COVID-19: Details on Canada’s Wage Subsidies

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  • April 24, 2020

COVID-19: Details on Canada’s Wage Subsidies

Updated April 24, 2020

Canada Emergency Wage Subsidy

As part of Canada’s economic support for businesses and workers facing impacts from COVID-19, the federal government announced the Canada Emergency Wage Subsidy (CEWS).  The subsidy aims to help businesses avoid lay-offs and dismissals due to the COVID-19 pandemic by providing a significant wage subsidy to eligible employers for up to 12 weeks until June 6, 2020 and retroactive to March 15, 2020.

Parliament passed the Canada Emergency Wage Subsidy on April 11, 2020.

Eligible Employers

Eligible employers include individuals, taxable corporations, partnerships consisting of eligible employers, non-profit organizations and registered charities, who have seen at least a 15% drop of their gross revenue in March 2020 and a 30% drop for the following months.  When applying for the subsidy, employers must be able to demonstrate the decline in revenue.

Eligible employers include employers of all sizes and all sectors of the economy, except public sector entities such as municipalities, local governments, Crown corporations, wholly owned municipal corporations, public universities, colleges, schools, and hospitals.

Eligible Employees

Eligible employees are individuals who are employed in Canada.  To be eligible, employees must have had continuous income from employment with no gap in income greater than 14 days during the eligibility periods which are defined as March 15-April 11, April 12-May 9, or May 10-June 6.

The federal government is considering a process to allow individuals rehired by their employer during an eligibility period to cancel their Canada Emergency Response Benefit claim and repay that amount.

Calculating Revenues

Revenue is calculated using the employer’s normal accounting method (either the accrual method or cash method, but not both) and based on the employer’s business carried on in Canada and earned from arm’s-length sources.  However, revenues from extraordinary items and amounts on account of capital are excluded.

With respect to registered charities and non-profit organizations, the revenue calculation includes most forms of revenue other than that from non-arm’s length sources.  These organizations can choose whether or not to include revenue from government sources in their calculations.

Special rules are provided if there are non-arm’s length transactions.  What is considered a non-arm’s length transaction will likely be based on the interpretation under the Income Tax Act.  Generally, non-arm’s length transactions include transactions between related persons, transactions between a personal trust and its beneficiary, and transactions in which there is a common mind directing the transaction for both parties.  More guidance on what is considered a non-arm’s length transaction can be found here: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/series-1-individuals/income-tax-folio-s1-f5-c1-related-persons-dealing-arms-length.html#N1084F

To calculate whether there has been the required drop in gross revenues, the employer can choose to compare their monthly revenues for March, April, and May 2020 to either:

  • The revenue earned in the same months of the previous year; or
  • The average revenue earned in January and February 2020
Claiming Period Required Reduction in Revenue Reference Period for Eligibility
March 15 – April 11 15% March 2020 over:
  • March 2019 or
  •  Average of January and February 2020
April 12 – May 9 30% April 2020 over:
  • April 2019 or
  • Average of January and February 2020
May 10 – June 6 30% May 2020 over:
  • May 2019 or
  • Average of January and February 2020

Once an employer is found eligible for a specific claiming period, the employer will automatically qualify for the next period.

The method chosen by an employer to calculate revenue and any reduction in revenue must remain the same throughout the program period.

Amount of Subsidy

The Government of Canada has provided a calculator to help employers estimate the amount of wage subsidy they may receive.  Employers will need to calculate their estimated subsidy before applying.  The calculator can be found here: https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-calculate-subsidy-amount.html

The subsidy amount for an employer will cover up to 75% of each employee’s first $58,700 of eligible remuneration, or in other words, up to $847 per week.  Eligible remuneration includes salary, wages, and other remuneration on which the employer would generally be required to make deductions and withholdings.  However, it does not include severance pay, stock option benefits, or the personal use of a corporate vehicle.

There is no overall limit on the total wage subsidy amount that an eligible employer may claim.

Employers must also make their best efforts to top-up employees’ salaries to bring them to pre-crisis levels.  Pre-crisis remuneration is based on an employee’s average weekly remuneration paid between January 1, 2020 and March 15, 2020 inclusively, excluding any seven-day period in which the employee did not receive any remuneration.

Employees are not required to perform any services in order to receive the wage subsidy benefit.  However, employees must maintain an employment relationship with the employer.

Refund for Certain Payroll Contributions

Certain employer contributions to Employment Insurance, Canada Pension Plan, Quebec Pension Plan, and the Quebec Parental Insurance Plan are eligible to be 100% refunded.  These contributions must have been paid to eligible employees who were on leave with pay during which time the employer was eligible to claim the CEWS.  The employee must have been on leave with pay for a full week, and the refund is not available if the employee was on leave for only a portion of a week.

Penalties for Abuse

Employers who claim the Canada Emergency Wage Subsidy and who do not meet the eligibility requirements will be required to repay amounts paid under the program.  Additionally, penalties such as fines or even imprisonment may apply in cases of fraudulent claims, where employers provide false or misleading information, or where employers misuse the funds obtained under the program.

Employers that engage in artificial transactions to reduce their revenue in order to claim the CEWS will be subject to a penalty equal to 25% of the value of the subsidy claimed as well as be required to repay in full, any subsidy that was improperly claimed.

How to Apply

Eligible employers will be able to apply through Canada Revenue Agency’s My Business Account portal or through an online application form via Service Canada.

Applications will open April 27, 2020.

Employers will have to keep records demonstrating their reduction in arm’s-length revenues and remuneration paid to employees.

Employers will also need to calculate their estimated subsidy for their business before applying.  The Government of Canada has provided a calculator for employers to use in estimating their subsidy:  https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-calculate-subsidy-amount.html

More information on the Canada Emergency Wage Subsidy can be found here: https://www.canada.ca/en/department-finance/economic-response-plan/wage-subsidy.html