On Saturday, April 11, 2020, the House of Commons and the Senate approved the $73-billion wage subsidy program aimed at helping businesses survive the economic downturn created by the COVID-19 pandemic. Under A second Act respecting certain measures in response to COVID-19 (introduced as Bill 14), the federal government will pay companies a wage subsidy under the Canada Emergency Wage Subsidy of 75 percent of the total eligible remuneration paid during the eligible period. To qualify for the subsidy, eligible employers must see a decline in revenues of at least 15 percent in March 2020, and at least 30 percent in April 2020 and May 2020.
The program along with the 10 percent temporary wage subsidy will cost the federal government $73 billion.
Let’s explore how the new Canada Emergency Wage Subsidy as of April 11, 2020 works. Information on the 10 percent temporary wage subsidy is explained after.
1. Canada Emergency Wage Subsidy
Purpose of the Canada Emergency Wage Subsidy
According to the government, the Canada Emergency Wage Subsidy aims to prevent further job losses, encourage employers to re-hire workers previously laid off as a result of COVID-19, and help better position Canadian companies and other employers to more easily resume normal operations following the crisis. The government added, that “while the Government has designed the wage subsidy to provide generous and timely financial support to employers, it has done so with the expectation that employers will do their part by using the subsidy in a manner that supports the health and well-being of their employees.”
What is an eligible employer?
The program is available to all Canadian employers (including individuals, taxable corporations, and partnerships consisting of eligible employers as well as non-profit organizations and registered charities), regardless of the size of their workforce, who have seen at least 15 percent of their revenue decrease in March 2020 and 30 percent for the months of April to June 2020 (see below for details). In applying for the subsidy, employers are required to attest to the decline in revenue.
Public bodies (i.e., municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals) are not eligible for this subsidy.
What is an eligible employee?
An eligible employee is an individual who is employed in Canada.
Eligibility for the CEWS of an employee’s remuneration will be available to employees other than those who have been without remuneration for 14 or more consecutive days in the eligibility period, i.e., from March 15 to April 11, from April 12 to May 9, or from May 10 to June 6.
What is the amount of the Canada Emergency Wage Subsidy (CEWS)?
The subsidy amount for a given employee on eligible remuneration paid for the period between March 15 and June 6, 2020 would be the greater of:
- 75 percent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
- the amount of remuneration paid, up to a maximum benefit of $847 per week or 75 percent of the employee’s pre-crisis weekly remuneration, whichever is less.
In effect, employers may be eligible for a subsidy of up to 100 percent of the first 75 percent of pre-crisis wages or salaries of existing employees. These employers would be expected where possible to maintain existing employees’ pre-crisis employment earnings.
Employers must make their best effort to top-up employees’ salaries to bring them to pre-crisis levels. No guidance has been provided at this time on how the government will measure best efforts or what the consequences would be for those who don’t make them. The pre-crisis remuneration for a given employee would be based on the average weekly remuneration paid between January 1 and March 15 inclusively, excluding any seven-day periods in respect of which the employee did not receive remuneration.
Employers will also be eligible for a subsidy of up to 75 percent of salaries and wages paid to new employees.
A special rule will apply to employees that do not deal at arm’s length with the employer. The subsidy amount for such employees 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 per cent of the employee’s pre-crisis weekly remuneration. The subsidy would only be available in respect of non-arm’s length employees employed prior to March 15, 2020.
There would be no overall limit on the subsidy amount that an eligible employer may claim.
What are eligible employee remunerations?
Baseline remuneration, in respect of an eligible employee of an eligible employer, means the average weekly eligible remuneration paid to the eligible employee by the eligible employer 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.
Eligible remuneration may include salary, wages, and other remuneration like taxable benefits. 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, it does not include severance pay, retiring allowances, or items such as stock option benefits or the personal use of a corporate vehicle.
The usual treatment of tax credits and other benefits provided by the government would apply. Assistance received under either wage subsidy would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
Calculating the employer’s revenues
An employer’s revenue for this purpose would be its revenue in Canada earned from arm’s-length sources. Revenue would be calculated using the employer’s normal accounting method, and would exclude revenues from extraordinary items and amounts on account of capital. employers would be allowed to calculate their revenues under the accrual method or the cash method, but not a combination of both. Employers would select an accounting method when first applying for the CEWS and would be required to use that method for the entire duration of the program.
