which is affiliated with every other member. Some examples of affiliated persons include: (i) an individual and a spouse or common-law partner, (ii) a corporation and a person who controls the corporation, and (iii) two corporations are affiliated if the persons that control each corporation are affiliated with each other. Control for this purpose means de jure control and additional detailed rules also apply in determining control.
Under the Tax Act:
Some examples of related persons include: (i) individuals connected by blood relationship, marriage, common-law partnership or adoption, (ii) a corporation and a person who controls the corporation, and (iii) two corporations if they are controlled by the same person or group of persons. Like the affiliated person test, control for this purpose means de jure control and additional detailed rules also apply in determining control.
In assessing whether two parties factually deal at arm’s length, the courts have generally considered whether there is a “common mind” that directs the bargaining for both parties to the transaction, whether the parties “act in concert” without separate interests or whether one party has de facto control over the other9.
In addition, the CRA has adopted the following positions for partnerships:
All or substantially all
The phrase “all or substantially all” is not defined in the Tax Act, but the CRA’s longstanding position has been that “all or substantially all” means at least 90%. However, in caselaw, the courts have found that thresholds lower than 90% have satisfied the “all or substantially all” requirement.
Artificial reduction in revenue
In order to protect the integrity of the CEWS program, the CEWS rules contain an anti-avoidance provision designed to prevent employers from artificially decreasing revenue in order to access the CEWS. This anti-avoidance rule applies if:
For the purposes of the requirement in item (a) above, the transaction, event, series or action does not include a decision by a charity or Qualifying Tax-Exempt to make an election to exclude government funding in determining qualifying revenue or a decision or election to have one of the special rules for determining qualifying revenue apply with respect to groups or affiliated groups, joint ventures or non-arm’s length persons or partnerships.
If this anti-avoidance rule applies, the qualifying revenue of the employer for a current reference period is deemed to be equal to the qualifying revenue of the employer for the relevant prior reference period. The net result if this anti-avoidance rule applies is that the employer will not have any decline in revenue, thereby barring the employer from accessing the CEWS for the particular claim period. Further, if this rule applies, the employer will be subject to a penalty as described below under the heading “Penalties” in Section 4.
The CEWS is delivered by deeming the amount of the CEWS to which the employer is entitled for a claim period to be an overpayment on account of the employer’s liability for tax under Part I of the Tax Act for its taxation year in which the claim period ends. Upon receipt of the application, the amount of the deemed overpayment will be refunded by the CRA to the taxpayer by the same method as other tax refunds (mail, direct deposit or large value transfer system (LVTS)).
The amount of the CEWS is generally based on certain remuneration paid by an eligible employer to its eligible employees during a particular claim period, as well as certain employer-paid payroll contributions. In order to avoid duplication with other COVID-19 relief measures, the CEWS is reduced by certain benefits the employer and the employees are entitled to under other programs.
It should be noted that the amount of the CEWS in respect of a claim period cannot exceed the amount claimed by the employer in their application for the CEWS in respect of that claim period.
The remuneration component of the CEWS
The first component of the CEWS is based on remuneration paid to an eligible employee in respect of a week in a claim period, and is the greater of:
Effectively, an employer can be subsidized for 75% of the eligible remuneration paid to eligible employees in respect of a week in a claim period up to a maximum of $847 per week for each eligible employee. There is no overall limit on the amount of the CEWS that an employer may claim in respect of their workforce.
An eligible employee of an employer is an individual who is employed in Canada but excludes any employee for a particular claim period who is without remuneration for 14 or more consecutive days in that period. It should be noted that eligibility is based on the employee being employed in Canada and not based on the employee residing in Canada.
On the CEWS Website, the CRA states that employees that were laid-off or furloughed can become eligible employees retroactively, if they are rehired and their retroactive pay and status meet the eligibility criteria for the applicable claim period. In order to include these employees in calculating the CEWS, the employer must first rehire and pay them.
The carve out in the eligible employee definition for employees without remuneration for 14 or more consecutive days is intended to prevent an employer and an employee from each claiming benefits in respect of the same claim period under the CEWS and the CERB program, respectively. If an employee is rehired and paid retroactively, this could impact the employee’s entitlement to the CERB. This point is expanded on below under the heading “Interaction with the CERB” in Section 4.
