Canadian Federal Wage Subsidies During the COVID-19 Pandemic
****APRIL 22, 2020 UPDATE****: On April 21, 2020, the Canada Revenue Agency provided general guidance concerning the Canada Emergency Wage Subsidy and a calculator for determining the subsidy amount for qualifying entities. The general guidance can be found here, and the calculator can be found here.
Pursuant to the guidance:
On April 11, 2020, at an emergency sitting of Parliament, the Federal Government passed Bill C-14, the COVID-19 Emergency Response Act, No. 2 (“Bill C-14”), to amend the Income Tax Act (Canada) (the “ITA”) and thereby establish the statutory foundation for the Canada Emergency Wage Subsidy (“CEWS”). The legislation, which received Royal Assent on April 11, 2020, can be found here and the corresponding press release can be found here.
Bill C-14 forms part of the Federal Government’s economic response plan to support the Canadian economy during the COVID-19 global pandemic (the “Response Plan”). It follows the passing on March 25, 2020 of Bill C-13, the COVID-19 Emergency Response Act (“Bill C-13”), which implemented other measures forming part of the Response Plan, including a 10% temporary wage subsidy (the “10% Temporary Wage Subsidy”) that is separate from (but reduces) the CEWS.
Comments on the amendments to the ITA to effect the CEWS under Bill C-14 and the 10% Temporary Wage Subsidy under Bill C-13 are set out below. For a more general summary of the parameters of the CEWS, please click here.
For details of other tax measures that form part of the Response Plan (including administrative and audit measures), and various provincial tax measures, please click here. For a summary of various municipal tax relief measures, please click here.
Unless otherwise stated, all statutory references are to the provisions of the ITA.
Summary and Goal
As described more particularly below, the CEWS is intended to allow eligible employers (referred to in Bill C-14 as “qualifying entities”) who suffer significant (i.e., 15% or more in March 2020 and 30% or more in April or May 2020, compared to prior reference periods) revenue drops to keep Canadian employees on the payroll (i.e., avoid layoffs and terminations) and to bring Canadian employees who are already on layoff back onto the payroll, by providing these employers with a subsidy of up to $847 per week per eligible employee.
In respect of most eligible employees, the Federal Government will provide eligible employers with a subsidy generally equal to the greater of:
- 75% of the amount of eligible remuneration paid to the employee, up to a maximum benefit of $847 per week; and
- the least of (i) the eligible remuneration paid to the employee, (ii) 75% of the employee’s pre-crisis weekly remuneration, and (iii) $847 per week.
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 the particular week) and for whom the employer is eligible to receive the base subsidy.
Eligible employers must apply for the CEWS before October 2020, and will be able to access the application through the Canada Revenue Agency (“CRA”) My Business Account online portal, which is expected to be available to employers within two to five weeks.
What employers are eligible to receive the CEWS?
In order to be eligible to receive the CEWS, an employer must be a “qualifying entity” as defined in new subsection 125.7(1).
A “qualifying entity” is an “eligible entity” that: (i) meets a decline in revenue test for the relevant period as described below, (ii) files an application (which the individual who has principal responsibility for the financial activities of the eligible entity must attest is complete and accurate in all material respects) with the Minister of National Revenue, in the prescribed form and manner, before October 2020, and (iii) had, on March 15, 2020, a business number and payroll program account with the CRA.
An “eligible entity” is defined in new subsection 125.7(1) to mean:
- a corporation, other than a corporation that is exempt from tax under Part I of the ITA or is a public institution (as described below);
- an individual;
- a registered charity, other than a public institution;
- a person, other than a public institution, that is exempt from tax under Part I because of the application of paragraph 149(1)(e), (j), (k) or (l) (i.e., certain agricultural organizations, boards of trade and chambers of commerce, labour organizations and fraternal benefit societies, and certain non-profit organizations);
- a partnership all of the members (directly or through one or more other partnerships) of which are one or more of the foregoing; or
- a prescribed organization (of which there are none, as of April 13, 2020).
