On July 17, 2020, the Government of Canada announced significant changes to the Canada Emergency Wage Subsidy (“CEWS”) program. This is good news. The updated rules allow more businesses to qualify, even when revenue decline is less than 30%.
Please refer to the examples where we highlight real-life scenarios and show how your business may qualify for up to an 85% wage subsidy.
1. CEWS Extended Until December 2020
The CEWS has been extended until December 19, 2020, for a total of 10 qualifying periods:
| Qualifying Period | Dates | Current Reference Period for Revenue Test |
| Period 1 | March 15, 2020 to April 11, 2020 | March 2020 |
| Period 2 | April 12, 2020 to May 9, 2020 | April 2020 |
| Period 3 | May 10, 2020 to June 6, 2020 | May 2020 |
| Period 4 | June 7, 2020 to July 4, 2020 | June 2020 |
| Period 5 | July 5, 2020 to August 1, 2020 | July 2020 |
| Period 6 | August 2, 2020 to August 29, 2020 | August 2020 |
| Period 7 | August 30, 2020 to September 26, 2020 | September 2020 |
| Period 8 | September 27, 2020 to October 24, 2020 | October 2020 |
| Period 9 | October 25, 2020 to November 21, 2020 | November 2020 |
| Period 10 | November 22, 2020 to December 19, 2020 (No concrete rules proposed yet for this period) | December 2020 |
The rules have been firmed up until November 21, 2020 (up to the Period 9). The government will likely announce regulations for Period 10 closer to the date.
2. CEWS No Longer an All or Nothing Subsidy
The CEWS is no longer an all or nothing proposition: businesses with less than 30% revenue decline may still qualify in proportion to their revenue decline. This allows more businesses to be eligible for the CEWS.
3. CEWS Split Up into Two Subsidies: The Base Subsidy and Top-up Subsidy
The CEWS is divided into two parts: a base subsidy and a top-up subsidy. Both parts will make up the total subsidy a business will receive for the CEWS.
I. The Base Subsidy
The base subsidy is available to all eligible employers with a revenue decline greater than 0%. Instead of a one size fits all solution, the subsidy is based on the magnitude of the revenue decline.
- The base wage subsidy % is the % of your wages that will be subsidized. This base wage subsidy % is prorated based on % of revenue decline. If the revenue decline exceeds 50%, the base wage subsidy % maxes out (see table below).
- The maximum base subsidy % gradually decreases from 60% in Periods 5 and 6 to 20% in Period 9.
- The Safe harbour rule for Periods 5 and 6 allows employers to still qualify for a 75% wage subsidy. If revenue decline is ≥ 30% in Periods 5 and 6, employers will be eligible for a 75% wage subsidy. This is done to maintain certainty for employers relying on the CEWS[1].
- The “Base Percentages” and maximum weekly benefit for the base wage subsidy are as follows:
| Period 5*: July 5 – August 1 |
Period 6*: August 2 – August 29 | Period 7: August 30 – September 26 | Period 8: September 27 – October 24 | Period 9: October 25 – November 21 |
|
| Maximum weekly benefit per employee | Up to $677 | Up to $677 | Up to $565 | Up to $452 | Up to $226 |
| Revenue drop: 50% and over | 60% | 60% | 50% | 40% | 20% |
| Revenue drop: 0% to 49% | 1.2 x revenue drop% (e.g., 1.2 x 20% revenue drop = 24% base CEWS rate) |
1.2 x revenue drop% (e.g., 1.2 x 20% revenue drop = 24% base CEWS rate) |
1.0 x revenue drop% (e.g., 1.0 x 20% revenue drop = 20% base CEWS rate) |
0.8 x revenue drop% (e.g., 0.8 x 20% revenue drop = 16% base CEWS rate) |
0.4 x revenue drop% (e.g., 0.4 x 20% revenue drop = 8% base CEWS rate) |
- See examples below to see these rules in action.
II. The Top-up Subsidy
- The top-up subsidy is an additional subsidy of up to 25% for employers who are facing prolonged periods of revenue decline of over 50% (i.e., over the last 3 preceding months of a qualifying period).
- The revenue decline test for the top-up subsidy is determined under one of the following methods:
- General approach: Comparing the preceding 3 months revenue to the same months in the prior year.
- Alternative approach: Comparing the average monthly revenue in the preceding 3 months to the average monthly revenue in January and February 2020.
- The methods must be consistent between the base subsidy and the top-up subsidy. If the prior reference period is January and February 2020 for the base wage subsidy, the employer must use the same method for the top-up subsidy.
- Top-up wage subsidy % is the lesser of:
- 1.25 x (Revenue Drop – 50%), and
- 25%.
