On April 11, 2020, Bill C-14 - A second Act respecting certain measures in response to COVID-19, received Royal Assent, which created the Canada Emergency Wage Subsidy (Subsidy) by adding section 125.7 to the Income Tax Act.

The Subsidy is designed to enable employers to keep employees on payroll, re-hire workers that were previously laid off, and help employers hire new workers during the COVID-19 pandemic.

Eligible entities

The following entities may qualify for the Subsidy as “eligible entities”:

• A corporation that is not tax-exempt;
• An individual;
• A registered charity;
• Certain tax-exempt entities (including agricultural organizations, boards of trade or chambers of commerce, non-profit corporations for scientific research and experimental development, labour organizations or societies, benevolent or fraternal benefit societies or orders, and non-profit organizations) other than public institutions; and
• A partnership, all of the members of which are eligible entities.

In order to qualify for the Subsidy, employers must have had a business number registered with the Minister to make source deductions on March 15, 2020 (i.e., a CRA business account number with an RP).

Public institutions

Public institutions, including Crown corporations, municipalities, schools, school boards, hospitals, health authorities, public universities, colleges and First Nation bands, do not qualify for the Subsidy.

Eligible employee

An eligible employee is someone who is employed in Canada by an eligible entity and has not been without remuneration for 14 or more consecutive days in a qualifying period.

Applying for the Subsidy

Applications for the Subsidy will be submitted through the CRA’s MyAccount website. Applications must be submitted before October 2020. The individual who has principal responsibility for the financial activities of the employer must attest that the application is complete and accurate in all material aspects.

Employers should note that the Minister could publicly name any person or partnership that makes an application for the Subsidy.

Payment of the Subsidy

The Subsidy will be paid by direct deposit and is expected to be paid in the next two to four weeks.

Amount of the Subsidy

The amount of the Subsidy is up to a maximum of $847 per week, per employee for up to three months, retroactive to March 15, 2020.

The Subsidy for each eligible employee is the greater of (a) and (b):

Where (a) is the least of the following:

• 75 percent of eligible remuneration paid to the eligible employee in respect of that week,
• $847, and
• Nil, if the eligible employee does not deal at arm’s length with the employer;

and,

where (b) is the least of the following:

• The amount of the eligible remuneration paid to the eligible employee in respect of that week,
• 75 percent of the baseline remuneration in respect of the eligible employee determined for that week, and
• $847.

There is no limit on how much an employer is entitled to receive in Subsidies.

Baseline remuneration

Baseline remuneration is defined as 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.

Employers do not have to “top-up” the salaries of their employees so that they are equivalent to their baseline earnings in order to receive the Subsidy.

Eligible remuneration

Eligible remuneration includes: (i) salary, wages or other remuneration, and (ii) fees, commissions or other amounts for services.

Eligible remuneration does not include the following amounts:

• Retiring allowances;
• Stock options;
• Any amount that can reasonably be expected to be paid or returned, directly or indirectly, to the employer, or a person with which the employer does not deal at arm’s length, or another person or partnership at the direction of the employer; and
• Any amount that is in excess of the employee’s baseline remuneration, if the employee is reasonably expected to be paid a lower weekly amount than the baseline remuneration, and one of the main purposes of the arrangement is to increase the amount of the Subsidy received by the employer.

Dividends paid to an employee who is also a shareholder is not considered “eligible remuneration” and, therefore, will not be used in the computation of the Subsidy.

New employees

New employees who are hired after March 15, 2020, may be entitled to the Subsidy; however, the Subsidy will be limited to 75 percent of their eligible remuneration, up to $847. 

Non-arm’s length employees

Non-arm’s length employees will only be eligible for the Subsidy if they were employed by their employer prior to March 15, 2020, and the Subsidy for these employees will be limited to 75 percent of their baseline remuneration (i.e., average salary they were paid from January 1, 2020 to March 15, 2020).

Refund for certain payroll contributions

Employers will be entitled to a refund of 100 percent of the employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Québec Pension Plan, and the Québec Parental Insurance Plan for employees who are on leave with pay and are eligible for the Subsidy.

An employee is 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 is not available for eligible employees who are on leave with pay for only a portion of a week.
This refund is not subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the Subsidy. There is no overall limit on the refund amount that an eligible employer may claim.

Employers will be required to continue to collect and remit employer and employee contributions for CPP and EI, as usual, and may apply for a refund for their contributions at the same time they apply for the Subsidy.

Declines in revenue

In order to qualify for the Subsidy, an employer must have a decline in “qualifying revenue” of at least 15 percent in March, and at least 30 percent in April or May when compared to a “prior reference period.” The employer can use the following as “prior reference periods”:

• The same month of the preceding year (i.e., compare qualifying revenue of March 2020 to the prior reference period of March 2019); or
• An average of January and February 2020.

The average of January and February 2020 can only be used as prior reference periods if either:

• The employer was not carrying on business or otherwise carrying on its ordinary activities on March 1, 2019; or
• If the employer elects to use January and February 2020 as the prior reference periods for all qualifying periods.

If an entity qualifies for the Subsidy for one qualifying period, it is deemed to qualify for the Subsidy for the immediately following qualifying period.