The term “public institution” is also defined in new subsection 125.7(1) to mean an organization described in any of paragraphs 149(1)(a) to (d.6) (e.g., certain government entities, municipalities, municipal or public bodies performing a function of government, and various subsidiary entities), as well as an organization that is a school, school board, hospital, health authority or public university or college.
There is no residency requirement in the foregoing definition. Unlike the 10% Temporary Wage Subsidy discussed below, there is also no requirement that a corporation be a Canadian-controlled private corporation (“CCPC”) in order to be an eligible entity.
While the eligible entity definition includes some entities that may not have been covered under the CEWS as initially announced, there are other entities that remain effectively excluded. By way of example, in order for a partnership to qualify as an eligible entity, all of the members (directly or through one or more other partnerships) of the partnership must be eligible entities and, as a result, partnerships with one or more partners that are not eligible entities (e.g., a partnership of which a public institution or a tax-exempt corporation such as a paragraph 149(1)(o.2) pension fund subsidiary corporation is a member) will not qualify. However, there is the possibility for certain entities to qualify by being prescribed by way of regulation.
What is the eligibility threshold for the CEWS?
Currently, the CEWS 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 are as follows:
- Period 1 - March 15, 2020 to April 11, 2020;
- Period 2 - April 12, 2020 to May 9, 2020; and
- Period 3 - May 10, 2020 to June 6, 2020.
Stated very generally, in order to qualify for the CEWS in a particular qualifying period, an eligible entity must demonstrate the following:
- in the case of Period 1: a reduction of March 2020 revenue of 15% (or greater);
- in the case of Period 2: a reduction of April 2020 revenue of 30% (or greater) or a reduction of March 2020 revenue of 15% (or greater); and
- in the case of Period 3: a reduction of May 2020 revenue of 30% (or greater) or a reduction of April 2020 revenue of 30% (or greater).
More specifically and as summarized in the chart below, pursuant to paragraph (c) of the definition of “qualifying entity” in new subsection 125.7(1), in order to qualify in any particular qualifying period, the employer’s “qualifying revenues” for the “current reference period” must be equal to (or less than) the “specified percentage” for the qualifying period of its qualifying revenues for the “prior reference period”.
The “specified percentage” is 85% for Period 1 and 70% for Periods 2 and 3. If the CEWS is extended to apply to one or more additional periods, the specified percentage for those additional periods will be set out by regulation.
If the employer was not carrying on business or otherwise carrying on its ordinary activities on March 1, 2019, the employer’s qualifying revenues for the prior reference period in respect of each qualifying period will be determined by reference to its January and February 2020 revenues. More specifically, its qualifying revenues for the prior reference period will be determined by the formula “0.5A(B/C)”, where A equals the employer’s qualifying revenue for January and February 2020; B equals the number of days in January and February 2020, (i.e., 60); and C equals the number of days in January and February 2020 that the eligible entity was carrying on business.
In all other cases, the employer may choose to use the corresponding month in 2019 (i.e., March, April or May 2019, as applicable) as the prior reference period or to compare its revenue by reference to January/February 2020 revenue, as set out above. If the employer elects to use January/February 2020 revenue, it must do so in respect of each qualifying period (i.e., the employer may not alternate between methods).
The following chart summarizes the current reference period, prior reference period and specified percentage for each qualifying period:
Current Reference Period
Prior Reference Period
Alternative Prior Reference Period
Specified percentage of qualifying revenue that Current Reference Period must not exceed of Prior Reference Period (or Alternative Prior Reference Period, if applicable)
Period 1: March 15 to April 11
January and February 2020
Period 2: April 12 to May 9
January and February 2020
Period 3: May 10 to June 6
January and February 2020
Pursuant to new subsection 125.7(9), if an employer meets the revenue reduction test in one qualifying period, it will be deemed to have met the revenue reduction test in the immediately following qualifying period (i.e., an employer with a qualifying revenue reduction of 15% (or greater) in March 2020 will be deemed to meet the revenue reduction test in April 2020, and an employer with a qualifying revenue reduction of 30% (or greater) in April 2020 will be deemed to meet the revenue reduction test in May 2020). This deemed qualification only applies to the immediately subsequent period; not each successive period (i.e., the rule does not apply in an iterative manner).
