COVID-19 – Canada Emergency Wage Subsidy (CEWS) Expansion

COVID-19 – Canadian Tax and Business News, release #17 (Updated July 22, 2020)

Our COVID-19 Canadian Tax and Business News updates are our way of informing our clients, friends and business associates with recent information that may help businesses and individuals while coping with the outcomes from the COVID-19 pandemic.  

Our goal is to monitor the news and release relevant information as it becomes available.

“In order to carry a positive action we must develop here a positive vision” 

– Dalai Lama

The summary below is based on our understanding and interpretation of the announcements made by the government. The information below is in summary form and subject to change until the proposals are passed as legislation. Contact one of our professionals to discuss these matters in the context of your situation before acting upon such information.

CEWS Expansion

The CEWS was initially put into place for a 12-week period from March 15, 2020 to June 6, 2020 to provide eligible employers with a 75% wage subsidy up to a maximum of $847 per week per employee. On July 17, 2020, Finance Minister Bill Morneau announced details on the proposed expansion of the CEWS until November 21, 2020 with the possibility of a further extension to December 19, 2020. The proposed expansion divides the program into two parts consisting of a “base subsidy” and a “top-up subsidy”. These proposed changes will be applicable to the claim period beginning July 5, 2020 (claim period 5) and through to November 21, 2020 (claim period 9). Updated July 22, 2020 – Claims for all periods must be filed by January 31, 2021. The summary is below is based on draft legislation introduced by the Federal government which requires Royal Assent before becoming law.

Base Subsidy

The Base Subsidy is available to eligible employers impacted by the COVID-19 crisis and is applicable to wages paid to active employees. It is not available to furloughed employees (the proposed provisions for furloughed employees is discussed later in this article). Eligible employers, for the purpose of the base subsidy, includes employers with any revenue reduction. The previous minimum 30% revenue reduction requirement has been eliminated.  As a result, even a 1% revenue decline will be sufficient to qualify for the base subsidy. 

The base subsidy is determined using a “specified rate” applied to the amount of remuneration paid up to $1,129 per week (note this wage cap is the same cap applied in the original version of this program as eligible employers would max out on the $847 weekly once eligible remuneration exceeded the $1,129 threshold). The specified rate applicable will depend on the level of revenue decline and varies throughout the subsequent claim periods as they are phased out over time. The table below outlines the rate structure of the base subsidy.

For example, an eligible employer with a revenue decline of 10% in Period 5 will have a base subsidy rate of 12% (10% revenue decline*1.2). An eligible employer with a 60% revenue decline in Period 5 will have a base subsidy rate of 60%.

Under the original CEWS program, eligible employers were able to utilize the accrual method of accounting to determine revenues for purposes of determining their revenue decline. Alternatively, they also had to ability to elect to use the cash method to determine revenues. In either case, eligible employers had to use the same accounting method throughout the entire program. Update July 22, 2020 – The original release of this e-blast noted that as part of the draft legislative amendments, the Federal government proposed that entities that used the cash method to determine their revenue decline previously could now elect to use the accrual method for claim periods 5 through 9. That statement was incorrect. To clarify, businesses that previously elected to use the cash method in claim periods 1 through 4 must continue to do so for claim periods 5 through 9. However, it should be noted that the draft legislative amendments will allow farmers, fishers, and self-employed commission agents who ordinarily use the cash accounting method to elect to use the accrual method to determine their revenue decline for purposes of the CEWS.

When determining the revenue decline for purposes of the base subsidy, employers can utilize the general approach (year over year comparison) or the alternative benchmark (average of January and February 2020). Whichever approach an employer chooses will apply from claim period 5 and onwards. Note that employers do not have to use the same method they used in claim periods 1 through 4. The table below outlines the relevant period for determining the revenue decline for the base subsidy.

As a result of the revenue periods noted above, an eligible employer can utilize the prior month’s revenue decline to determine the applicable subsidy rate for a current wage subsidy claim period. For example, assume an eligible employer has a 40% revenue decline in June 2020 and a 20% revenue decline in July 2020. When determining the applicable wage subsidy rate for claim period 5, the eligible employer can utilize the 40% June decline to derive a wage subsidy rate of 48% for the claim period. This is a better result compared to a 24% wage subsidy rate if the July 2020 revenue drop of 20% was used. However, in this case, the eligible employer would be able to rely on the “safe harbour provisions” to bump up the wage subsidy rate to 75%. The safe harbour provision applies to periods 5 and 6 and is discussed further below.