Non-arm’s length employees
For eligible employees who do not deal at arm’s length with the employer at any time in the claim period, the CEWS is only available if the employee was employed prior to March 15, 2020. For such non-arm’s length employees, the amount of the CEWS is limited to the amounts in item (b) of the formula described above.
For the purpose of the CEWS, “eligible remuneration” generally includes salary, wages or other remuneration (such as taxable benefits) and fees, commissions or other amounts for services. These are amounts for which employers would generally be required to withhold or deduct amounts to remit to the Receiver General on account of the employee’s income tax obligation.
However, eligible remuneration does not include:
The “baseline remuneration” in respect of an eligible employee means the average weekly eligible remuneration paid to the eligible employee by the employer during the period that begins on January 1, 2020 and ends on March 15, 2020, excluding any seven-day period in respect of which the employee did not receive remuneration.
Employees with multiple employers
If an eligible employee is employed in a week by two or more eligible employers that do not deal with each other at arm’s length, the total amount of the CEWS in respect of that eligible employee for that week cannot exceed the amount that would arise if the eligible employee’s eligible remuneration for that week were paid by one eligible employer. This rule is intended to ensure that the combined total CEWS amount claimed in respect of that employee for a week does not exceed $847.
The payroll contribution component of the CEWS
The second component of the CEWS is equal to 100% of employer-paid premiums to Employment Insurance, the Canada Pension Plan, the Québec Pension Plan and the Québec Parental Insurance Plan for eligible employees for each week in the claim period throughout which those employees are on leave with pay. This component of the CEWS is not subject to a weekly maximum benefit per employee (in contrast to the remuneration component of the CEWS), nor is there any overall limit.
With respect to determining when an employee is considered to be on leave with pay, Backgrounder No. 2 states that, in general, an employee will be considered to be on leave with pay throughout a week if that employee is remunerated by the employer for that week but does not perform any work for the employer in that week. However, the payroll contributions in respect of eligible employees that are on leave with pay for only a portion of a week are excluded from the CEWS. On the CEWS Website, the CRA further clarifies that this component of the CEWS is available in respect of eligible employees who are on leave with full or partial pay for any full week in the claim period, where the employer is eligible to claim the CEWS for that week in respect of those employees.
Backgrounder No. 2 also clarifies that employers are required to continue to collect and remit employer and employee payroll contributions to each program as usual.
Other benefits that reduce the CEWS
Amounts deemed to have been remitted by the employer under the TWS in the claim period are deducted in computing the CEWS. Also deducted are amounts received by an eligible employee in the claim period as a work-sharing benefit under the EI Work Sharing Program.
In order to claim the CEWS, eligible employers must file an application, in prescribed form and manner, with the CRA for each claim period before October 2020. The CRA states on the CEWS Website that the online application process for the CEWS will open on April 27, 2020.
Importantly, the individual with primary responsibility for the financial activities of the employer will need to attest to the completeness and accuracy of each application. It many cases, this individual would be the chief financial officer of the entity. This is a stricter requirement than most other tax filings, where any authorized person of the taxpayer can sign.
As per the CEWS Website:
The CRA recommends that eligible employers ensure that their business details and direct deposit information on file with the CRA for their payroll accounts are correct to ensure faster and easier processing of payments.
The CRA indicates that the CEWS will be processed at the payroll account level. As such, eligible employers who have more than one payroll account will be required to file a separate application for each payroll account.
As part of the CEWS application, employers will be required to calculate their estimated subsidy amount. The CEWS Website has an online calculator that can be used for this purpose. The CEWS Website also indicated that the CRA is not collecting or retaining any of the information entered into the online calculator (or the related spreadsheet), but rather the amounts entered are only used to help employers determine the amount of the CEWS they may be eligible to claim. In addition, after the application is submitted, employers may be required to provide a full list of the names and Social Insurance Numbers of their employees for verification purposes.
Employers will receive CEWS payments by mail, or if registered, by direct deposit. Employers expecting a CEWS payment of $25 million or more will receive the payment through the LVTS. In order to do so, the employer must be enrolled in direct deposit on their payroll account and must be registered for the LVTS. For employers who are not registered for the LVTS, the CEWS Website contains a link to begin the registration process.