- The top-up wage subsidy is maxed out when revenue decline is 70% or more:
| 3-month average revenue drop | Top-up CEWS rate | Top-up calculation = 1.25 x (3-month revenue drop – 50%) |
| 70% and over | 25% | 1.25 x (70%-50%) = 25% |
| 65% | 18.75% | 1.25 x (65%-50%) = 18.75% |
| 60% | 12.5% | 1.25 x (60%-50%) = 12.5% |
| 55% | 6.25% | 1.25 x (55%-50%) = 6.25% |
| 50% and under | 0.0% | 1.25 x (50%-50%) = 0.0% |
- With the top-up subsidy combined with the base subsidy, an employer may qualify for an 85% wage subsidy in Periods 5 and 6 (i.e., 60% + 25%) if revenue decline for the base subsidy is ≥ 50%.
- Suppose an employer is applying for CEWS for Period 5. The below table shows the results under the General and Alternative Approach:
| Revenue for General Approach | Revenue for Alternative Approach | Revenue Decline % General Approach | Revenue Decline % Alternative Approach | |
| Current Reference Period: April 1 to June 30, 2020 | $210,000 ($70,000 per month) |
65% ($210,000 vs $600,000) |
53% ($70,000 vs $150,000) |
|
| Prior Reference Period: April 1 to June 30, 2019 | $600,000 | |||
| Prior Reference Period: January 1 and February 29, 2020 | $300,000 ($150,000 per month) |
- Ignoring other considerations, this employer should elect the alternative with the larger revenue decline which is the general alternative. As such, the employer should receive a top up subsidy of 18.75% for the 5th qualifying period as illustrated in the chart above for a 65% revenue decline.
- Refer to the chart below that shows the maximum CEWS subsidy % for businesses that qualify for both the maximum top-up CEWS and the base CEWS:
| Timing | Period 5*: July 5 – August 1 | Period 6*: August 2 – August 29 | Period 7: August 30 – September 26 | Period 8: September 27 – October 24 | Period 9: October 25 – November 21 |
| Maximum weekly benefit per employee | Up to $960 | Up to $960 | Up to $847 | Up to $734 | Up to $508 |
| Revenue Decline for Base CEWS: 50% or more | 85% (60% base CEWS + 25% top-up) |
85% (60% base CEWS + 25% top-up) |
75% (50% base CEWS + 25% top-up) |
65% (40% base CEWS + 25% top-up) |
45% (20% base CEWS + 25% top-up) |
| Revenue Decline for Base CEWS: 0% to 49% | 1.2 x revenue drop + 25% (e.g., 1.2 x 20% revenue drop + 25% = 49% CEWS rate) | 1.2 x revenue drop + 25% (e.g., 1.2 x 20% revenue drop + 25% = 49% CEWS rate) | 1 x revenue drop + 25% (e.g., 1 x 20% revenue drop + 25% = 45% CEWS rate) | 0.8 x revenue drop + 25% (e.g., 0.8 x 20% revenue drop + 25% = 41% CEWS rate) | 0.4 x revenue drop + 25% (e.g., 0.4 x 20% revenue drop + 25% = 33% CEWS rate) |
4. CEWS for Furloughed Employees
- For Period 5 and after, the CEWS for furloughed employees (i.e., employees on leave but with pay) would be available to eligible employers that qualify for either the base subsidy or the top-up subsidy in the relevant period.
| Periods 4 and 5 – As long as revenue decline is > 0%, employers will qualify for the 75% CEWS. There is no need to meet a revenue decline of 30% in periods 4 and 5, as long as revenue decline is more than 0%, eligible employers can qualify for CEWS for furloughed employees. |
The subsidy calculation for a furloughed employee would remain the same as for Periods 1 to 4. It would be the greater of:
|
- Beginning in Period 7, there will be changes to the CEWS for furloughed employees so that there is the equitable treatment between furloughed employees and those taking advantage of the CERB. No concrete rules are currently proposed (at this time), but the rules will be enacted through passing income tax regulations. The objective is twofold. First, to get employees away from the CERB and into the CEWS program. Second, to provide more clarity to furloughed employees as to their compensation because the existing CEWS rules are based on varying subsidy rates based on their employer’s revenue decline in a given month, whereas there is more certainty with the CERB.
- The employer portion of contributions in respect of the CPP, EI, the QPP, and the Quebec Parental Insurance Plan in respect of furloughed employees would continue to be refunded to the employer. In periods 5 and beyond, this is the case as long as the revenue decline is greater than 0%.
5. Changes to Baseline Remuneration Calculation
- The baseline remuneration, also referred to as ‘pre-crisis earnings’, is used to calculate the maximum that the wage subsidy can cover each employee, arm’s length and non-arm’s length, that was hired prior to March 15.