Top Up Subsidy

The second part of the expanded CEWS is a 25% top-up for employers most adversely impacted by the COVID-19 pandemic. Eligible employers that experience a 3-month average revenue drop of more than 50% would qualify for the top-up subsidy. The top-up rate is equal to 1.25 times the average revenue drop in excess of 50% and is capped at 25%. For example, an employer with a 65% 3-month average revenue drop will be entitled to a top up of 18.75% (15% excess*1.25=18.75%). The full top-up of 25% is achieved with a 3-month average revenue decline of 70%.

The top-up is determined based on the revenue drop when comparing revenues in the 3 preceding months to the same months in the prior year. Similar to the base subsidy, an alternative approach can also be used which compares the average monthly revenue in the preceding 3 months to the average monthly revenue in January and February 2020. It should be noted that the same revenue decline approach must be used when calculating both the base and top-up subsidy. Therefore, an employer cannot use the general approach when determining revenue decline for purposes of the base subsidy and the alternative benchmark approach when determining the revenue decline for the top-up subsidy or vice versa. It will be imperative for an employer to analyze the revenue decline under all different scenarios to ensure they are receiving the maximum subsidies under both parts of the program.

The table below outlines the relevant period for determining the revenue decline for the top-up subsidy.

Similar to the base subsidy, the top-up subsidy rate is applied to eligible remuneration paid up to a weekly maximum of $1,129. As such, the maximum weekly top up wage subsidy is $282.25 ($1,129*25%) assuming an employer qualifies for the maximum top-up. The table below outlines the combined maximum an employer can receive under the base and top-up subsidy programs.

Safe Harbour Rules

The proposed CEWS expansion also contains a safe harbour provision for claim periods 5 and 6 which provides eligible employers, with a revenue decline of 30% or more, to be entitled to at least a 75% CEWS rate. This will ensure the entitlement is not less than what an employer could have received under the original provisions of the program. The rate can increase to 85% if an employer is eligible for the top-up as discussed above.

Furloughed Employees

For claim periods 5 and 6, the CEWS calculation for furloughed employees will be calculated in the same manner as it was under the original provisions of the program. However, beginning in claim period 7, CEWS will be adjusted to align with benefits provided through the Canada Emergency Response Benefit (CERB) and Employment Insurance (EI). The employer portion of CPP and EI premiums for these employees will continue to be refunded to the employer. The provisions for furloughed employees will be available to eligible employers that qualify for the expanded CEWS.

Eligible Employees

Effective for claim period 5 and subsequent periods, employees that are without remuneration for 14 or more consecutive days in a claim period will no longer be excluded from the CEWS.

Eligible Remuneration & Baseline Remuneration

There are no proposed changes to the definition of eligible remuneration under the expanded CEWS program. However, there will be some changes in how the wage subsidy will be calculated. Baseline remuneration will no longer have to be considered for active arm’s length employees. As such, the amount of the CEWS will be solely based on the actual remuneration for the claim period. This can result in a lower wage subsidy amount compared to the original CEWS program as the original calculation allowed for a 100% recovery when employee’s were paid 75% of their baseline. This is no longer the case under the expanded program as the subsidy is now calculated as eligible remuneration multiplied by the applicable “specified rate”.

For non-arm’s length employees that were employed prior to March 16, 2020, the wage subsidy will be based on the lesser of the non-arm’s length employee’s weekly remuneration and baseline remuneration, up to a weekly maximum of $1,129.

In determining the baseline remuneration for a non-arm’s length employee, it is defined differently for period 4 compared to periods 5 through 9. For period 4, baseline remuneration is defined as the weekly average remuneration from January 1 to March 15, 2020; from March 1, 2019 to May 31, 2019; or from March 1, 2019 to June 30, 2019. For periods 5 through 9, baseline remuneration is defined as the average weekly remuneration from January 1, 2020 to March 15, 2020 or from July 1, 2019 to December 31, 2019. In either case, any period of 7 or more consecutive days without remuneration will be excluded.

Resources

News Release – Redesigned CEWS

Backgrounder – CEWS Expansion

As we all try to stay safe, we need to remind ourselves business will get back to normal but in the meantime let’s all do our part to get to normal as soon as we can. If you have any questions or require further information, don’t hesitate to reach out to us.