On July 27, 2020 the federal government passed new legislation, modifying the existing Canada Emergency Wage Subsidy (“CEWS”) program. Highlights of the changes include:
- Extending the program until December 19, 2020, including redesigned program details until November 21, 2020;
- Making the subsidy accessible to a broader range of employers by introducing a base subsidy available to all eligible employers that are experiencing a decline in revenues, including employers with a revenue decline of less than 30 per cent, with the subsidy amount varying depending on the scale of revenue decline;
- Introducing a top-up subsidy of up to an additional 25 per cent for employers that have suffered a decline in revenues exceeding 50%;
- Provide certainty to employers that have already made business decisions for July and August by ensuring they would not receive a subsidy rate lower than they would have had under the previous rules; and
- Addressing certain technical issues with respect to the CEWS.
Extension of CEWS Program
The CEWS program has been extended for an additional five periods (periods 5 to 9) and will cover the following dates:
- July 5 – August 1 (period 5)
- August 2 – August 29 (period 6)
- August 30 – September 26 (period 7)
- September 27 – October 24 (period 8)
- October 25 – November 21 (period 9)
The legislation also provided for the extension of the program for a period that will end no later than December 31, 2020. The government has stated that the subsidy will continue until December.
Determining Decline in Revenues
For periods 5 to 9, the reference periods used to determine the revenue decline percentages for both the base subsidy and the top-up subsidy can be chosen by an eligible employer as follows:
- a “general” approach based on current monthly revenues compared to the same months’ revenues in the prior year; or
- an “alternative” approach based on current monthly revenues compared to the average of January and February 2020 revenues.
An eligible employer must use the same reference period approach to determine its revenue drop percentage for periods 5 to 9, and this approach must be used for determining both the base CEWS and the top-up CEWS. Note that an employer does not have to continue using the same approach that it had used previously for periods 1 to 4. Employers that have elected to use the alternative approach for the first 4 periods will be able to either maintain that election for Period 5 and onward or revert to the general approach. Similarly, employers that have used the general approach for the first 4 periods would be able to either continue with the general approach or elect to use the alternative approach for Period 5 and onward. Whichever approach they choose will apply for Period 5 and onward and will apply to the calculation of the base subsidy and the top-up subsidy.
While a change in eligible employer’s revenues for purposes of the base subsidy is measured on a month by month basis, for the purpose of the top-up subsidy, eligibility will generally be determined by the change in an eligible employer’s revenues for a 3-month period.
Reference periods for the base subsidy
|Period 5 || July 5 to August 1, 2020 || July 2020 over July 2019 or June 2020 over June 2019 ||July 2020 or June 2020 over average of January and February 2020 |
|Period 6 ||August 2 to August 29, 2020 ||August 2020 over August 2019 or July 2020 over July 2019 ||August 2020 or July 2020 over average of January and February 2020 |
|Period 7||August 30 to September 26, 2020 ||September 2020 over September 2019 or August 2020 over August 2019 ||September 2020 or August 2020 over average of January and February 2020 |
|Period 8||September 27 to October 24, 2020 ||October 2020 over October 2019 or September 2020 over September 2019 ||October 2020 or September 2020 over average of January and February 2020 |
|Period 9||October 25 to November 21, 2020 ||November 2020 over November 2019 or October 2020 over October 2019 ||November 2020 or October 2020 over average of January and February 2020 |
|Reference periods for the top-up Subsidy|
|Claim period||General approach||Alternative approach|
|Period 5||July 5 to August 1, 2020||April to June 2020 over April to June 2019||April to June 2020 average over January and February 2020 average*|
|Period 6||August 2 to August 29, 2020||May to July 2020 over May to July 2019||May to July 2020 average over January and February 2020 average*|
|Period 7||August 30 to September 26, 2020||June to August 2020 over June to August 2019||June to August 2020 average over January and February 2020 average*|
|Period 8||September 27 to October 24, 2020||July to September 2020 over July to September 2019||July to September 2020 average over January and February 2020 average*|
|Period 9||October 25 to November 21, 2020||August to October 2020 over August to October 2019||August to October 2020 average over January and February 2020 average*|
* The calculation will equal the average monthly revenue over the 3 months of the reference period divided by the average revenue for the months of January and February 2020.
