COVID-19 Update - What Employers Need to Know About the Canada Emergency Wage Subsidy (CEWS)
On April 11, 2020, at an emergency sitting of the Legislature, the Federal Government passed Bill C-14, the COVID-19 Emergency Response Act, No. 2 (“Bill C-14”). Bill C-14, which received Royal Assent on April 11, 2020, amends the Income Tax Act (Canada) (the “Tax Act”) and establishes the statutory foundation for the Canada Emergency Wage Subsidy (“CEWS”). The legislation can be found here and the corresponding press release can be found here.
The following is a summary of the key details of the CEWS program as of April 11, 2020. We will continue to monitor updates on the CEWS, including with respect to the application process, and will provide additional information as it becomes available.
What is the Goal of the CEWS?
- The goal of the program is to provide a wage subsidy to allow eligible employers to keep employees on the payroll (i.e. avoid layoffs and terminations) and to bring employees who are already on layoff back onto the payroll.
What Employers are Eligible to Receive the CEWS?
- The subsidy will apply to individuals (including trusts, which are generally considered to be individuals for purposes of the Tax Act), corporations (other than most corporations exempt from tax under Part I of the Tax Act), registered charities, and organizations exempt from tax because of paragraph 149(1)(e), (j), (k) or (l) of the Tax Act (i.e., certain agricultural organizations, boards of trades and chambers of commerce, labour organizations and fraternal benefit societies, and certain non-profit organizations) and partnerships consisting of eligible employers, regardless of the number of employees.
- The subsidy will not apply to any “public institution”, which is defined to mean organizations described in any of paragraphs 149(1)(a) to (d.6) of the Tax Act (e.g., certain government entities and municipalities), as well as schools, school boards, hospitals, health authorities and public universities and colleges.
What is the Eligibility Threshold for the CEWS?
- An employer will be eligible for subsidy if the employer can demonstrate a drop in qualifying revenue of 15% or more for March 2020, and 30% or more for April 2020 and May 2020. Employers will be required to attest to this revenue drop in their application.
- An employer may demonstrate the drop in qualifying revenue by comparing revenue in an eligible period to one of the following reference periods:
- A year-over-year comparator (i.e. comparing March 2020 to March 2019, April 2020 to April 2019, and May 2020 to May 2019); or
- An average of revenue earned in January and February 2020.
- Employers must select either the monthly year-over-year approach or the alternative January/February averaging approach when first applying for the CEWS and are required to use the same approach for the entire duration of the program.
- As described below under “Do Employers Have to Re-Apply”, a deeming rule also applies.
How is “Qualifying Revenue” Calculated?
- An employer’s qualifying revenue is generally its inflow of cash, receivables or other consideration arising in the course of its ordinary activities (generally from the sale of goods, the rendering of services, and the use by others of the employer’s resources) in Canada, and excludes extraordinary items and amounts derived from non-arm’s length persons or partnerships.
- Qualifying revenue is to be computed using the employer’s normal accounting methods, subject to certain exceptions, including special rules for registered charities and certain other tax-exempts.
- Special permissive rules may also apply in respect of employers that normally prepare financial statements on a consolidated basis, employers that are part of an affiliated group, joint venture participants, and employers that derive all or substantially all (generally understood to be 90% or greater) of their revenue from persons or partnerships with which they do not deal at arm’s length.
- Employers are allowed to calculate revenues under the accrual method or the cash method, but not a combination of both. Employers must select an accounting method when first applying for the CEWS and use that method for the entire duration of the program. An election is required for employers seeking to use the cash method.
Do Employers Have to Re-Apply?
- To provide certainty, once an eligible employer is found eligible for a specific period, it will automatically qualify for the next period of the CEWS program. For example, an employer with a qualifying revenue drop of more than 15% in March would qualify for the first and second periods of the program, covering remuneration paid between March 15 and May 9. Similarly, an employer with a qualifying revenue drop of 30% in April would qualify for the second and third periods of the program, covering remuneration paid between May 10 to June 6.
What is the Value of the Subsidy that the CEWS will Provide?
- In respect of most eligible employees, the Government will provide eligible employers with a subsidy equivalent to the greater of:
- 75% of the amount of remuneration paid, up to a maximum benefit of $847 per week per employee; and
- the amount of remuneration paid, up to a maximum benefit of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.
- Eligible remuneration will include salary, wages, and other remuneration like taxable benefits. It will not include severance pay or items such as stock option benefits or the personal use of a corporate vehicle.
- For employees that do not deal at arm’s length with the employer, the subsidy amount will be limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, up to a maximum benefit of the lesser of $847 per week and 75% of the employee’s pre-crisis weekly remuneration. The subsidy will only be available in respect of non-arm’s length employees who were employed prior to March 15, 2020.
Are Employers Required to Top Up the CEWS?
- The Government has stated that employers are expected to “at least make best efforts to bring employees’ wages to their pre-crisis levels”.
- Pre-crisis remuneration (defined as “baseline remuneration” in Bill C-14) for a given employee will be based on the average weekly remuneration paid to the employee between January 1, 2020 and March 15, 2020 and will exclude any period of seven or more consecutive days for which the employee did not receive remuneration.