“Qualifying revenue” of an eligible entity for a prior reference period or a current reference period is defined in new subsection 125.7(1) to mean “the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity – generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity – in Canada in the particular period”, subject to the following:
- it does not include:
- “extraordinary” items;
- amounts derived from persons or partnerships not dealing at arm’s length for purposes of the ITA with the eligible entity; and
- deemed “overpayments” under new subsection 125.7(2) (i.e., the CEWS, to the extent it is received by the eligible entity) and amounts received under the 10% Temporary Wage Subsidy;
- in the case of an eligible entity that is a registered charity, it includes revenue from a “related business” (as defined in subsection 149.1(1)), gifts and other amounts received in the course of the charity’s ordinary activities; provided that the charity may elect to exclude government funding for all prior and current reference periods; and
- in the case of an eligible entity that is person described in paragraph 149(1)(e), (j), (k) or (l), it includes membership fees and other amounts received in the course of the eligible entity’s activities; provided that the eligible entity may elect to exclude government funding for all prior and current reference periods.
Pursuant to new subsection 125.7(4), qualifying revenue of an eligible entity is to be determined using the entity’s normal accounting practices, subject to the following exceptions:
- Accrual vs. Cash: an eligible entity may make an election, which must apply for all qualifying periods, to determine its qualifying revenue based on the cash method, within the meaning assigned by subsection 28(1) (i.e., the method set out under the ITA for purposes of computing income of a taxpayer from a farming or fishing business) with any modifications that the circumstances require.
- Consolidated Group with Consolidated Financials: if a group of eligible entities normally prepares consolidated financial statements, each member of the group may determine its qualifying revenue separately, provided every member of the group determines its qualifying revenue on that basis.
- Affiliated Group: if an eligible entity and each member of an affiliated group of eligible entities of which the eligible entity is a member jointly elect, the qualifying revenue of the group determined on a consolidated basis in accordance with relevant accounting principles is to be used for each member of the group.
- Joint Ventures: if all of the interests in an eligible entity are owned by participants in a joint venture and all or substantially all of the qualifying revenue of the eligible entity for a qualifying period is in respect of the joint venture, then the eligible entity may use the qualifying revenues of the joint venture (determined as if the joint venture were an eligible entity). By way of example, assume that ACo and BCo are participants in a co-ownership project (i.e., the joint venture) and are the shareholders of a captive employment vehicle (CCo), the purpose of which is to provide services to the joint venture. This provision may allow CCo to access the CEWS based on a decline in the qualifying revenue of the joint venture, even if CCo could not independently demonstrate a decline in qualifying revenue.
- Service Providers: if all or substantially all (generally understood to be 90% or greater) of an eligible entity’s qualifying revenue (determined without reference to the exclusion of amounts derived from persons or partnerships not dealing at arm’s length for purposes of the ITA with the eligible entity (the “Non-Arm’s Length Exclusion”)) for a qualifying period is from one or more persons or partnerships with which the eligible entity does not deal at arm’s length for purposes of the ITA and each particular person or partnership jointly elects with the eligible entity for purposes of determining whether the eligible entity has met the revenue reduction test:
- the eligible entity’s qualifying revenue for the prior reference period is deemed to be $100;
- the eligible entity’s qualifying revenue for the current reference period is deemed to be the total of all amounts, each of which is determined by the formula “$100(A/B)(C/D)” where:
- A is the eligible entity’s qualifying revenue (determined without reference to the Non-Arm’s Length Exclusion) for the current reference period attributable to a particular person or partnership;
- B is the total of all amounts, each of which is the eligible entity’s qualifying revenue (determined without reference to the Non-Arm’s Length Exclusion) for the current reference period attributable to a particular person or partnership (i.e., B is the aggregate of the eligible entity’s qualifying revenue as so determined from all such persons or partnerships);
- C is the particular person or partnership’s qualifying revenue (determined as if the definition of “qualifying revenue” were read without reference to the “in Canada” requirement) for the current reference period; and
- D is the particular person or partnership’s qualifying revenue (determined as if the definition of “qualifying revenue” were read without reference to the “in Canada” requirement) for the prior reference period.
