Update: Federal Government Releases Details of the Canada Emergency Wage Subsidy

April 13, 2020

On April 8, 2020, the Government of Canada provided many key details relating to the Canada Emergency Wage Subsidy (CEWS) in advance of its consideration by Parliament. The information below is taken from the Government’s April 8 News Release and accompanying Backgrounder. It is expected that the legislation will be debated and passed by Parliament on the weekend of April 11-12.

Updates:

  • The legislation was introduced into the House of Commons as Bill C-14 on April 11. It was passed, received Royal Assent and came into force the same day. The legislation is available here.
  • This post should be read in conjunction with our FAQ, which deals with many of the legislation’s key requirements in greater detail. (April 13, 2020) 

 

The purpose and key features of the CEWS are as follows:

  • The purpose of the CEWS is to provide a wage subsidy to eligible employers and enable them to continue to pay their employees through their own payroll in the 12-week period of the program (March 15 to June 6) including by bringing those back from layoff, even if they are unable to work for the employer.
  • The subsidy covers the greater of (i) 75 percent of the amount of remuneration paid up to a maximum of $847 per week and (ii) the amount of remuneration paid, up to a maximum benefit per week of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.
  • Pre-crisis remuneration is based on the average paid in full work weeks from January 1 through March 15, 2020. Eligible remuneration includes salary, wages and taxable benefits but excludes certain benefits such as stock options and the use of a company vehicle. Employers are expected to make best efforts to top-up to pre-crisis levels, but the top-up does not appear to be a pre-condition to employer’s participation in CEWS.
  • To be eligible, an employee must be employed in Canada and, to be eligible with respect to remuneration, must have not been without remuneration for more than 14 consecutive days in any of the three 4-week claiming periods noted above. As such, employees who have, for example, been on layoff since March 15, 2020 may not be eligible for CEWS in respect of the first claim period (described below). However, it is possible that a procedure will be put in place to allow the employee to receive the CEWS benefit and repay the benefit received under the Canadian Emergency Response Benefit. 

The Government has also introduced additional flexibility into the eligibility criteria for the program, in response to feedback on the first version of the proposal, which was released on March 27 and supplemented on April 1. Changes include (i) a more flexible reference point for the “revenue loss” measurement that is a key element in determining eligibility for CEWS and (ii) a 100 percent refund of certain employer EI, CPP, QPP and Quebec Parental Insurance Plan contributions.

New Features and Flexibility

More options for measuring declines in revenue

The Government has responded to concerns about the appropriateness, for some businesses and sectors, of the previously announced basis for calculating measuring the revenue drop that is the core criterion of CEWS eligibility. That formula required a drop of 30% in “year over year” terms between March, April or May 2019 and the corresponding months in 2020. Recognizing that this measure might not capture the difficulties faced by some businesses, the Government has decided to allow the following alternative method to be used:

  • Comparison of revenue from March, April and May 2020 to the average of the revenues earned in January and February of 2020.

In addition to this, the criteria have been made more flexible in two other key respects:

  • For the month of March, the revenue drop need only have been 15 percent, rather than 30 percent (recognizing that the pandemic did not affect many businesses until the second half of that month);
  • Either cash or accrual accounting may be used in the calculations (recognizing that a gap may exist between revenue earned and revenue actually received).

Note that an employer may not elect to use cash accounting in one period and then switch to accrual accounting in a later period (or vice versa).

Claim periods

Eligibility must be established for each of three 4-week claim periods during the course of the program:

  • March 15 to April 11
  • April 12 to May 9
  • May 10 to June 6

In period (1), eligibility is determined by reference to March 2020 revenues (15% drop required), in period (2) by April 2020 revenues and in period (3) by May 2020 revenues (30% drop required in each case). In each of these periods, the revenue comparator can be either the same month in 2019 or the average of January and February 2020. However, the same approach must be employed in all claim periods.

Note that the legislation as passed allows additional claim periods, or “qualifying periods”, to be added by regulation until September 30, 2020.

In a key development, the legislation states that an entity that qualifies in one claim period is deemed also to qualify for the subsequent claim period (unless the only reason it qualified in the earlier period was this deeming provision).

Rules for corporate groups, joint ventures and non-arm’s length entities

The legislation will also contain rules to deal with issues that are particular to corporate groups, joint ventures and non-arm’s length entities. With respect to non-arm’s length entities, the Backgrounder states:

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.

Payroll contribution refunds

The Government also announced that the CEWS would be extended to include a 100 percent refund of employer contributions to EI, CPP/QPP and the Quebec Parental Insurance Plan. This refund would apply in respect of eligible employees who are on paid leave (provided that the employer is entitled to claim for the CEWS with respect to the employees). These refunds would not count toward the $847 weekly maximum benefit.

It should be noted that the refund is not available for a given week if the employee performed any work during that week.

Additional Details

Clawbacks

In order to prevent “double-dipping”, the legislation creates two types of clawback:

  • If an employer receives a benefit under the 10 percent wage subsidy that was created by the COVID-19 Emergency Response Act, in effect as of March 25, the amount available under the CEWS will be reduced by an equivalent amount.
  • Where an employer participates in the work-sharing program, under which employees agree to work less than their normal number of hours, the amount available to the employer under the CEWS will be reduced to take into account the EI benefits that the employees receive under the program.

Compliance

The legislation contemplates repayment, fines and imprisonment as possible penalties for false or fraudulent claims. Any employer who contrives a transaction to create an artificial loss of revenue in order to qualify for the CEWS is subject to full repayment of any subsidy thereby obtained plus a 25% penalty.

The Government will be alert to abuses of the program and will take steps to ensure that amounts owed to employees are actually being paid.

Tax Consequences

The Backgrounder to the legislation specifically mentions two tax consequences of participation in the CEWS:

  • Because the CEWS is a form of government assistance, it must be included in the employer’s taxable income.
  • Where federal tax credits are calculated with reference to the employer’s remuneration expenses, wage subsidies such as the CEWS are not counted.

Applying for the CEWS

Employers would apply for the CEWS via the Canada Revenue Agency web portal or through a web-based app. Details of the application process are still in development and will be released shortly.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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