Calculation of Base Subsidy
Effective July 5, 2020 (i.e., Period 5 and subsequent periods), employers will be eligible for a base subsidy amount for active employees. This base subsidy will be a specified rate, applied to the amount of remuneration paid to the employee for the eligibility period, on remuneration of up to $1,129 per week. The rate of the base subsidy will now vary depending on the level of revenue decline, and its application will be extended to employers with a revenue decline of less than 30 per cent. This expansion will mean that all eligible employers with a revenue decline would now qualify for CEWS support.
The specified rate would be determined based on the change in an eligible employer’s monthly revenues, as described further below. The maximum base CEWS rate would be provided to employers with a revenue drop of 50 per cent or more. Employers with a revenue drop of less than 50 per cent would be eligible for a lower base subsidy rate.
The maximum base CEWS rate will be gradually reduced from 60 per cent in Periods 5 and 6 (July 5 to August 29) to 20 per cent in Period 9 (October 25 to November 21).
Rate Structure of the Base Subsidy
July 5 – August 1
|Period 6*: August 2 – August 29||Period 7: August 30 – September 26||Period 8: September 27 – October 24||Period 9:|
October 25 – November 21
|Maximum weekly benefit per employee||Up to $677||Up to $677||Up to $565||Up to $452||Up to $226|
|50% and over||60%||60%||50%||40%||20%|
|0% to 49%||1.2 x revenue drop|
(e.g., 1.2 x 20% revenue drop = 24% base CEWS rate)
|1.2 x revenue drop|
(e.g., 1.2 x 20% revenue drop = 24% base CEWS rate)
|1.0 x revenue drop|
(e.g., 1.0 x 20% revenue drop = 20% base CEWS rate)
|0.8 x revenue drop|
(e.g., 0.8 x 20% revenue drop = 16% base CEWS rate)
|0.4 x revenue drop|
(e.g., 0.4 x 20% revenue drop = 8% base CEWS rate)
* In Periods 5 and 6, employers who would have been better off in the CEWS design in Periods 1 to 4 will be eligible for a 75% wage subsidy if they have a revenue decline of 30% or more. As described further below (see Safe harbour rule for Periods 5 and 6).
A top-up subsidy of up to 25 per cent will be available to employers that were the most adversely impacted by the pandemic. Generally, an eligible employer’s top-up subsidy will be determined based on the revenue drop experienced when comparing revenues in the preceding 3 months to the same months in the prior year. Under the alternative approach to the calculation of baseline revenues, an eligible employer’s top-up CEWS will be determined based on the revenue drop experienced when comparing average monthly revenue in the preceding 3 months to the average monthly revenue in January and February 2020.
- For example, if an employer had $600,000 in revenue between April 1 and June 30, 2019, and $210,000 in revenue between April 1 and June 30, 2020, the employer would have a 3-month revenue drop of 65 per cent.
- Under the alternative approach, if an employer had $400,000 in revenue between January 1 and February 29, 2020 (average monthly revenue of $200,000), and $210,000 in revenue between April 1 and June 30, 2020 (average monthly revenue of $70,000), the employer would have a 3-month revenue drop of 65 per cent.
Employers that have experienced a 3-month average revenue drop of more than 50 per cent will receive a top-up subsidy rate equal to 1.25 times the average revenue drop that exceeds 50 per cent, up to a maximum top-up subsidy rate of 25 per cent, which is attained at a 70‑per‑cent revenue decline. As with the base subsidy rate, the top-up subsidy rate will apply to remuneration of up to $1,129 per week. The top-up subsidy rate for selected average revenue drop levels is illustrated in the table below.
Rate Structure of the Top-Up Subsidy
|3-month average revenue drop||Top-up CEWS rate||Top-up calculation = 1.25 x (3-month revenue drop – 50%)|
|70% and over||25%||1.25 x (70%-50%) = 25%|
|65%||18.75%||1.25 x (65%-50%) = 18.75%|
|60%||12.5%||1.25 x (60%-50%) = 12.5%|
|55%||6.25%||1.25 x (55%-50%) = 6.25%|
|50% and under||0.0%||1.25 x (50%-50%) = 0.0%|
The overall CEWS rate will be equal to the top-up CEWS rate plus the base CEWS rate.