The exceptions available under subsection 125.7(4) provide greater flexibility for corporate groups, and ought to permit various eligible entities to qualify for the CEWS which would not have otherwise qualified. However, not all arrangements have been addressed and certain anomalies may arise. For example, where multiple businesses are operated within a single corporation (as opposed to a separate corporation being used for each business), there appears to be no provision which would enable the corporation to determine its eligibility for the CEWS on a business-by-business basis. Accordingly, it is possible that if the revenues of one business were to decline but the revenues of the other business or businesses do not decline (or do not decline to a sufficient extent) such that the aggregate revenues of the corporation remain above the relevant threshold, the corporation would be precluded from qualifying for the CEWS, notwithstanding that the corporation may have qualified in respect of the first business had that business been the corporation’s only business (i.e., had the business been undertaken in a stand-alone corporation). Similarly, issues may arise in the context of corporate reorganizations or where a business expansion has occurred, or restructurings undertaken, between the prior reference period and the current reference period.
Qualifying Revenue Anti-Avoidance Rule
New subsection 125.7(6) contains an anti-avoidance rule, the effect of which is to disqualify an eligible entity from entitlement to receive the CEWS if:
- the eligible entity, or any person or partnership that is not dealing at arm’s length for purposes of the ITA with the eligible entity, enters into a transaction, participates in an event (or series of transactions or events) or takes an action (or fails to take an action) that has the effect of reducing the qualifying revenues of the eligible entity for the current reference period; and
- it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause an eligible entity to qualify for the CEWS in respect of that qualifying period.
If the anti-avoidance rule applies, the employer will be required to repay the amount paid to it under the CEWS for that qualifying period, and will also be liable to a penalty under new subsection 163(2.901) equal to 25% of the disallowed CEWS.
In respect of which employees is a qualifying entity eligible to receive the CEWS?
“Eligible employee” of an eligible entity in respect of a week in a qualifying period is defined in new subsection 125.7(1) to mean an individual employed in Canada by the eligible entity in the qualifying period, other than an individual who is without remuneration by the eligible entity in respect of 14 or more consecutive days in the qualifying period.
How is the CEWS calculated?
Amount of the CEWS
Pursuant to new subsection 125.7(2), the amount of the CEWS is calculated on a week-by-week, employee-by-employee basis (but aggregated in respect of the qualifying period), pursuant to the formula “A-B-C+D”, where, simplified:
- A, as more particularly described below, is the total of the base CEWS subsidy amounts in respect of a particular eligible employee for each week in the qualifying period;
- B is the amount received by the eligible entity under the 10% Temporary Wage Subsidy in respect of the qualifying period;
- C is the total of all amounts, if any, received by the eligible employee for each week in the qualifying period as a work-sharing benefit under the Employment Insurance Act; and
- D is an amount equal to the total of all employer premiums or contributions, as applicable, under the Employment Insurance Act, the Canada Pension Plan, certain provincial pension plans and the Quebec Parental Insurance Plan payable by the eligible entity in respect of the eligible employee for a week in the qualifying period during which the employee is on leave with pay for the entirety of the week.
The effect of variable D is that eligible entities effectively receive a refund of the listed employer-paid premiums or contributions, as applicable, for an eligible employee that are payable in respect of a week for which the employee is on leave with pay. Notably, this refund is not available if the employee is on leave with pay for only a portion of the week (i.e., if the employee works part of the week).
Pursuant to variable A in the formula, the base subsidy amount in respect of an eligible employee for a week is equal to the greater of:
- 75% of “eligible remuneration” (as described below) paid to the employee in respect of the week (provided that the eligible employee deals at arm’s length for purposes of the ITA with the eligible entity in the qualifying period), up to a maximum of $847; and
- the least of (i) the eligible remuneration paid to the employee in respect of that week, (ii) 75% of the employee’s “baseline remuneration” (as described below) for that week, and (iii) $847.
