Today, the government announced key changes to the 75% Canada Emergency Wage Subsidy (CEWS). Today’s update addresses many of the concerns we previously raised. As a result, many businesses that didn’t qualify before would now qualify under what we call CEWS “Version 2.0”.
Conditions to Qualify
- The subsidy is available to eligible employers who suffer a drop in revenues of at least 15% in March, and 30% in April or May compared to a chosen benchmark period (below).
- If eligible, the government will subsidize atleast 75% of the wages paid to eligible employees. (it is possible to also get 100% of the wages subsidized as we discuss below)
Who are Eligible Employers?
- Individuals, corporations, non-profit organizations, registered charities, and partnerships consisting of eligible employers.
Benchmark Period to Compare Revenues under Version 2.0
- Under Version 1.0, the government required employers to compare revenues to the corresponding month in 2019.
- To broaden this test, under Version 2.0, employers can also compare their March, April, and May revenues to the average revenue in January and February 2020.
- Once the benchmark (year-over-year or the alternative approach) is chosen for the first CEWS application (i.e., March), employers need to continue using the same benchmark for the remaining application periods (i.e., April and May).
This will help many new businesses that did not have a previous track record of revenues.
Who are eligible employees?
- Wages must be paid to “eligible employees.”
- An eligible employee must be employed in Canada.
- An eligible employee does not include employees that have been without pay for more than 14 consecutive days in any of the 3 claim periods above. This is so that both the CEWS and Canadian Emergency Response Benefit (CERB) is not claimed on the same employee.
- This last point is a bit inconsistent and may not achieve the desired outcome. According to CRA’s recently released Q&A about the CERB, for the May and June CERB application, CRA expects employees to have no employment income in the entire application period instead of only 14 consecutive days. Suppose you have an employee who does not work for 15 straight days in a claim period; this employee may not qualify for the CERB or CEWS as the rules are currently described.
Claim Periods
There are three claim periods to apply for the CEWS.
- Period 1 – March 15 to April 11
- Compare March 2020 revenues with (i) March 2019 or (ii) Average of Jan/Feb 2020
- Period 2 – April 12 to May 9
- Compare April 2020 revenues with (i) April 2019 or (ii) Average of Jan/Feb 2020
- Period 3 – May 10 to June 6
- Compare May 2020 revenues with (i) May 2019 or (ii) Average of Jan/Feb 2020
- Note once you choose the benchmark approach, you need to stay consistent throughout all three claim periods.
Computing Revenues under CEWS Version 2.0: Cash or Accrual Method
- Under Version 1.0, the employer’s revenue was their revenue in Canada earned from arm’s-length sources calculated using the normal accounting method (excluding revenues from extraordinary items and amounts on account of capital.
- Under Version 2.0, employers can 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 (i.e., for the March period) and would be required to use the same method for subsequent applications (i.e., April and May period).
- The ability to use the cash method of accounting for revenues is welcoming news for many companies with stable revenues but having difficulties collecting their revenues due to the economic downturn.
Computing Revenues for NPOs and Charities
- Registered charities and non-profit organizations can choose whether or not to include revenue from government sources as part of the revenue calculation.
- Once chosen, the same approach would have to apply throughout the program period.
- It is not clear whether you can include government grants in the benchmark period but exclude them for the March, April, and May 2019 revenues.
Amount of Subsidy
The subsidy per employee on remuneration paid between March 15 and June 6, 2020, would be the greater of:
- 75% of eligible remuneration paid, up to a maximum benefit of $847 per week; and
- The lesser of the following amounts:
- remuneration paid, up to a max benefit of $847 per week, or
- 75% of the employee’s pre-crisis weekly remuneration
Can you get 100% of the employee’s pre-crisis weekly subsidized?
Yes. It is possible if you pay employees only 75% of pre-crisis wages. The below example demonstrates this:
Example
- Pat earned pre-crisis earnings of $500 per week
- Pat was re-hired in April 2020 and earned $375 per week (75% of the pre-crisis earnings)
The subsidized portion of Pat’s remuneration per week is $375. In effect, 100% of Pat’s weekly wage is subsidized. However, based on good faith, where possible, the government expects employers to maintain employees’ pre-crisis employment earnings. This is not a requirement, however.