- The baseline remuneration is generally the average weekly earnings paid to an employee from January 1 to March 15, 2020, but an employer can elect to use another permitted period mentioned below.
- For Period 4 – the baseline remuneration of an employee would be based on the average weekly remuneration paid from:
- January 1 to March 15, 2020 (automatic);
- March 1, 2019 to May 31, 2019 (by electing under 125.7(b)(i)); or
- March 1, 2019 to June 30, 2019 (by electing under 125.7(b)(ii)).
- For Period 5 and subsequent periods – the baseline remuneration of an employee would be based on the average weekly remuneration paid from:
- January 1 to March 15, 2020 (automatic); or
- July 1, 2019 to December 31, 2019 (by electing under 125.7(b)(iii).
- For Periods 1 to 3 – The baseline remuneration of an employee would be based on the average weekly remuneration paid from:
- January 1 to March 15, 2020 (automatic); or
- March 1, 2019 to May 31, 2019 (by electing under 125.7(b)(i))
6. Using Same Revenue Decline % in Subsequent Period
- For Periods 5 and after, an eligible employer would be able to use the higher of the revenue decline % in the current period or the previous period[2].
- In example, if an employer had a revenue decline of 65% in Period 6 but a 45% revenue decline in Period 7, the 65% revenue decline can be used in calculations for Period 6 and Period 7. This allows an employer to increase their base subsidy for Period 7.
- This rule is meant to mimic the automatic deeming rules that were in place for Periods 1 to 4 and add more certainty for employers relying on CEWS.
- Employers can choose which period to use on an employee-by-employee basis.
7. Changes to the Prior Reference Periods for Revenue Test
- Allows employers who elected to use the alternative approach (i.e., an average of January and February 2020 revenues) for the first 4 periods to maintain that election or revert to the general approach (year-over-year comparison). This is done by electing under 125.7(1)(b)(ii)(B) of the definition of “prior reference period.”
- Once an employer elects a reference period approach, it would apply for Period 5 and onward for the base CEWS and the top-up CEWS.
8. Application Period Extended
The application period has been extended from before October 2020 to before February 2021. Therefore, a qualifying entity has until January 31, 2021, to file a CEWS application for any qualifying period.
9. Election to Use Accrual Method of Revenue
The updated rules now allow entities that use the cash method of accounting to elect to use accrual-based accounting to compute their revenues.
10. Purchased Businesses with No History
- New rules are introduced to help entities who purchased a business and do not have historical revenues in the 2019 reference period.
- The updated rules provide continuity rules for the calculation of an employer’s drop in revenues in certain circumstances where the employer purchased all or substantially all the assets used in carrying on business in Canada by the seller.
- The buyer can use the seller’s prior period revenues. The seller cannot double count, meaning the seller must subtract this revenue in calculating the seller’s CEWS. (Presumably, in most instances, the seller would no longer have a business and would not apply for CEWS in any case. It is possible that the seller has multiple businesses, and only one of them was sold to the buyer.)
Rules Remaining Unchanged
- No changes are proposed to the definition of eligible remuneration.
- Generally, no changes to who qualifies as an “eligible employer” or “eligible employee.”
- Eligible employers include individuals, corporations and trusts, partnerships consisting of eligible employers, non‑profit organizations and registered charities.
- An eligible employee is an individual who is employed in Canada.
- Effective July 5, 2020, the eligibility criteria would no longer exclude employees that are without remuneration in respect of 14 or more consecutive days in an eligibility period.
- Generally, no changes to the computation of revenues.
Examples
Example 1: Café Inc Qualifies for the 85% Wage Subsidy
In this example, we show how businesses really hard hit for a prolonged period by COVID-19 may qualify for am 85% wage subsidy.
- Suppose Cafe Inc. has 5 employees who make $1,000 per week. Due to COVID, the owners laid off all of their employees.
- The owners closed the café in March and reopened in July and rehired all of their employees who each worked for 4 weeks in the 5th qualifying period.
| Revenues | Revenue for General Approach | Revenue Decline |
| July 2020 | $150,000 | 70% |
| July 2019 | $500,000 | |
| April to June 2020 | $300,000 | 80% |
| April to June 2019 | $1,500,000 |
- Base wage subsidy is 60% (maximum reached)
- The top-up wage subsidy is the lesser of:
- 37.5% (1.25 x (80%-50%)), or
- 25%
- Combined CEWS is 85% (60% + 25%) of eligible remuneration up to a maximum of $1,129 per week.
- In our case, the CEWS for the 5th qualifying period is $17,000 ($1,000 x 4 weeks x 5 employees x 85%).