As set out in the table below, there are currently three claim periods:

The Minister has the power to add additional qualifying periods that end no later than September 30, 2020 by regulation.

Qualifying revenue

Qualifying revenue is defined as the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity, generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity, in Canada in the particular period.
Qualifying revenue excludes the following:

• Extraordinary items;
• Amounts derived from persons or partnerships not dealing at arm’s length with the eligible entity; and
• The amount of Subsidy received by the employer.

Registered charities and non-profits

Registered charities are required to include revenues from related businesses, gifts and other amounts received in the course of their ordinary activities when computing their qualifying revenues. However, registered charities may elect to exclude funding received from government sources in the determination of their qualifying revenues for all of their prior and current reference periods.

Similarly, certain tax-exempt entities, including non-profit organizations, must include membership fees and other amounts received in the course of their ordinary activities in their qualifying revenues; however, they may elect to exclude funding received from government sources from their qualifying revenue for all of their prior and current reference periods.

Accounting methods

Employers are required to determine their qualifying revenues in accordance with their “normal accounting practices.” However, an employer may make an election to determine its revenues based on the cash method (based on when amounts are actually received), instead of the accrual method (based on when amounts are earned). It is important to note that the election would apply for all of the qualifying periods.

Since the deadline to apply for the Subsidy is October 2020, employers may wish to wait until after all the qualifying periods in order to determine whether they would benefit by electing to use the cash method of accounting.

The following entities are permitted to use methods other than their normal accounting methods when calculating their qualifying revenues.

Group of eligible entities

If a group of eligible entities normally prepares consolidated financial statements, then each member of the group may determine its qualifying revenue separately if every member of the group determines its qualifying revenue on that basis.

Affiliated group of eligible entities

If the eligible entity is a member of an affiliated group of entities, then the qualifying revenue of the group determined on a consolidated basis in accordance with relevant accounting principles is to be used for each member of the group if each member of the affiliated group of entities elects to do so.

Joint venture

If all of the interests of an eligible entity are owed by participants in a joint venture, and all or substantially all (i.e., 90 percent or more) of the qualifying revenue of the eligible entity for a qualifying period is in respect of the joint venture, then the eligible entity may use the qualifying revenues of the joint venture.

Non-arm’s length persons or partnerships

If all or substantially all (i.e., 90 percent or more) of an eligible entity’s qualifying revenue for a qualifying period is from one or more particular persons or partnerships with which the eligible entity does not deal at arm’s length, then the eligible entity can calculate its qualifying revenues in reference to the qualifying revenues of those non-arm’s length persons or partnerships. The calculation is based on the eligible entity’s proportionate share of the qualifying revenue from each non-arm’s length person or partnership. Each particular person or partnership must elect to calculate their qualifying revenue in this manner along with the eligible entity. It is important to note that the qualifying revenue of the non-arm’s length person or partnership is not limited to income from Canada.

Taxation of the Subsidy

The Subsidy received by an employer would be considered government assistance and would be included in the employer’s taxable income. Employers would be entitled to a corresponding deduction for salary and wages that are paid to employees, and the Subsidy would likely be tax neutral in most cases. However, the Subsidy would reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration. Therefore, special consideration must be made when an employer applies for the Subsidy if it intends to claim credits such as Film Tax Credits and Scientific Research and Experimental Development Tax Credits. Employers are deemed to have received the Subsidy immediately before the end of the qualifying period.

Non-arm’s length entities

If an employee is employed by two or more qualifying entities that do not deal with each other at arm’s length, then the amount of the Subsidy shall not exceed the amount that would arise if the employee were paid by one of the qualifying entities.

Outstanding returns

Normally, the Minister cannot issue refunds when there are any outstanding returns. However, the Minister is permitted to pay the Subsidy to an employer even if the employer has outstanding returns under the Income Tax Act, the Air Travellers Security Charge Act, or the Excise Tax Act.

Penalties

Penalty of 25 percent of the Subsidy

An employer that enters into a transaction or participates in an event (or series of transactions or events), or takes an action (or fails to take an action) for the main purpose of reducing its qualifying revenues to receive the Subsidy, then the employer is liable to a penalty of 25 percent of the amount of the Subsidy.

Gross negligence penalties of 50 percent

Every person who knowingly, or under the circumstances amounting to gross negligence, has made or participated in, assented to or acquiesced in the making of a false statement or omission in an application for the Subsidy is liable to a penalty of up to 50 percent of the amount of the Subsidy to which the employer was not entitled.

Temporary wage subsidy of 10 percent

Organizations that do not qualify for the Subsidy may continue to qualify for the previously announced wage subsidy of 10 percent of remuneration paid from March 18 to before June 20, up to a maximum subsidy of $1,375 per employee and $25,000 per employer.

For employers that are eligible for both the Subsidy and the 10 percent wage subsidy for a period, any benefit from the 10 percent wage subsidy will reduce the amount available to be claimed under the Subsidy in that same period.

Work-Sharing program

For employers and employees that are participating in a Work-Sharing program, EI benefits received by employees through the Work-Sharing program will reduce the benefit that their employer is entitled to receive under the Subsidy.

For more information, please contact Mark Woltersdorf, Andy Pushalik and Gergely Hegedus, or another member of Dentons’ Tax, or Employment and Labour groups.