If an eligible employee is employed by two or more qualifying entities that do not deal with each other at arm’s length for purposes of the ITA, new paragraph 125.7(5)(b) provides that the total CEWS in respect of the eligible employee for that week shall not exceed the amount that would arise if the eligible employee’s eligible remuneration for that week were paid by one qualifying entity.
“eligible remuneration” and “baseline remuneration”
“Eligible remuneration” of an eligible employee of an eligible entity is defined in new subsection 125.7(1) to mean amounts described in paragraph 153(1)(a) (i.e., salary, wages or other remuneration) or paragraph 153(1)(g) (i.e., fees, commissions or other amounts for services), other than:
- a retiring allowance;
- stock option benefits under (or because of) any of paragraphs 7(1)(a) to (d.1);
- any amount that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever, to the employer, a person or partnership not dealing at arm’s length with the employer for purposes of the ITA, or any other person or partnership at the direction of the employer; and
- any amount that is paid in respect of a week, if, as part of an arrangement involving the eligible employee and the employer: (i) the amount is in excess of the eligible employee’s baseline remuneration, (ii) after the qualifying period, the eligible employee is reasonably expected to be paid a lower weekly amount than the baseline remuneration, and (iii) one of the main purposes of the arrangement is to increase the amount of the CEWS in respect of the eligible employee.
“Baseline remuneration” in respect of an eligible employee of an eligible entity is also defined in new subsection 125.7(1), and means the average weekly eligible remuneration paid to the eligible employee by the eligible entity during the period that begins on January 1, 2020 and ends on March 15, 2020, excluding any period of seven or more consecutive days for which the employee was not remunerated.
How is the CEWS paid?
Pursuant to new subsection 125.7(2), the CEWS operates as a deemed “overpayment” of a qualifying entity’s liability for tax under Part I of the ITA.
The amount of any deemed overpayment in respect of the CEWS for a particular qualifying period is expressly limited to the amount claimed by the qualifying entity in its application for that qualifying period.
New subsection 125.7(3) provides that despite its character as an overpayment of tax, the amount received by a qualifying entity under the CEWS will be considered government assistance received immediately before the end of the qualifying period to which it relates for all purposes of the ITA other than section 125.7. Government assistance is generally included in a taxpayer’s income for tax purposes under paragraph 12(1)(x) and, in respect of the CEWS, will reduce the amount of remuneration expenses eligible for federal tax credits calculated on the same remuneration.
Bill C-14 also provides that, under new subsection 164(1.6), at any time after the beginning of a taxation year of a taxpayer in which an overpayment is deemed to have arisen under subsection 125.7(2) (i.e., at any time at which the qualifying entity is eligible to receive the CEWS), the Minister of National Revenue may, notwithstanding subsection 164(2.01), refund to the taxpayer all or any part of the overpayment (i.e., pay the CEWS). This provision is the statutory means by which the CEWS may be paid to qualifying entities during the year, and overrides the provision of the ITA which otherwise prevents the Minister from refunding amounts to a taxpayer who has overdue income tax, GST/HST or certain other returns.
To provide for qualifying entities that are partnerships, new subsection 125.7(7) provides that, for purposes of new subsection 125.7(2) and subsection 160.1(1), a partnership is deemed to be a taxpayer and, for purposes of new subsection 125.7(2) only, a partnership is deemed to have a liability under Part I of the ITA for a taxation year in which a qualifying period ends. Consequential changes are also made to render partnerships liable for penalties that may apply in respect of the CEWS.
Penalties, Disclosure and Administrative Matters
Finance Minister Bill Morneau described the CEWS as a “high-trust” system, and stated that the Federal Government will take decisive action against anyone who “breaks that trust”. In addition, the Federal Government has stated that employers are expected to make “best efforts” to top-up employees’ salaries to bring them to pre-crisis levels.