Example 2: Getting CEWS with < 30% Revenue Decline & Furloughed Employees
In this example, we show how businesses that are recovering but having a revenue decline of <30% can still access some level of CEWS even though the old rules required a decline of at least 30%.
- Suppose Purple Automotive Inc. has 5 employees who make $1,000 per week. Each employee worked 4 weeks during the 5th qualifying period except for 1 employee who was furloughed.
- The business qualified for CEWS for the previous periods, but revenues are starting to pick up. The owner was worried that the CEWS benefits would stop because revenue decline is less than 30%.
- With the new CEWS rules, this business should qualify for a reduced CEWS, as follows:
| Revenues | Revenue for General Approach | Revenue Decline |
| July 2020 | $80,000 | 20% |
| July 2019 | $100,000 | |
| April to June 2020 | $300,000 | 25% |
| April to June 2019 | $400,000 |
- Base wage subsidy is 24% (1.2 x 20%).
- The top-up wage subsidy is the lesser of:
- 0% (1.25 x (25%-50%)), or
- 25%
- Furlough employees subsidy is the greater of:
- $750, and
- Minimum of:
- $750;
- $847; or
- $1,000
- Combined CEWS is 24% (24% + 0%) of eligible remuneration up to a maximum of $1,129 per week + 75% of furloughed employee renumeration. In our case, the CEWS for the 5th qualifying period is $6,840 ($1,000 x 4 weeks x 4 employees x 24% + $1,000 x 4 weeks x 1 employee x 75%). In addition, the CPP and EI contributions of the furloughed employee would also be reimbursed.
Example 3: Safe Harbour Rule for Periods 4 and 5
In this example, we show that with the Safe Harbor rule, employers can still access a 75% wage subsidy as long as their revenue decline is at least 30% in July or August.
- Suppose Priya’s Fine Arts has 5 employees who make $1,000 per week and worked 4 weeks during the 5th qualifying period.
- With the new CEWS rules, this business should qualify for a 75% wage subsidy under the safe harbour rule, as follows:
| Revenues | Revenue for General Approach | Revenue Decline |
| July 2020 | $200,000 | 33% |
| July 2019 | $300,000 | |
| April to June 2020 | $750,000 | 25% |
| April to June 2019 | $1,000,000 |
- Base wage subsidy without the Safe Harbour Rule would only be is 39.6%.
- The top-up wage subsidy is the lesser of:
- 0% (1.25 x (25%-50%)), or
- 25%
- Combined CEWS would be 39.6% (39.6% + 0%) of eligible remuneration up to a maximum of $1,129 per week. Since July’s revenue decline was at least 30%, Priya’s Fine Arts can qualify for the 75% wage subsidy.
- With the Safe Harbour Rule, the CEWS for the 5th qualifying period should be $15,000 ($1,000 x 4 weeks x 5 employees x 75%).
Example 4: Safe Harbour and Prior Reference Period
There could be instances where the June revenue decline was ≥ 30%, but the July revenue was <30%. The Safe Harbour Rule and the rule that allows you to use the previous month’s revenue decline % allows employers to benefit from the 75% wage subsidy even when Period 5 or 6 revenues may be <30%.
- Suppose Simple Subs has 5 employees who make $1,000 per week and worked 4 weeks during the Period 5.
- The business qualified for CEWS for the previous periods, but revenues are starting to pick up. The owner was worried that the CEWS benefits would be much less with the changes.
Without the Safe Harbour & Previous Revenue Decline % Rules
- Under the new CEWS rules, this business should qualify for a reduced CEWS, as follows:
| Revenues | Revenue for General Approach | Revenue Decline |
| July 2020 | $80,000 | 20% |
| July 2019 | $100,000 | |
| April to June 2020 | $250,000 | 37.5% |
| April to June 2019 | $400,000 | |
| June 2020 | $30,000 | 40% |
| June 2019 | $50,000 |
- Base wage subsidy is 48% (1.2 x higher of 20% or 40%).
- The top-up wage subsidy is the lesser of:
- 0% (1.25 x (37.5%-50%)), or
- 25%
- Without the Safe Harbour Rule, Combined CEWS would 48% (48% + 0%) of eligible remuneration up to a maximum of $1,129 per week. CEWS for Period 5 would be $9,600 ($1,000 x 4 weeks x 5 employees x 48%).
With the Safe Harbour & Previous Revenue Decline % Rules
- With the Safe harbour rule, the CEWS for Period 5 should be $15,000 ($1,000 x 4 weeks x 5 employees x 75%).
[1] See 125.7(2)(A)(b)(i).
[2] Subsection 125.7(9)(b).
[3] See 125.7(2)(A)(b)(i).