For registered charities and non-profit organizations, the calculation will include most forms of revenue, excluding revenues from non-arm’s length persons. These organizations would be allowed to choose whether or not to include revenue from government sources as part of the calculation. Once chosen, the same approach would have to apply throughout the program period.
Special rules for the computation of revenue would be provided to take into account certain non-arm’s length transactions, such as where an employer sells all of its output to a related company that in turn earns arm’s length revenue. As well, affiliated groups would be able to compute revenue on a consolidated basis.
Eligibility period
According to the guidelines, eligibility would generally be determined by the change in an eligible employer’s monthly revenues, year-over-year, for the calendar month in which the period began. However, all employers are allowed to calculate their change in revenue using an alternative benchmark to determine their eligibility. This would provide more flexibility to employers for which the general approach may not be appropriate, including high-growth firms, sectors that faced difficulties in 2019, non-profits and charities, as well as employers established after February 2019. Under this alternative approach, employers would be allowed to compare their revenue using an average of their revenue earned in January and February 2020. Employers would select the general year-over-year approach or this alternative approach when first applying for the CEWS and would be required to use the same approach for the entire duration of the program.
Moreover, qualifying period means:
(a) the period that begins on March 15, 2020 and ends on April 11, 2020, with a reference period for eligibility of March 2020 over March 2019 or average of January and February 2020, with a required reduction in revenue of 15 percent;
(b) the period that begins on April 12, 2020 and ends on May 9, 2020, with a reference period for eligibility of April 2020 over April 2019 or average of January and February 2020, with a required reduction in revenue of 30 percent;
(c) the period that begins on May 10, 2020 and ends on June 6, 2020; with a reference period for eligibility of May 2020 over May 2019 or average of January and February 2020, with a required reduction in revenue of 30 percent;or
(d) a prescribed period that ends no later than September 30, 2020.
In order to provide certainty to employers, once an employer is found eligible for a specific period, the employer would automatically qualify for the next period. The government provided the following examples:
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 percent lower than $120,000, ABC Inc. would be eligible for the CEWS for the first and second claiming period. To be eligible for the third claiming period, ABC Inc. revenues would have to be $84,000 or less for the month of April or May (that is, 30 percent lower than $120,000).
The amount of wage subsidy received by the employer in a given month would be ignored for the purpose of measuring year-over-year changes in monthly revenues.
For example, if revenues in March 2020 were down 20 percent compared to March 2019, the employer would be allowed to claim the CEWS (as calculated above) on remuneration paid between March 15 and April 11, 2020, as well as between April 12 to May 9. Alternatively, this employer could use its average revenue from the months of January and February 2020, instead of March 2019, to determine if it is eligible for the CEWS. Once an approach is chosen, the employer would have to apply it throughout the program period.
Refund for certain payroll contributions
The government expanded the CEWS by introducing a new 100 percent refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund would cover 100 percent of employer-paid contributions for eligible employees for each week throughout which those employees are on leave with pay and for which the employer is eligible to claim for the CEWS for those employees.
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. This refund would not be available for eligible employees that are on leave with pay for only a portion of a week.
This refund would not be subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the CEWS. There would be no overall limit on the refund amount that an eligible employer may claim.
For greater certainty, employers would be required to continue to collect and remit employer and employee contributions to each program as usual. Eligible employers would apply for a refund, as described above, at the same time that they apply for the CEWS.
Special rules and interaction with other programs
The 10 percent Temporary Wage Subsidy (TWS) is still available, it’s important for employers to determine which program applies. Employers who meet the requirements for the CEWS can also claim the TWS but, any benefit from the TWS would generally reduce the amount available to be claimed under the CEWS.
Employers who are ineligible for the CEWS can claim the TWS, as long as that they meet the conditions for that program, which have not changed.
Any EI benefits received by employees through the Work-Sharing program will reduce the benefit that their employer is entitled to receive under the CEWS.
Eligibility for the CEWS of an employee’s remuneration will be available to employees other than those who have been without remuneration for 14 or more consecutive days in the eligibility period, i.e., from March 15 to April 11, from April 12 to May 9, or from May 10 to June 6.
The usual treatment of tax credits and other benefits provided by the government will apply. As a consequence, the wage subsidy received by an employer would be considered government assistance and be included in the employer’s taxable income.
Assistance received under either wage subsidy would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.
Record keeping
Employers will have to keep records demonstrating their reduction in arm’s-length revenues and remuneration paid to employees. Employers will not be expected to submit any paperwork to the CRA at the time of the application but may need to later to verify its attestation in the event of an audit by the CRA.