Safe Harbour Rule for Periods 5 and 6
For Periods 5 and 6, an eligible employer will be entitled to a CEWS rate not lower than the rate that they would be entitled to if their entitlement were calculated under the CEWS rules that were in place for Periods 1 to 4. This means that in Periods 5 and 6, an eligible employer with a revenue decline of 30 per cent or more in the relevant reference period would receive a CEWS rate of at least 75 per cent or potentially an even higher CEWS rate using the new rules outlined above for the most adversely affected employers (up to 85 per cent).
CEWS for Furloughed Employees
For Periods 5 and 6, the subsidy calculation for a furloughed employee will remain the same as for Periods 1 to 4. It would be the greater of:
- For arm’s-length employees, 75 per cent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
- 75 per cent of the employee’s pre-crisis weekly remuneration up to a maximum benefit of $847 per week or the amount of remuneration paid, whichever is less.
Beginning in Period 7, CEWS support for furloughed employees will be adjusted to align with the benefits provided through the Canada Emergency Response Benefit (CERB) and/or Employment Insurance (EI).
For Period 5 and subsequent periods, the CEWS for furloughed employees will be available to eligible employers that qualify for either the base rate or the top-up rate for active employees in the relevant period.
The employer portion of contributions in respect of the Canada Pension Plan, Employment Insurance, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in respect of furloughed employees will continue to be refunded to the employer.
No changes are proposed to the definition of eligible remuneration. 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, or items such as stock option benefits or the personal use of a corporate vehicle.
For active arm’s-length employees, the amount of remuneration will be based solely on actual remuneration paid for the eligibility period, without reference to the pre-crisis remuneration concept used for earlier CEWS periods.
A modified special rule will apply to active employees that do not deal at arm’s length with the employer. For Period 5 and subsequent periods, the wage subsidy for such employees will be based on the employee’s weekly eligible remuneration or pre-crisis remuneration, whichever is less, up to a maximum of $1,129. The subsidy will only be available in respect of non-arm’s-length employees that were employed prior to March 16, 2020.
For Period 4, the pre-crisis remuneration of an employee was based on the average weekly remuneration paid to the employee 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 Period 5 and subsequent periods, the pre-crisis remuneration of an employee will be based on the average weekly remuneration paid to the employee from January 1 to March 15, 2020 or from July 1, 2019 to December 31, 2019. In all cases, the calculation of average weekly remuneration will exclude any period of 7 or more consecutive days without remuneration. Employers can choose which period to use on an employee-by-employee basis.
Eligible Employers and Employees
Eligible employers include individuals, taxable corporations and trusts, partnerships consisting of eligible employers, non‑profit organizations and registered charities. Public institutions are generally not eligible for the subsidy. As announced on May 15, 2020, eligible employers also include the following groups:
- Partnerships that are up to 50-per-cent owned by non-eligible members;
- Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible employers;
- Registered Canadian Amateur Athletic Associations;
- Registered Journalism Organizations; and
- Non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.
An eligible employee is an individual who is employed in Canada. Effective July 5, 2020, the eligibility criteria will no longer exclude employees that are without remuneration in respect of 14 or more consecutive days in an eligibility period.
The government has shared draft legislative proposals to make the changes to the CEWS. These proposed changes, which would generally apply as of March 15, 2020, include:
- providing an appeal process based on the existing procedure for notices of determination that allows for an appeal to the Tax Court of Canada;
- providing continuity rules for the calculation of an employer’s drop in revenues in certain circumstances where the employer purchased all or substantially all the assets used in carrying on business by the seller;
- allowing prescribed organizations that are registered charities or non-profit organizations to choose whether to include government-source revenue for the purpose of computing their reductions in qualifying revenue; and
- allowing entities that use the cash method of accounting to elect to use accrual-based accounting to compute their revenues for the purpose of the CEWS.
The government is proposing to move forward with previously released legislative changes, including relieving changes for calculating pre-crisis “baseline” remuneration, for corporations that have amalgamated and for eligible entities that use payroll service providers. The government is also proposing to move forward with the amendment that would align the treatment of trusts and corporations for the purposes of the CEWS.
Disclaimer: The COVID-19 Canadian tax policies in the above article are changing rapidly as the governments introduce new measures. Certain details have yet to be published. We will aim to update them as soon as they are available.