Is there a Maximum Cap on the CEWS Amount?
- There is no limit on the total aggregate subsidy amount an eligible employer may claim.
What About Payroll Remittances?
- In addition to the base subsidy, the CEWS will cover 100% of employer-paid contributions (i.e. contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan) for eligible employees who are on leave with pay (i.e. who are not performing any work for the employer in any particular week) and for whom the employer is eligible to receive the base CEWS subsidy. Note that this coverage of payroll remittances is not available if the employee is on leave with pay for only a portion of a week (i.e., if the employee works part of the week).
- Employers will be required to continue to collect and remit employer and employee contributions to each program as usual. However, employers will be able to apply for a refund at the same time that they apply for the base CEWS subsidy, and this refund will not be subject to the weekly maximum benefit of $847 per employee.
- There will also be no overall limit on the refund amount that an eligible employer may claim.
Is the CEWS Retroactive?
- Yes, the CEWS is retroactive to March 15, 2020.
How Long will the CEWS Remain in Place?
- Currently, the program will be available for 12 weeks from March 15 to June 6, 2020, with the possible extension by regulation to no later than September 30, 2020.
- The three current qualifying periods for remuneration are as follows:
- Period 1 (March 15 to April 11): An employer must show a reduction in revenue of 15% in March 2020 as compared to either March 2019 or an average of January and February 2020.
- Period 2 (April 12 to May 9): An employer must show a reduction in revenue of 30% in April 2020 as compared to either April 2019 or an average of January and February 2020.
- Period 3 (May 10 to June 6): An employer must show a reduction in revenue of 30% in May 2020 as compared to either May 2019 or an average of January and February 2020.
What Employees are Eligible to Receive Payment under the CEWS?
- CEWS coverage is available in respect of individual employees employed in Canada by an eligible employer in the applicable qualifying period, other than those who are without remuneration from the employer in respect of 14 or more consecutive days in the applicable qualifying period.
If an Employer has Employees on Layoff Currently, Do They All Have to be Recalled?
- Employers are expected to make best efforts to recall or re-hire employees, but Bill C-14 does not require a full recall as a condition of eligibility for the CEWS.
- CEWS payments, however, will not be available in respect of employees who are without remuneration from their employer in respect of 14 or more consecutive days during a qualifying period.
Are Employers Required to Have Work for Recalled or Retained Employees to Perform while on the CEWS?
- The requirement is to bring employees back onto payroll, but it does not require that they perform work. In effect, they could be classified as being on a paid leave of absence, subsidized in part by the CEWS.
- In fact, as noted above, coverage for employer-paid payroll remittances only applies to those employees covered by the CEWS that are not performing work for the employer during the week.
How Do Employers Apply for the CEWS?
- Employers will be able to access the application through the CRA’s My Business Account online portal which will become available in the coming weeks.
- The CEWS application portal is expected to be available to employers within two to five weeks.
What Records are Employers Required to Keep?
- Employers should keep records demonstrating (a) their revenue calculations, and (b) the remuneration paid to employees.
When will Funds Become Available?
- No specific date has been provided, but the Government has suggested that funds will be available in approximately 6 weeks.
Should Employers Wait Until Approved Before Recalling Employees?
- There is no one-size-fits-all answer to this question. We recommend speaking with your lawyers at McCarthy Tétrault, and your financial and tax advisors to determine the best approach for your organization.
How Does the CEWS Interact with the CERB?
- The Government is encouraging all eligible employers to rehire employees as quickly as possible and to apply for the CEWS if they are eligible. To ensure the Canada Emergency Response Benefit (“CERB”) works as intended, the Government stated that it is considering implementing an approach to limit duplication, 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.
How Does the CEWS Interact with Work-Sharing Programs?
- 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.
Will Employers be Taxed on the CEWS Monies?
- Any wage subsidies received by employers will be considered government assistance and included in the employer’s taxable income.
- Assistance received under the CEWS or the 10% wage subsidy available to eligible small businesses will reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
Are There Penalties for Misuse of the CEWS?
- The Government noted that this is a “high-trust” system, but that it is prepared to and will take decisive action against anyone who manipulates the CEWS.
- In order to maintain the integrity of the program, employers will be required to repay amounts paid under the CEWS if they do not meet the eligibility requirements.
- Employers that engage in artificial transactions to reduce revenue for the purposes of claiming the CEWS will be subject to a penalty equal to 25% of the value of the subsidy claimed, in addition to being required to repay the full amount of the subsidy which was improperly claimed.
- Finally, under existing provisions of the Tax Act, persons making, or participating in making, a false or deceptive statement could be prosecuted with a summary or indictable offence. Anyone found guilty could be sentenced to prison for up to 5 years.
Our group will continue to monitor these developments and provide updates as information becomes available. Please watch our COVID-19 hub and our McCarthy Tétrault Employer Advisor blog for further updates. If you need assistance, please reach out to any member of our National Labour & Employment Team whenever you need to.