Warning from the government and penalties
The government is warning participating employers to pay the balance of employee wages. There will be “severe penalties” if these funds are not applied to employees or employers engage in other fraud.
The employer will be required to repay amounts paid under the Canada Emergency Wage Subsidy if they do not meet the eligibility requirements and pay their employees accordingly. Penalties may apply in cases of fraudulent claims.
In addition, anti-abuse rules will ensure that the subsidy is not inappropriately obtained and to ensure that employees are paid the amounts they are owed. The government new offences that will apply to individuals, employers or business administrators who provide false or misleading information to obtain access to this benefit or who misuse any funds obtained under the program. The penalties may include fines or even imprisonment. The CEWS will be denied to an employer where: (a) a person or partnership not dealing at arm’s length with the employer enters into a transaction or participates in an event (or a 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 employer for a reference period; and (b) it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause the employer to qualify for the CEWS.
Employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 percent of the value of the subsidy claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed.
Example of how the CEWS benefits an employer
Maude and Stéphane own a corporation that operates an automobile repair shop in Saint Boniface, Manitoba. They are working full time, each drawing a salary of $1,300 per week, and have three part-time employees, each earning $800 per week, for a total weekly payroll of $5,000. Maude and Stéphane have reduced their opening hours due to decreased demand for their services. They had initially laid off their employees, but they have now decided to re-hire them following the announcement of the Canada Emergency Wage Subsidy. Their employees are not being asked to report to work during this challenging period.
Maude and Stéphane are now keeping their employees on the payroll, paying them 75 percent of their pre-crisis salary ($600 per week). Maude and Stéphane would be eligible for a weekly wage subsidy of $3,494 ($847 for each of themselves and $600 for each of their employees). Maude and Stéphane would also be eligible for a 100-percent refund of their employer-paid contributions to Employment Insurance and the Canada Pension Plan in respect of their employees, providing an additional benefit of up to $124 per week.
At the end of each claiming period, Maude and Stéphane would submit an application through the Canada Revenue Agency portal, attesting that their decline in revenues in each month is sufficient to qualify, when compared to the average of January and February. They would also report the total remuneration paid to themselves and their furloughed employees during the month. As Maude and Stéphane have access to direct deposits with the Canada Revenue Agency, they would receive their subsidy shortly after each application.
How to apply for the CEWS
Eligible employers will be able to apply for the CEWS through the Canada Revenue Agency’s My Business Account portal as well as a web-based application. More details about the application process will be made available shortly.
2. 10 percent wage subsidy
On March 25, 2020, the federal government announced the passing of the $82 billion aid package by the House of Commons for a period of six months. An Act respecting certain measures in response to COVID-19 (introduced as Bill C-13) was approved by the Senate and received Royal Assent the same day. The new law has several measures that impact the workplace including providing eligible small employers with a temporary wage subsidy for a period of three months. As per the law (Bill 13) and government guidelines, the wage subsidy works the following way, as outlined below.
Regular remittance principle
As an employer, you are required to make source deductions before paying wages (and most other forms of remuneration) to your employees. You generally must deduct and withhold amounts for income taxes, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions, and Employment Insurance (EI) premiums. You must then pay these withholdings, along with employer CPP/QPP contributions and EI premiums, to the Canada Revenue Agency (CRA) (and Revenu Quebec) by the due date. If you make payments quarterly or monthly, the payments are due by the 15th of the following month. Some employers who must make accelerated remittances have to remit earlier.
What is the 10 percent wage subsidy?
This Temporary Wage Subsidy for Employers allows eligible employers to reduce payroll remittances made to the CRA only.
The temporary 10 percent wage subsidy for employers is a three-month measure that will allow eligible employers to reduce the amount of payroll deductions required to be remitted to the Canada Revenue Agency (CRA). The subsidy is calculated when the employer remits federal, provincial or territorial tax amounts to the CRA.
Under the new law (Bill 13), employers that qualify for the wage subsidy the employer can choose to reduce its payroll income tax remittances to the CRA by the amount of the subsidy. The reduction of tax remittances can begin on the employer’s next remittance date (April 15th if the employer is a quarterly or monthly filer.) The amount of the wage subsidy will be included in the employer’s income and taxed in the year it is received.
You can reduce the income tax on payroll remittances, up to $1,375 for each eligible employee and to a maximum of $25,000 total per employer, for all remuneration paid from March 18, 2020 to June 19, 2020.