What is Pre-crisis Remuneration
The pre-crisis remuneration for a given employee is the average weekly remuneration paid between January 1 and March 15, excluding any 7-day periods where the employee did not receive remuneration.
New employees without pre-crisis earnings
Employers will be eligible for a subsidy of up to 75% of the remuneration paid to new employees.
Eligible Remuneration
- Eligible remuneration may include salary, wages, and taxable benefits.
- However, it does not include severance pay, stock option benefits, or auto benefits from personal use of a corporate vehicle.
Special Rules for Owner-Managers & Related Employees
- The subsidy is available in respect of non-arm’s length employees only if they were employed before March 15, 2020, provided they earned pre-crisis earnings.
- The subsidy for non-arm’s length employees will be limited to:
- 75% of the employee’s pre-crisis weekly remuneration, or
- $847 per week.
- When performing the wage subsidy calculation, make sure to identify family members who are employees and modify the calculation.
Is there a limit to the CEWS?
- No limit on the subsidy amount that an eligible employer may claim.
Do I Have to Remit CPP and EI on Subsidized Wages?
- Yes, you would be required to continue to remit employer and employee contributions.
- Refunds available for employees on paid leave (see heading below).
CPP and EI Refund for Employees on Leave with Pay
- In addition to CEWS, there will be a 100% refund for the employer’s contributions to EI and CPP for each week for an employee who is on leave with pay and where the employer is eligible to claim the CEWS for those employees.
- The employee cannot do any work for the employer in that entire week. This refund is not available where employees are on leave with pay for only a portion of a week.
- The CPP/WI Refund is not subject to the maximum weekly benefit per employee of $847 and no overall limit on the refund amount.
- It is not enough to simply ask employees to not come into work. The backgrounder makes it clear that the employees cannot perform any work for the employer in that week. If employees work from home, you may not qualify for the CPP/EI refund.
- It is not clear how these rules will work for non-arm’s length employees. Whether an owner-manager can pay him or herself salary without working, and yet get the CPP/EI refund in addition to the 75% wage subsidy.
Re-hiring employees that are getting the CERB?
- This program aims to help businesses re-hire their employees. The government is looking at a process to allow re-hired employees during the same eligibility period to cancel their CERB claim and repay that amount. The intention is that an employee cannot get CERB while their wages are subsidized through CEWS.
Interaction with 10% Wage Subsidy
- The 10% wage subsidy program is still available
- Check out our free calculator.
- If you’re eligible for both programs, then any benefit from the 10% Wage Subsidy will reduce the benefit available under CEWS in the claim period.
Are CEWS benefits taxable?
- Yes, it is considered government assistance.
- CEWS also reduces the eligible remuneration eligible for certain tax credits like SR&ED tax credit.
Penalties
- Employers who do artificial transactions to reduce revenues would have to repay the subsidy with a 25% additional penalty.
- Anti-abuse rules will be in place to ensure employers do not get the subsidy in situations where they fail to pay employees.
How do I Apply?
- Apply through the Canada Revenue Agency’s My Business Account
- The application should be available in 2 to 5 weeks from today; however, legislation has to be passed in parliament first (which we understand is in progress and maybe looking at a session after Easter).
- Set up direct deposits to receive amounts faster.
Example of How CEWS Works
The following example from Finance Canada helps us to apply the above:
- M and S own a corporation.
- M and S work full time in the corporation and continue to pay themselves $1,300 per week.
- They have 3 part-time employees, each earning $800 per week.
- M and S initially laid off their employees, but re-hired them and asked employees not to report to work or do any work.
- M and S pay employees 75% of their pre-crisis salary ($600 per week).
Applying for CEWS
- M and S would be eligible for a weekly wage subsidy of $847 for each of themselves (since they had pre-crisis earnings) and $600 for each of their employees.
- M and S would also be eligible for a 100% refund of their portion of the EI and CPP paid their employees, providing an additional benefit of up to $124 per week.
- At the end of each claiming period, M and S would submit an application attesting that their decline in revenues in each month is sufficient to qualify when compared to the benchmark methods discussed above.
