Written by Hennadiy Kutsenko, Anu Nijhawan, Jordan Fremont and Carl Cunningham
The Canada Emergency Wage Subsidy (CEWS) was enacted, as amendments to the Income Tax Act (Canada) (ITA), on April 11, 2020, for the purposes of assisting employers in financial hardship due to the COVID-19 pandemic and of reducing potential lay-offs of employees. As described previously (COVID-19 Relief for Employers: The Canada Emergency Wage Subsidy is Approved and Applications for the Canada Emergency Wage Subsidy Open on April 27, 2020), the CEWS generally provides "eligible entities" with a wage subsidy of up to 75 percent of "eligible remuneration" paid to an "eligible employee" per week, up to a maximum of $847 per week. The application portal for the CEWS opened on Monday, April 27, 2020 and benefit payments began to be made on May 7, 2020. The Canada Revenue Agency (CRA) and Department of Finance continue to provide guidance on the CEWS, including the issuance by the CRA of an application guide and various FAQs and, most recently, the extension by the Department of Finance of the CEWS timeframe and approval of regulations to extend eligibility for the CEWS. Additional legislative changes have also been proposed.
Extension to August 29, 2020
As originally announced on May 8, 2020, the CEWS will be extended by an additional 12 weeks to August 29, 2020 (originally, the CEWS lasted only to June 6, 2020), so as to provide workers and employers with greater confidence that they will continue to receive support including during the post-crisis economic recovery.
There are no changes to the maximum wage subsidy available ($847/week per eligible employee) or the revenue decline threshold, but the Federal Government has stated that it will consult with key business and labour representatives over the next month on potential adjustments to the CEWS, including potential amendments to the requisite 30 percent revenue decline threshold. In the interim, employers should continue to operate on the assumption that eligibility for the CEWS in respect of each qualifying period in the 12 weeks through to August 29, 2020, will require a decline in qualifying revenue of 30 percent, although this will need to be confirmed prior to applications for those periods being submitted.
Additional Eligible Entities
Eligible entities under the CEWS are, generally, individuals, taxable corporations, certain (but not all) non-profit corporations and registered charities but, as noted in COVID-19 Relief for Employers: The Canada Emergency Wage Subsidy is Approved, not all common business forms were included in the defined term "eligible entity", including, for example, partnerships in which non-eligible entities held an interest and various tax-exempt entities. Some of these omissions have been addressed through a new regulation 8901.1 of the ITA, approved on May 15, 2020. This regulation expands the list of organizations which constitute eligible entities to include:
- Any partnership, provided that, at all times during the particular qualifying period, the fair market value of partnership interests held, directly or indirectly (including through one or more partnerships), by a person or partnership other than an eligible entity do not, in the aggregate, exceed 50 percent of the fair market value of all interests in the partnership. As such, partnerships will no longer be barred from eligibility for the CEWS simply because a minority interest is held by a non-eligible entity.
- Indigenous government-owned corporations (and their subsidiaries) that are tax-exempt corporations pursuant to ITA subsections 149(1)(d.5) or 149(1)(d.6), provided that such entities are carrying on business and are at least 90 percent owned by tax-exempt Aboriginal governments or similar Indigenous governing bodies. Notably, the particular provisions of the ITA provide for the tax-exemption only where income earned by such corporations meets certain geographical restrictions. Partnerships where each member is either an eligible entity or a tax-exempt Aboriginal government are also prescribed as eligible entities. These regulations follow an announcement made by Indigenous Services Canada in late April that these changes would be forthcoming.
- Registered Canadian Amateur Athletic Associations (RCAAAs) which are national not-for-profit associations responsible for the promotion of sport and tax-exempt under ITA paragraph 149(1)(g).
- Registered journalism organizations which are non-profit organizations under ITA paragraph 149(1)(h).
- A person or partnership that operates a private school or private college. The Federal Government's announcement indicates that this is intended to also include institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.
The regulations are retroactive to the initial implementation of the CEWS on April 11, 2020, such that these new eligible entities can apply for the CEWS starting March 15, 2020, and subsequent qualifying periods so long as the other requirements are satisfied.
Additional Proposed Legislative Changes
In addition to the foregoing, the Government has indicated that it will be proposing further legislative amendments to ensure that the CEWS continues to meet its objectives.
Support for Seasonal Employees and Employees Returning from Extended Leave
In certain circumstances, the computation of the upper limit of the CEWS subsidy amount is based, in part, on the eligible employee's "baseline remuneration", being the employee's average weekly pre-crisis remuneration for the period between January 1 and March 15, 2020. In response to concerns that the definition of "baseline remuneration" could produce unintended results for certain employees, such as those that were on parental, disability, or unpaid leave from January 1 to March 15, or those employed on a seasonal basis, the Government has proposed to amend the CEWS to allow employers to choose one of two periods when calculating the baseline remuneration of their employees. Specifically, employers would be permitted to calculate baseline remuneration for an employee as currently provided or, alternatively, as the average weekly remuneration paid to the employee from March 1 to May 31, 2019, in both cases excluding any period of 7 or more consecutive days without remuneration. The announcement indicates that employers will be able to choose which period to use on an employee-by-employee basis.
Amalgamations and Wind-ups
A concern had been raised that corporations formed on the amalgamation of two or more predecessor corporations might not qualify for the CEWS by virtue of the amalgamated corporation being deemed a new corporation as of the time of amalgamation and hence not having benchmark revenues for the relevant prior reference period. To address these concerns, the Government has proposed to amend the CEWS to allow corporations formed on an amalgamation of two or more predecessor corporations (or where a corporation is wound up into another), to calculate benchmark revenue for the revenue-decline test using the combined revenues of the predecessor corporations, subject to an anti-avoidance rule which applies where it is reasonable to consider that one of the main purposes for the amalgamation (or the winding up) was to qualify for the CEWS.
While this change will be effective only upon the implementation of amending legislation, this change, as well as the one described above, is proposed to be retroactive to April 11, 2020, which means that it would apply to the first qualifying period starting March 15, 2020, and subsequent qualifying periods.
Commencing in the third qualifying period (May 10 – June 6) and subsequent periods, the Government has proposed to amend the eligibility of trusts to the CEWS to better align the tax treatment of trusts and corporations. As a result, trusts with employees would continue to be eligible for the CEWS, subject to the following added exceptions:
- Where the trust is a tax-exempt entity (other than a public institution), it would qualify only if it is a registered charity or one of the other types of tax-exempt eligible entities.
- Where the trust is a public institution, it would qualify only if it is a prescribed organization.
Amendments to Revenue Threshold
In addition, the Federal Government will be consulting with key business and labour representatives over the next month on potential adjustments to the requisite 30 percent revenue decline threshold.
The most recent set of CEWS amendments and regulations are welcome, as they close certain gaps in the legislation and evidence the Government's continuing commitment to assist employers during the COVID-19 pandemic. Various other important issues remain (such as the treatment of owners of small businesses that receive remuneration in the form of dividends and other open technical issues), and it is hoped that future regulations and announcements will clarify some of these points.
The Bennett Jones Employment Services, Tax and Public Policy groups continue to work with employers, government and other national and local organizations to work through these issues, and would be pleased to assist you as you look to identify and implement strategies in connection with your evaluation of the CEWS. In addition, please visit our COVID-19 Resource Centre for other COVID-19-related materials.