CEWS NEWS – Bigger and Better

Welch LLP Updates

Since the enactment of the original CEWS legislation contained in Bill C-14 which received Royal Assent on April 11, 2020, the government has put forth numerous proposals meant to expand and enhance the Canada Emergency Wage Subsidy. However, the proposals are yet to be passed into law. The latest proposals were announced on July 17, 2020, which if enacted will among other things, serve to extend the wage subsidy entitlement to December 19, 2020. At the time of writing this article, the Bill is still in its first reading in the House of Commons. However, employers have been able to make their CEWS subsidy claims for period 4 even though technically the law allowing this has yet to be enacted.

Here are some highlights of the proposed changes

  • Effective July 5, 2020, the CEWS will be divided into two parts – a base subsidy and a top-up subsidy.
  • Employers who qualify for the base subsidy will be eligible for a benefit of up to 60% of the maximum weekly remuneration of $1,129 which is a reduction of the current CEWS rate of 75%
  • A new “top up” subsidy has been introduced to help those employers who have been particularly hard hit by the COVID-19 crisis
  • Employers who qualify for the top-up subsidy will be eligible for a benefit of up to 85% of the maximum weekly remuneration of $1,129 which is an increase over the current CEWS rate of 75%
  • The criteria to qualify for the maximum base subsidy will require a revenue decline of 50% whereas under the current program only a 30% decline in revenue was required to receive the maximum subsidy
  • Under the new CEWS even employers with less than a 30% decline in revenue could now qualify for the subsidy albeit at a lesser amount
  • A change in the reference period rules will allow for a change of the reference periods to be used for purposes of determining the percentage of revenue decline for periods 5 (July) and subsequent periods.
  • A change which will allow entities who usually use the cash method as their regular accounting method to elect to use the accrual method for the purpose of calculating their percentage of revenue decline.
  • An extension to the deadline for applying for the CEWS from September 30, 2020 to January 31, 2021

The government has introduced the concept of a base subsidy and a top up subsidy which will affect wage subsidy periods starting July 5, 2020.

The base subsidy will be available to eligible employers and the amount of the subsidy will vary depending on the percentage of revenue decline experienced by the employer. Even employers with less than a 30% decline in revenue will qualify for the base subsidy with the amount of the subsidy varying depending on the percentage of revenue decline.

The top-up subsidy will provide up to an additional 25% over and above the base subsidy amount to employers experiencing extra-large declines in revenue. The top-up will apply for employers who have seen more than a 50% decline in their revenue levels. The top-up percentage is designed to increase at graduated rates depending on the level of revenue decline suffered by the employer. The maximum top-up of 25% applies in respect of revenue declines of 70% or more.

The new base and top-up calculations will only apply to remuneration paid to active employees. A different calculation will apply to remuneration paid to furloughed employees. In addition, the government has introduced the concept of a "safe harbor" for periods 5 and 6 which will ensure that employers receive at least the amount of the subsidy they would have received had they performed their calculations in accordance with the initial CEWS program.

Table 1 below describes the rate structure for the base subsidy under the new CEWS program. As you can see, the maximum subsidy rate has been decreased to 60% down from 75% starting period 5 and the subsidy amounts gradually decrease and the percentage of revenue decline required to qualify for the maximum subsidy increases after period 6.

Table 1: Rate structure of 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 $677 Up to $677 Up to $565 Up to $452 Up to $226
Revenue drop
50% and over 60% 60% 50% 40% 20%
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)
* In Periods 5 and 6, employers who would have been better off in the CEWS design in Periods 1 to 4 would be eligible for a 75% wage subsidy if they have a revenue decline of 30% or more. As described further below (see Safe harbour rule for Periods 5 and 6).

For example, say an employer experiences a 30% revenue decline for the month of July. Based on the new rules, in order to calculate the wage subsidy rate, an employer would multiply its percentage of revenue decline by 1.2 to come up with the base CEWS rate. In this case the base CEWS rate would be 30% x 1.2 = 36%. However, due to the safe harbor rule described later in this document, in this case, the employer would still be entitled to the 75% CEWS rate.

On the other hand, if say an employer experiences a 20% revenue decline for the month of July, based on the new rules, the CEWS rate would be 20% x 1.2 = 24%. Since the revenue decline is less than 30%, the safe harbour rule does not apply.

Table 2 below describes the rate structure for the top-up subsidy under the new CEWS program. The revenue drop required to qualify for the top-up subsidy is based on a comparison of revenue in the preceding 3 months to the same 3 months in the prior year. Alternatively, the average monthly revenue in January and February 2020 can be used as the comparison period.