The CEWS Website also cautions that employers should retain records demonstrating their decline in revenues and remuneration paid to employees, as claims for the CEWS are subject to verification.
In the event that the CRA subsequently determines that an employer did not meet the eligibility requirements to qualify for the CEWS, the employer will be required to repay any amounts received under this program, together with interest at a prescribed rate.
Further, in order to maintain the integrity of the CEWS program, an employer could be subject to penalties, as follows:
Under the CEWS program, any subsidy received is characterized as government assistance. As a result, an employer will be required to include any subsidy received in computing its taxable income. Assistance received under the CEWS program would also reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
Under the CEWS legislation, the CRA is able to publicly disclose the name of any person or partnership that makes an application for relief under the program. This ability to publicly disclose may have been introduced as a backstop to ensure that employers use their best efforts to bring employees’ wages to their pre-COVID-19 levels, as this condition is not a pre-requisite to obtaining relief under the program.
Certain Canadian individual employees may be entitled to claim a subsidy under the CERB program if their employment situation is adversely impacted by the COVID-19 outbreak. The claim periods under the CERB correspond to those under the CEWS and eligibility for the CERB is determined in part based on the employment income received, or expected to be received, by the individual in a 14-day period in a particular claim period11.
In Backgrounder No. 2, the Government announced that it was considering an approach to limit duplication between the CERB and CEWS programs, which could include “a process to allow individuals rehired by their employer during the same eligibility period to cancel their CERB claim and repay that amount.” Consequently, employees may need to revisit their entitlement to the CERB in the event that their employers are able to rehire them and pay remuneration (including on a retroactive basis) as a result of relief provided under the CEWS program.
The CEWS Website currently provides that depending on the specific situation, if an employee is rehired, that employee may be required to repay some or all of the amounts received by that employee under the CERB program and further details on this will be made available shortly. For employees who already know that they will need to repay their CERB payments, the CEWS Website contains a link to the steps that can be taken to return or repay those benefits.
1 Other relief measures in the Government’s COVID-19 Economic Response Plan were passed into law on March 25, 2020 by Bill C-13 COVID-19 Emergency Response Act (Bill C-13). These measures include relief for employers, such as the Temporary Wage Subsidy (TWS), and relief for individuals, such as the Canada Emergency Response Benefit (CERB) and the EI Work Sharing Program. For a discussion of these measures see our previous bulletin: https://www.torys.com/insights/publications/2020/04/covid-19-canadian-federal-tax-changes-and-announcements.
2 Details on the CEWS program are also contained on the CRA’s website at https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy.html (CEWS Website).
3 The Government originally announced that the CEWS program would be for a 12-week period from March 15 to June 6, 2020. However, the CEWS rules provide flexibility for the Government to extend the program and add additional claim periods ending no later than September 30, 2020, as well as corresponding aspects of the decline in revenue test for such claim periods.
4 Canada, Department of Finance, Government Introduces COVID-19 Emergency Response Act, No.2 to Help Businesses Keep Canadians in their Jobs, April 11, 2020.
5 For example, Air Canada, has already declared its intention to utilize the CEWS and rehire employees that were laid-off; see https://www.cbc.ca/news/business/air-canada-hiring-wage-subsidy-1.5525926.
6 It should be noted that paragraphs 149(1)(a) and (b) of the Tax Act describe individuals who are not Canadian citizens and who are officers or servants of a foreign government whose duties require that they reside in Canada as well as certain of their family members and servants. It is not clear how the CEWS rules are intended to apply to such individuals as they may not be an “organization” as described in the public institution definition.
7 Canada, Department of Finance, Additional Details of the Canada Emergency Wage Subsidy, April 11, 2020.
8 The term “group” is not defined in the Tax Act or for purposes of the CEWS rules. As such, the term “group” appears to relate to accounting requirements for consolidated group reporting.
9 See paragraph 1.3 of the CRA’s Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm’s Length, November 26, 2015.
10 Ibid., at paragraphs 1.42 to 1.44.1.
11 On April 15, 2020, the Department of Finance announced some relieving changes to the CERB program, including permitting individuals to earn up to $1,000 per month while collecting the CERB.
Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
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