The Temporary Wage Subsidy
On March 25, 2020, the Canadian government passed Bill C-13 to enact legislative measures in response to COVID-19. Among these measures were various amendments to the Income Tax Act (the “Act”), including Section 153 of the Act. Subsection 153(1) of the Act deals with the withholding of tax and source deductions on wages. This amendment, commonly known as the Temporary Wage Subsidy for employers, is intended to allow employers to remit less taxes on their payroll.
The Legislation – New Subsection 153(1.03)
New subsection 153(1.03) introduces various new definitions, one of which is “eligible employer.” One form of an eligible employer, and presumably the most common, is a Canadian controlled private corporation (CCPC) that:
- Would have a business limit for its last taxation year that ended before the start of the eligible period greater than nil, if the amount determined for paragraph 125(5.1)(b) were deemed to be nil[1], or
- If the corporation does not have a taxation year that ended before the start of the eligible period, would meet the condition in clause (A) if its taxation year ended immediately before the start of the eligible period,
[Emphasis added]
Multiplying the Wage Subsidy Among Associated Corporations & Potential Pitfall
The Temporary Wage Subsidy has a limit of $25,000 per employer; however, this is not shared amongst employers. This means, one corporate group with many operating companies may access multiple subsidies. However, a potential oversight in filing the corporate tax return may deny access to multiple wage subsidies if tax planning is not carefully undertaken.
Under subsection 125(2), every corporation has a business limit of $500,000. This business limit is reduced by taxable capital under paragraph 125(5.1)(a) and passive income under paragraph 125(5.1)(b). Since subsection 125(5.1)(b) is deemed to be nil, Finance appears to restrict access to the wage subsidy based on a corporate group’s taxable capital as its only limitation.
However, also under subsection 125(2), a corporation that is associated with another corporation automatically has a business limit of nil. If a corporation does not have a business limit, it is not eligible for the temporary wage subsidy.
Fortunately, subsection 125(3) allows associated corporations to file an agreement (Schedule 23 of T2 Return) to share the $500,000 business limit. This allocation is a possible trap that needs to be carefully evaluated. We highlight two practical examples of how taxpayers can fall into this trap.
Example 1 – Allocating the Small Business Limit
Consider a fact pattern in which there are two associated corporations, each of which has a taxable income of $500,000. As long as a full $500,000 is sheltered using the small business deduction, most taxpayers would be indifferent as to which corporation received the small business limit. In many instances, one corporation would be assigned 100% of the limit. The other corporation would be assigned none of the business limit for the sake of simplicity. Even though the income tax payable would not be any different if both corporations were assigned 50% of the small business limit, it has an impact on accessing the wage subsidy since an eligible employer must have a business limit. Even if 1% of the business limit is allocated, both corporations would be able to access the wage subsidy.
Example 2 – Management Corporation
In other instances, a corporation may be responsible for the payroll function of an associated corporate group. This management corporation acts as a cost center with any income allocated to it entirely offset by the wages paid, such that any income earned would be nominal and unlikely to warrant an allocation of the small business limit in ordinary circumstances. Taxpayers who continue to adopt this approach may realize that they may be ineligible for the wage subsidy even though they have eligible employees but are otherwise ineligible because of the mere fact that the management corporation was not assigned a portion of the small business limit.
These examples highlight that corporate groups with multiple employers should assign at least some portion of the small business limit across all of the associated corporations if they want to use the temporary wage subsidy amongst various entities within the same group.
Martin Lee, CPA, CA
Thanusan Raveendran, CPA, CA
Mohammed Al-khooly, CPA, CA
Notes
[1] Interestingly, the wage subsidy would also be available for corporations that earn passive income. While corporations that earn passive income do not enjoy the small business deduction under subsection 125(1), these corporations are still entitled to a business limit so assigning even 1% to these corporations would entitle these passive corporations to access the wage subsidy.
