The Canada Emergency Wage Subsidy

The Government of Canada has released further details on the Canada Emergency Wage Subsidy (CEWS).  The CEWS is intended to help employers of all sizes and from every industry—and their employees—through the challenges created by the COVID-19 pandemic.  For eligible employers, up to 75% of employee wages and salaries will be subsidized for a period of 12 weeks, retroactive to March 15, 2020.  However, the subsidy is only available to organizations that experience a decrease in revenue of 15% for the period between March 15 and April 11, and 30% in the two subsequent periods.

Eligible Employers

Individuals, taxable corporations, partnerships consisting of eligible employers, non-profit organizations, and registered charities are all eligible employers for the CEWS.  However, public institutions, such as municipalities, local governments, Crown corporations, hospitals, schools, and public universities and colleges, are not considered eligible employers.  In addition, eligible employers must demonstrate that they experienced the required decrease in revenue during an eligible claim period in comparison to a specified reference period.

Eligible Claim and Reference Periods

Two alternatives may be used to compare current revenue to historical revenue in determining the extent of revenue decline for the purpose of CEWS eligibility.  Employers have the option of comparing monthly revenue to revenue for the same period in 2019 or comparing monthly revenue to their average revenue for January and February of 2020.

Note that the legislation enacted for the CEWS allows the federal government to extend the program for an additional period that ends no later than September 30, 2020, and the government has indicated that it intends to do so.

For example, if revenue in March 2020 was down 20% compared to March 2019, an employer would be entitled to claim the CEWS on remuneration paid between March 15 and April 11, 2020.  In addition, if March revenue only dropped 10% based on the same year-over-year comparison, but dropped 20% when compared to average revenue for January and February 2020, then the employer would still qualify for the subsidy.

The alternative option of comparing monthly revenue to an organization’s average revenue for the first two calendar months of 2020 is intended to make the subsidy available to organizations that might not otherwise qualify, such as newer start-ups (which might have had little or no revenue in early 2019), high-growth firms, and industry sectors that may have faced challenges in 2019.  Eligible employers are expected to select one of the reference period options and apply it consistently for the remainder of the program.

Calculating Revenue

Revenue to be used in determining the extent of decline and eligibility for the CEWS generally must:

• Come from business carried on in Canada;
• Be received from arm’s-length sources;
• Be determined using the employer’s normal accounting methods;
• Exclude extraordinary items;
• Ignore amounts generated from capital; and
• Utilize either the cash or accrual method of accounting in a consistent manner.

However, exceptions to the general rules can complicate the calculation of revenue for the purpose of determining CEWS eligibility.  In certain circumstances, the legislation allows an employer to make elections, such as using the cash method of accounting, in determining its eligibility for the program. 

For charities and non-profit organizations, revenue excludes items generated from non-arm’s length parties.  Revenue from government sources can be included or excluded by such entities, but the method selected must be applied in a consistent manner for the entire length of the program.

Subsidy Amount

The CEWS is determined for each employee based on compensation earned for the period between March 15 and June 6, 2020, and is equal to 75% of that compensation, up to a maximum of $847 per week.

The Canada Revenue Agency (CRA) has provided the following details regarding compensation earned for the purpose of determining the subsidy amount:

• Pre-crisis remuneration, which is the average weekly remuneration paid between January 1 and March 15, 2020 (excluding any weeks where an employee did not receive pay), may be substituted for actual compensation in certain circumstances;
• Compensation earned by new employees qualifies for the subsidy;
• Compensation includes certain taxable benefits, but excludes severance pay, retiring allowances, stock options, dividends for owner-managed corporations, and benefits related to the personal use of company vehicles;
• Canada Pension Plan and Employment Insurance deductions from pay do not impact the subsidy calculation; and
• Employers are entitled to the wage subsidy for non-arm’s length employees, but only if they were employed prior to March 15, 2020.

There is no cap on the total subsidy amount that may be claimed by an employer.

Refund for Certain Employer Contributions

The federal government has also introduced refunds for the employer-paid part of contributions made on behalf of eligible employees who are furloughed (on leave with full or partial pay) for any full week in a claim period, and for which the employer is eligible to claim the CEWS for those employees.  This includes employer contributions to:

• The Canada Employment Insurance Plan;
• The Canada Pension Plan;
• The Quebec Pension Plan; and
• The Quebec Parental Insurance Plan.

For example, a refund is available to cover contributions paid on behalf of eligible employees directed to not report to work or placed on leave with pay for a week.  Eligible employers may apply for this refund at the same time as the CEWS.  There is no limit on the payroll contribution refund, but these amounts cannot be included in the CEWS computation. 

How to Apply

Eligible employers may apply for the CEWS in one of three ways:

1)  Through the CRA’s My Business Account portal;
2)  By authorizing a business representative to apply on their behalf; or
3)  Through an online application process.

 The CRA has released further details about the application process and a calculator to assist in determining the subsidy amount an organization can expect under the program.

Other Considerations

Interaction with Temporary Wage Subsidy

An eligible employer that is entitled to both the temporary (i.e., 10%) wage subsidy and the CEWS must deduct any amount claimed under the 10% wage subsidy program when determining its entitlement under the CEWS.

Interaction with Work-Sharing Program

For employers and employees that are participating in the Work-Sharing Program, any Employment Insurance benefits received by employees through the program will reduce the employer’s benefit entitlement under the CEWS.

Interaction with the Canadian Emergency Response Benefit

Employers are not eligible to claim the CEWS for an employee who has been without remuneration for 14 or more consecutive days in an eligible claim period (see chart above).  This restriction has been introduced to prevent employers from claiming the subsidy for an employee that may also be eligible for the Canadian Emergency Response Benefit.

Tax Status of CEWS

The CEWS is taxable government assistance when received by an employer.  Therefore, any CEWS amounts should be included in the employer’s taxable income for the year in which the subsidy is received.  In addition, such amounts will reduce eligible amounts for certain federal tax credits, such as the wages used to calculate Scientific Research and Experimental Development tax credits.

Potential Penalties

Employers must maintain adequate documentation to substantiate both decreased revenue and compensation levels.  Given the high profile and significant cost of the CEWS program, audit activity in this area is almost a certainty.  Any taxpayer that applies for the CEWS without meeting the requirements will be required to repay any amounts received under the program.  Penalties, including fines and imprisonment, may be levied where CEWS claims are determined to be fraudulent in nature.  Employers that engage in artificial transactions to reduce revenue for the purpose of becoming eligible for the CEWS may also be subject to a penalty equal to 25% of the value of any subsidy claimed.

The latest details on the CEWS may be found on the Department of Finance website at:
Additional Details on the Canada Emergency Wage Subsidy