This is an update to our recent blog post summarizing the Canada Emergency Wage Subsidy (“CEWS”). You can find the first part of our post, which summarizes the government’s original announcement, here.

On April 11, 2020, the federal government passed Bill C-14, amending the Income Tax Act to create the CEWS. The subsidy provides financial support to eligible employers for wages paid to eligible employees for the period from March 15, 2020 to June 6, 2020 (divided into three qualifying periods), subject to a possible extension up to September 30, 2020.

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Q:        How does the program work?

A:        For each qualifying period, an eligible employer can claim, from the government, a capped wage subsidy for remuneration paid to each eligible employee.

Q:        What are the qualifying periods?

A:        Right now, there are three qualifying periods:

• March 15, 2020 – April 11, 2020
• April 12, 2020 – May 9, 2020
• May 10, 2020 – June 6, 2020

The government has the right to create additional qualifying periods in the future, ending no later than September 30, 2020.

Q:        Which employers are eligible?

A:        There are two key criteria to being an eligible employer.

First, the employer must be a taxable corporation, individual, registered charity, certain not-for-profit or other tax-exempt organization, certain partnership, or other prescribed organization. Public institutions, including schools, school boards, hospitals, health authorities, public universities, public colleges, Crown corporations and municipal authorities, are not eligible for this subsidy.

Second, the employer must be able to show that it has experienced a gross revenue reduction of:

• For the qualifying period from March 15, 2020 – April 11, 2020, 15% or more in March 2020 when compared to March 2019 or when compared to the employer’s average revenue in January and February 2020;
• For the qualifying period from April 12, 2020 – May 9, 2020, 30% or more in April 2020 when compared to April 2019 or when compared to the employer’s average revenue in January and February 2020; or
• For the qualifying period from May 10, 2020 – June 6, 2020, 30% or more in May 2020 when compared to May 2019 or when compared to the employer’s average revenue in January and February 2020.

If an employer uses average revenue in January and February 2020 as the reference period, it must do so for each qualifying period. Once an employer is found eligible for a specific period, it automatically qualifies for the next period.

For the purpose of the CEWS, revenue generally refers to cash, receivables or other consideration that the entity receives from its normal activities in Canada. Certain special amounts are excluded from the meaning of revenue, including any amounts received from non-arm’s length entities or partnerships. Special rules apply to determine the eligibility of employers who earn all or substantially all of their revenue from non-arm’s length entities or partnerships.

Affiliated entities and certain joint ventures can choose to calculate their revenue as a group, as long as every entity within the group uses the same approach. Individual entities cannot calculate revenues on a department-specific or location-specific basis for the purpose of applying for the subsidy.

Q:        Which employees are eligible?

A:        An eligible employee is any individual employed in Canada during a qualifying period, unless the employee was without pay for 14 or more consecutive days. Employees who do not deal at arm’s length with their employers can be consider “eligible employees”, but are subject to special rules.

Q:        How much is the subsidy?

A:        Generally, the maximum subsidy that an employer can claim for an individual employee for a given week is equal to a certain capped amount.

The capped amount for employees who deal at arm’s length with their employer is equal to the greater of the following amounts:

• $847 or 75% of the remuneration paid for the week, whichever is less; and
• $847, the amount of remuneration paid during the week, or 75% of the employee’s average pre-crisis weekly earnings, whichever is less.

The capped amount for employees who do not deal at arm’s length with their employer is $847, the amount of remuneration paid for the week, or 75% of the employee’s average pre-crisis weekly earnings, whichever is less.

While not strictly required, employers are expected to make best efforts to “top up” employees’ salaries.

“Remuneration” generally includes salary, wages, and other taxable remuneration, as well as fees, commissions and similar amounts. It does not include retiring allowances, certain equity entitlements, amounts that will be repaid by the employee to the employer or a related party, or amounts paid to an employee to increase the subsidy claim.

Employers can claim the subsidy for employees who are on a paid leave, as long as they are on leave for full weeks. In that case, the employer can also claim an additional amount equal to the employer’s premiums or contributions under the Employment Insurance Act, Canada Pension Plan (or equivalent provincial plan), or Quebec’s Act respecting parental insurance.

While there is a weekly “cap” per employee, there is no limit on the total amount that eligible employers can claim. An employer’s subsidy will, however, generally be reduced by (i) any amounts received from the previously-created 10% wage subsidy for small and medium-sized employers and (ii) any amounts received by employees though the Federal Work-Sharing Program.

The employer will be required to include any subsidy received by it in its income for Canadian tax purposes.

Q:        What if an employer files an improper claim?

A:        If the government determines that an employer received the subsidy without meeting the eligibility conditions, the employer will be required to repay any amounts it received. Penalties may apply in the case of fraudulent claims or abuse, including fines or imprisonment. In particular, employers that engage in artificial transactions to reduce revenue for the purpose of claiming the subsidy will be subject to a 25% penalty, in addition to being required to repay the subsidy. Employers should keep detailed records to substantiate amounts claimed.

Q:        How do employers apply?

A:        Eligible employers will be able to apply through the CRA’s My Business Account portal. The names of applicants may be published by the CRA. Applications must be made before October 2020. To apply, an employer must have had a CRA business number and payroll account as of March 15, 2020. The subsidy will be treated as an overpayment of Part I income tax, so employers may be required to file a Canadian income tax return in order to obtain the subsidy. The federal government will make more details about the application process available shortly.

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You can find the full text of Bill C-14 here.

In addition, you can access our Coronavirus Resource Center for more information on the impact of this situation on your business and what you can do to manage these risks. It covers areas of immediate concerns such as employer obligations, contract issues, supply chain disruption, financing and force majeure, as well as more forward-looking issues such as the practical impact of COVID-19 on transactions and IPO activity.

With special thanks to Stephanie Dewey for her contribution to this post. Stephanie is a member of the firm’s Tax Practice Group in Toronto.