Table 2: Top-up CEWS rates for selected levels of average revenue drop over the preceding three months
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%

Table 3 below describes the rate structure of the combined base CEWS and the top-up CEWS. As you can see, the maximum subsidy amount per employee for employers who have suffered revenue declines of 70% or is $960. Recall under the previous CEWS program the maximum subsidy an employer could receive per employee was $847. The goal of the new CEWS is to provide larger subsidies for those who need it the most.
 

Table 3: Rate structure of the combined base CEWS and the top-up CEWS for the most affected employers (i.e., those that experienced an average revenue drop of 70% or more in the preceding 3 months)
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 drop in the current 1-month reference period
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)
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)
* In Periods 5 and 6, employers who would have been better off in the CEWS design in Periods 1 to 4 would be eligible for a 75% wage subsidy if they have a revenue decline of 30% or more. As described further below (see Safe harbour rule for Periods 5 and 6).

The government has proposed a safe harbour rule for Periods 5 and 6 which will ensure that an eligible employer who has experienced a revenue decline of at least 30% will receive at least 75% of wage subsidy.  Under the safe harbor rules an employer will be entitled to a CEWS rate not lower than the rate that they would be entitled to if their entitlement were calculated under the CEWS rules that were in place for Periods 1 to 4. Employers would still have the opportunity to qualify for up to 85% of wage subsidy if they meet the eligibility criteria.

Although the CEWS calculation will change for active employees it will not change for furloughed employees in respect of Periods 5 and 6. Rather the subsidy calculation for a furloughed employee will remain the same as for Periods 1 to 4. Thus, it would be the greater of:

  • For arm's-length employees, 75 per cent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
  • 75 per cent of the employee's pre-crisis weekly remuneration up to a maximum benefit of $847 per week or the amount of remuneration paid, whichever is less.

Beginning in Period 7, CEWS support for furloughed employees will be adjusted by regulation to align with the benefits provided through the Canada Emergency Response Benefit (CERB) and/or Employment Insurance (EI).
For Period 5 and subsequent periods, the CEWS for furloughed employees will be available to eligible employers that qualify for either the base rate or the top-up rate for active employees in the relevant period.
The employer portion of contributions in respect of the Canada Pension Plan, Employment Insurance, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in respect of furloughed employees will continue to be refunded to the employer.

Under the previous CEWS legislation the concept of "baseline remuneration" was used mainly to prevent employers from claiming the CEWS subsidy in respect of remuneration paid to non-arm's length employees who were not receiving a regular wage prior to the COVID-19 pandemic.

Under the new CEWS program, there will be no reference to the baseline remuneration amount for active arm's length employees. Instead for these employees, remuneration used for the CEWS calculation will be based on the actual remuneration paid for the eligibility period. This is a change from the old program which would provide employers with the full amount of the subsidy even if they had reduced their wage payments by 25%. For example, an employer who paid an arm's length salary of $1,000 during the baseline period but only paid $750 during an eligible period could still have its CEWS benefit based on the $1,000 whereas under the new CEWS program the benefit will be based on the $750 payment. These new rules will take effect for period 5 and beyond.

When it comes to non-arm's length employees, the concept of a pre-crisis remuneration still applies but changes have been made to the determination of what constitutes pre-crisis remuneration. For period 4, the pre-crisis remuneration of an employee will be based on the average weekly remuneration paid to the employee from January 1 to March 15, 2020; from March 1, 2019 to May 31, 2019; or from March 1, 2019 to June 30, 2019. For Period 5 and subsequent periods, the pre-crisis remuneration of an employee will be based on the average weekly remuneration paid to the employee from January 1 to March 15, 2020 or from July 1, 2019 to December 31, 2019. In all cases, the calculation of average weekly remuneration will exclude any period of 7 or more consecutive days without remuneration. Employers can choose which period to use on an employee-by-employee basis. The wage subsidy for non-arm's length employees will be based on the employee's weekly eligible remuneration paid or the pre-crisis remuneration, whichever is less, up to a maximum of $1,129.

Proposed changes announced on May 15, 2020, sought to broaden the scope of employers who would be eligible for the wage subsidy. Based on the currently enacted legislation, eligible employers include individuals, taxable corporations and trusts, partnerships consisting of eligible employers, non‑profit organizations and registered charities. Public institutions are generally not eligible for the subsidy. The May 15, 2020 announcement proposed to add the following groups to the definition of eligible employer:

  • Partnerships that are up to 50-per-cent owned by non-eligible members;
  • Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible employers;
  • Registered Canadian Amateur Athletic Associations;
  • Registered Journalism Organizations; and
  • Non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.