Eligible entities will be able to access the application through the CRA’s My Business Account online portal, which is expected to be available to employers within two to five weeks.
Applicants will be expected to keep records demonstrating their revenue calculations and remuneration paid to employees. Further, as noted above, the individual who has principal responsibility for the financial activities of the eligible entity will be required to attest that the application is complete and accurate in all material respects.
Subsection 163(2) of the ITA, the existing provision of the ITA applying in respect of persons making, or participating in making, a false or deceptive statement, is expanded to apply to individuals who attest to the material completeness and accuracy of a CEWS application. A subsection 163(2) offence can be prosecuted as a summary or indictable offence and can carry with it a sentence of imprisonment for up to 5 years.
In addition, as noted above, employers that engage in artificial transactions to reduce revenue for the purposes of claiming the CEWS will be liable to a penalty equal to 25% of the subsidy claimed, in addition to being required to repay the full amount of the subsidy.
Notably, pursuant to new subsection 241(3.5), the Minister of National Revenue may communicate or otherwise make available to the public, in any manner that the Minister considers appropriate, the name of any person or partnership that applies for the CEWS. Such a provision is unusual in the context of the ITA.
Interaction of the CEWS and the CERB
The Federal 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 that 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.
10% Temporary Wage Subsidy
Legislation enacted as part of Bill C-13 permits an “eligible employer” to reduce payroll deductions otherwise required to be remitted to the CRA on remuneration paid between March 18, 2020 and June 19, 2020 to “eligible employees” as defined for purposes of the 10% Temporary Wage Subsidy. The amount of the permitted reduction (i.e., the wage subsidy) is equal to 10% of the remuneration paid during that period, subject to a maximum subsidy of $1,375 for each eligible employee, up to an aggregate maximum of $25,000 per eligible employer.
To qualify as an eligible employer, the employer must satisfy each of the following conditions:
- an individual (other than a trust)
- a CCPC that is eligible for the small business deduction (i.e., simplified, a CCPC that, in its last taxation year ending before March 18, 2020: (i) had a positive annual business limit for purposes of claiming the small business deduction; and (ii) was not part of an associated group that had at least $15 million in taxable capital);
- a registered charity;
- a partnership all of the members (direct or through one or more other partnerships) of which are one or more of the foregoing; or
- a non-profit organization exempt from tax pursuant to Part I because of paragraph 149(1)(l);
- have an existing business number and payroll program account with the CRA on March 18, 2020; and
- pay salary, wages, bonuses, or other remuneration to an eligible employee.
Interestingly, eligible employers that are CCPCs do not need to share the $25,000 maximum with other CCPCs with which they are associated.
An “eligible employee” for purposes of this subsidy is defined to mean an individual who is employed in Canada.
The subsidy, which does not require an application by an eligible employer, is received by the eligible employer simply by deducting the amount of the subsidy from payroll remittances payable to the CRA in respect of federal, provincial or territorial income tax. However, the subsidy cannot be claimed against remittances of Canada Pension Plan (“CPP”) contributions or Employment Insurance (“EI”) premiums, which must be paid in full. The subsidy is also not available to offset payroll remittances to Revenu Québec. However, where the amount of the subsidy exceeds the employer’s payroll remittances in respect of the specified period, the employer can reduce future payroll remittances to benefit from the subsidy. Further, eligible employers that have not reduced their payroll remittances by the full amount of their subsidy will either receive the remaining subsidy as a payment from the CRA at the end of the year or have the subsidy transferred to next year’s remittance.
The amount of the subsidy will be includable as income of the employer for tax purposes in the year in which it is received. The amount of the subsidy also will reduce the amount of remuneration eligible for other federal tax credits calculated on the same remuneration and, as stated above, will reduce the amount of the CEWS.
While the CRA is currently in the process of updating its reporting requirements to include information as to this subsidy, eligible employers will need to keep information to support their subsidy calculations, including:
- total remuneration paid from March 18, 2020 to June 19, 2020;
- federal, provincial and territorial income tax deducted from that remuneration; and
- the number of eligible employees employed in that period.