The employer does not need to apply for the subsidy. Payroll remittances are not subject to deferral as part of the tax measures. You must continue remitting payroll deductions by your remittance due date.
Eligibility for the 10 percent wage subsidy
The temporary wage subsidy for employers is a three-month measure that will allow eligible employers to reduce the amount of payroll deductions required to be remitted to the Canada Revenue Agency (CRA).
A small business is eligible if they are:
- are a non-profit organization, registered charity, or a Canadian-controlled private corporation (CCPC);
- 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 employee.
CCPCs are only eligible for the subsidy if their taxable capital employed in Canada for the preceding taxation year, calculated on an associated group basis, is less than $15 million.
A Canadian-controlled private corporation for the purposes of this provision is that
- would have a business limit for its last taxation year that ended before the start of the eligible period greater than nil, if the amount determined for paragraph 125(b) were deemed to be nil, or
- if the corporation does not have a taxation year that ended before the start of the eligible period, would meet the condition in clause (A) if its taxation year ended immediately before the start of the eligible period,
- an individual (other than a trust),
- a partnership, all of the members of which are described in subparagraphs (i) to (iii) or (v),
- a person exempt from tax under Part I because of paragraph 149(1), and
- a registered charity.
If you did not pay salary, wages, bonuses, or other remuneration to an eligible employee from March 18, 2020, to June 19, 2020, you cannot receive the subsidy, even if you are an eligible employer.
How much can the employer receive and how does it work?
The subsidy is equal to 10 percent of the remuneration you pay from March 18, 2020, to June 19, 2020, up to $1,375 for each eligible employee and to a maximum of $25,000 total per employer.
Once the employer has calculated the subsidy, he or she can reduce his or her current remittance of federal, provincial, or territorial income tax that the employer sends to the CRA by the amount of the subsidy.
The subsidy does not affect normal deductions at the source of income tax, Canada Pension Plan contributions, and Employment Insurance premiums from salary, wages, bonuses, or other remuneration paid to employees. The subsidy is only calculated when the employer remits these amounts to the CRA.
If the employer is eligible for the wage subsidy, but choose not to reduce payroll remittances during the year, the employer should calculate the temporary wage subsidy on remuneration paid between March 18, 2020, and June 20, 2020. The employer can then ask for the subsidy to be paid at the end of the year, or transferred to the next year’s remittance.
How is the subsidy calculated?
The subsidy must be calculated manually. The CRA will not automatically calculate the allowable subsidy.
The subsidy calculation is based on the total number of eligible employees employed at any time during the three-month period.
For example, the employer has 5 eligible employees earning monthly salaries of $4,100 for a total monthly payroll of $20,500. The employer’s wage subsidy for the month will be 10% of $20,500, or $2,050. For the three-month period, if all the employer’s payroll information remains the same in each month, the employer will pay $61,500 of remuneration. Therefore, 10% of the remuneration the employer pays in the three-month period is $6,150.
Since this amount is below the maximum allowable amount of $6,875 ($1,375 x 5 employees), the employer’s total wage subsidy for the three-month period will be $6,150.
The employer cannot reduce his or her remittance of Canada Pension Plan contributions or Employment Insurance premiums, just the federal, provincial, or territorial income tax. For example, if you deducted $2,500 of income tax from your employees’ pay and calculated a subsidy of $2,050, you would reduce your current payroll remittance of federal, provincial, or territorial income tax by $2,050. You would remit $450 of income tax to the CRA. The remaining $2,050 that you keep would represent your subsidy.
If the income taxes the employer deducts are not sufficient to offset the value of the subsidy in a specific period, the employer can reduce future remittances to benefit from the subsidy. This includes reducing remittances that may fall outside of the application period for the wage subsidy (after June 20, 2020).
If you pay tax-exempt salary, wages, bonuses, or other remuneration to an eligible employee, you can still calculate the Temporary Wage Subsidy on remuneration paid from March 18, 2020 to June 19, 2020. At the end of the year, the CRA will pay the amount to you.
Record keeping
The employer will need to keep information to support his or her subsidy calculation. This includes:
- the total remuneration paid between March 15, 2020, and June 20, 2020;
- the federal, provincial, or territorial income tax that was deducted from that remuneration; and
- the number of employees paid in that period.
Is the subsidy considered taxable income?
Yes. If you receive the subsidy, you have to report the total amount as income in the year in which the subsidy is received.
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