The latest list of proposed changes includes changes to the definition of eligible employee. The proposals seek to no longer exclude employees who are without remuneration in respect of 14 or more consecutive days in an eligibility period from being an eligible employee. The rule excluding these employees in the previous CEWS program was there to exclude employees eligible for the CERB from being an eligible for the wage subsidy. This change to now allow these employees to be eligible for the CEWS is consistent with the government's expressed desire to make it easier to transition employees away for the CERB and on to the CEWS.

As was the case under the previous CEWS model, an employer will automatically qualify for CEWS in the period subsequent to any period during which it experienced the required decline in revenue. The rule has changed slightly to account for the fact that under the proposed legislation, the subsidy rates will depend on the percentage of the revenue decline. In that case, the employer will always be entitled to use the greater percentage of revenue decline be it the percentage decline realized in the current period or that of the previous period.

Furthermore, under the proposed legislation, the employer will be entitled to change the method used to determine its revenue decline. Under the previous CEWS program, an employer could choose either the same month of the previous year or the average of January and February of 2020 to compare the percentage of revenue loss. Once a comparison period was chosen, the employer would have to continue to use that period throughout the program timeline. Starting with Period 5, the employer now will be entitled to choose a different comparison period which will apply for the balance of the program timeline. Table 4 below provides a summary of the reference periods which can be used to calculate an employer's eligibility for the CEWS.

 

Table 4: Rate structure of the combined base CEWS and the top-up CEWS for Periods 5 and 6* Average revenue drop in the preceding 3 months
Revenue drop in the current 1-month reference period   70% or more 50% to 69% 0% to 49%
50% or more 85% (60% base CEWS + 25% top-up) 60% + 1.25 x (3 month revenue drop-50%) (e.g., 60% base CEWS + 1.25 x (60% 3 month revenue drop - 50%) = 72.5% CEWS rate) 60% (60% base CEWS + 0% top-up)
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 + 1.25 x (3 month revenue drop-50%) (e.g., 1.2 x 20% revenue drop + 1.25 x (60% 3-month revenue drop-50%) = 36.5% CEWS rate) 1.2 x revenue drop (e.g., 1.2 x 20% revenue drop = 24% CEWS rate)
No revenue drop 25% (0% base CEWS + 25% top-up) 1.25 x (3 month revenue drop-50%) (e.g., 1.25 x (60% 3-month revenue drop-50%) = 12.5% CEWS rate) nil
* In Periods 5 and 6, employers who would have been better off in the CEWS design in Periods 1 to 4 would be eligible for a 75% wage subsidy if they have a revenue decline of 30% or more. As described further below (see Safe harbour rule for Periods 5 and 6).

An employer will need to use a 3-month period test in order to determine its eligibility for the top-up CEWS. Table 5 below shows a summary of the reference periods which can be used to calculate an employer's eligibility for the top-up CEWS.

Table 5: Reference periods for the base CEWS
  Claim period General approach Alternative approach
Period 5 July 5 to August 1, 2020 July 2020 over July 2019 or June 2020 over June 2019 July 2020 or June 2020 over average of January and February 2020
Period 6 August 2 to August 29, 2020 August 2020 over August 2019 or July 2020 over July 2019 August 2020 or July 2020 over average of January and February 2020
Period 7 August 30 to September 26, 2020 September 2020 over September 2019 or August 2020 over August 2019 September 2020 or August 2020 over average of January and February 2020
Period 8 September 27 to October 24, 2020 October 2020 over October 2019 or September 2020 over September 2019 October 2020 or September 2020 over average of January and February 2020
Period 9 October 25 to November 21, 2020 November 2020 over November 2019 or October 2020 over October 2019 November 2020 or October 2020 over average of January and February 2020

Additional proposed changes, which would generally apply as of March 15, 2020, include:

  • providing an appeal process based on the existing procedure for notices of determination that allows for an appeal to the Tax Court of Canada;
  • providing 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 by the seller;
  • allowing prescribed organizations that are registered charities or non-profit organizations to choose whether to include government-source revenue for the purpose of computing their reductions in qualifying revenue; and
  • allowing entities that use the cash method of accounting to elect to use accrual based accounting to compute their revenues for the purpose of the CEWS.

The government is also proposing to move forward with previously released legislative changes, including relieving changes for calculating pre-crisis "baseline" remuneration, for corporations that have amalgamated and for eligible entities that use payroll service providers. The government is also proposing to move forward with the amendment that would align the treatment of trusts and corporations for the purposes of the CEWS. Some of these proposed measures can be found in the May 15, 2020 backgrounder entitled Extending eligibility for the Canada Emergency Wage Subsidy.


Author: Mona Tessier
CPA, CA
Principal, Indirect Tax Specialist
Ottawa
mtessier@welchllp.com