COVID-19 – Canadian Tax and Business News, release #4
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.
“If you stick around long enough you’ll see everything in markets, and it [took] me to 89 years of age to throw this one into the experience” — Warren Buffet
Temporary Wage Subsidy for Employers
The Canada Revenue Agency (CRA) quietly posted additional details on the temporary wage subsidy announced by the Federal government as part of the $27 billion direct support emergency response package. No formal or official announcement was released but the guidance is posted on the CRA website. A link is provided at the end of this release. It should be noted that the guidance is not law and we could see other changes or requirements when the draft legislation is introduced.
Wage Subsidy Eligibility
As announced in our previous instalments of this series, non-profit organizations, charities and Canadian-controlled private corporations (CCPC) are eligible for the subsidy. It was unclear though if any CCPC’s would be excluded. Sole proprietorships and partnerships are excluded from the wage subsidy.
The CRA has clarified that CCPC’s are only eligible for the subsidy if their taxable capital for the preceding tax year, calculated on an associated group basis, is less than $15 million. A corporation’s taxable capital is, in general, the total of its shareholder’s equity and loans and advances to the corporation less investments in other corporations.
Calculation of the Subsidy
Each qualifying small employer will have their own $25,000 subsidy limit. This is welcoming as associated groups will not have to share the $25,000 limit as initially anticipated. The subsidy will be equal to 10% of remuneration paid. The subsidy is also based on the number of employees and is capped at $1,375. For example, a business with 5 employees is only eligible to receive a maximum subsidy of $6,875. Employers can reduce remittances for payroll paid between March 18, 2020 and June 20, 2020. As a result, most employers will see the benefit when remitting March withholdings on April 15, 2020.
The CRA also clarified that the subsidy can only be applied against income tax withholdings that are to be remitted. An employer cannot reduce remittances of Canada Pension Plan contributions or Employment Insurance premiums. In our Covid-19 #3 Business and Tax News release, our previous understanding was that the subsidy would apply to all payroll remittances.
As an example, we will continue with the fact pattern from our example in our Covid-19 #3 release. In that example, we assumed $6,000 was paid to an employee in April 2020 and the required amount to be remitted to the CRA for the month of April 2020 is $2,000 for this employee (including employee and employer portion of withholdings). As we initially calculated, the employer will only be required to remit $1,400 as they will be eligible for a $600 subsidy for this employee ($6,000*10%). However, the calculation needs to be taken a step further. Assuming $1,200 out of the total $2,000 required remittance represented income taxes. In this case, since the tax withheld of $1,200 is greater than the $600 subsidy, the full amount of the subsidy is available.
What happens if the taxes withheld were less than the $600 the corporation was eligible for in terms of the subsidy? The CRA has clarified that any unused portion of the otherwise eligible subsidy, can be used in a future remittance. There is also the option to have the subsidy paid out at the end of the tax year or transferred to next year’s remittance. We are unsure as to why the government has made this an option as it defeats the purpose of the subsidy if employers are not going to receive it when they need it the most.
This measure is also disappointing as it creates the possibility for the subsidy not to be fully absorbed if there are not enough income tax withholdings to be reduced. Furthermore, having the subsidy capped per employee hinders smaller employers for receiving the full benefit of the subsidy as they may not have enough employees to reap the full benefits. The government intended this subsidy to help keep employees on the payroll but at $1,375 per employee, it will not likely achieve its intended purpose.
Taxation and Books and Records
Unfortunately, the subsidy will be considered taxable income to eligible corporations. It will be taxed as part of their 2020 income. Furthermore, the CRA requires employers keep sufficient information to support the remuneration paid, amounts withheld and number of employees during the period as they will likely verify eligibility at some point in the future.
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.