After an extraordinarily compressed timeline for debate and amendment, Bill C-14, the legislation to enact the new Canada Emergency Wage Subsidy that will provide relief to employers struggling to remain operational due to COVID-19, has received royal assent.
The legislation is highly technical and laden with definitions and exceptions that make it complex—if there was a time for simple, straightforward stimulus programs, this would be it. But as I mentioned in a recent blog, the government is making every effort to prevent abuse of the Canada Emergency Wage Subsidy program, while working to enhance access for businesses that need it most. It’s a delicate balance and only time will tell if Ottawa has gotten it right.
But the final legislation has broadened the reach of the subsidy and should allow more businesses to qualify. It is by no means perfect, but under the current circumstances Bill C-14 could help many organizations re-hire employees or prevent further layoffs. The bigger question is whether it—and the various other federal relief programs that have been announced to date—will provide the support necessary to lay the groundwork for Canada’s long-term economic recovery.
The following is a high-level summary of the legislation:
As we know, the legislation provides for a 75 per cent Canada Emergency Wage Subsidy that will be made available to ‘eligible entities’ based on ‘eligible remuneration’ paid to ‘eligible employees’ during the ‘qualifying period,’ which runs from March 15th through to June 6th, 2020. The three-month qualifying period is broken down into three separate four-week periods, more specifically March 15th to April 11th; April 12th to May 9th; and May 10th to June 6th. Note, the legislation does enable the government to extend the qualifying period out to September 30th, 2020, should they deem it necessary to do so.
Defined as an individual employed in Canada by an eligible entity during the qualifying period. It only excludes individuals who are without remuneration by the eligible entity in respect of 14 or more consecutive days in the qualifying period (this is a reference to the CERB legislation).
Essentially includes all corporations, individuals (i.e., proprietors), registered charities, certain NPOs, and partnerships, all of the members of which are any of the other entities that are eligible. Note that in all cases, public institutions are excluded—these include municipal or provincial corporations, school boards, public universities and colleges, etc.
Includes wages, salaries or other remuneration. It also includes commissions, fees or other amounts for services paid to eligible employees. It specifically excludes retirement allowances, stock option benefits and amounts received by the employee that can reasonably be expected to be returned to the eligible entity (i.e., loans).
It should be noted that the eligible remuneration cannot exceed the employee’s ‘baseline remuneration.’ In all cases, with the exception of non-arm’s length employees as noted below, the wage subsidy is capped at $847 per week for each eligible employee that is being remunerated throughout the qualifying period.
Baseline remuneration is defined as the average weekly eligible remuneration paid to the eligible employee by the eligible entity during the period that begins on January 1st, 2020, and ends on March 15th, 2020, excluding any period of seven or more consecutive days for which the employee was not remunerated.
Remuneration for non-arm’s length employees
Individuals that are non-arm’s length employees are limited to 75 per cent of their baseline remuneration. Therefore, if a non-arm’s length employee was not receiving any remuneration throughout the period running from January 1st through to March 15th, 2020, they will not be entitled to a wage subsidy.
Another defined term which includes “the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity—generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity.” It goes on to provide certain exclusions for charities and NPOs.
It also states that qualifying revenue excludes extraordinary items and amounts derived from persons or partnerships not dealing at arm’s length with the employer. However, there are special rules for the computation of revenue that take into account certain issues related to corporate groups that are summarized below.
Computation of revenue
The legislation states that the qualifying revenue of an eligible entity is to be determined in accordance with its normal accounting practices, but it does provide the following exceptions:
1) Where a group of eligible entities normally prepares consolidated financial statements, each member of the group may determine its qualifying revenue separately, provided every member of the group determines its qualifying revenue on that basis;
2) Affiliated groups can jointly elect to determine the qualifying revenue of the group on a consolidated basis using relevant accounting principles, and each eligible entity of that group can use that consolidated revenue to determine their qualifying revenue.
3) For joint ventures—If all of the interests in an eligible entity are owned by participants in a joint venture and all or substantially all of the qualifying revenue of the eligible entity for a qualifying period is in respect of the joint venture, the eligible entity can use the qualifying revenues of the joint venture, determined as if the joint venture was an eligible entity, instead of its qualifying revenues for the purposes of determining its decline in revenue.
4) Where certain eligible entities receive all or substantially all of their revenue from non-arm’s length sources, there is a provision that will allow those entities to determine their decline in revenue based on the decline in revenue of the non-arm’s length parties.
5) The legislation also provides for the ability of the eligible entity to make an election to compute their revenues on a cash basis as opposed to an accrual basis. The election must apply to all qualifying periods and the revenue must be determined according to the cash basis provisions related to the computation of farm and fishing income.
Once you have computed your qualifying revenue for the Canada Emergency Wage Subsidy, you must have experienced a decrease in revenue of at least 15 per cent in March, and 30 per cent in April. Therefore, in order to qualify an entity has to meet the following conditions:
- It has to file an application with the Minister in prescribed form on or before October 20th, 2020;
- An individual who has principal responsibility for the financial activities of the eligible entity must attest that the application is complete and accurate;
- The qualifying revenues of the eligible entity dropped by 15 per cent in March when compared to March of 2019, or if the entity so elects or was not carrying on business in March 2019, when compared to the average revenue earned by the eligible entity in January and February of 2020. For April, the revenues must have dropped by at least 30 per cent—the decline can be determined in a similar fashion when determining the decline in March—i.e., compared to April of 2019, or if it elected to use the average of January and February for its March comparison, that same comparison must be used for April, as well. In other words, you can’t alternate between the two methods. NOTE—If you qualify for March you automatically qualify for April. This means that if you met the criteria of the revenue drop in one period you automatically meet the revenue decline for the next period. So, as noted, if you meet the 15 per cent decline in March you should qualify for the subsidy right through to May 9th;
- The last requirement is that the entity had a payroll number registered with the Minister on March 15th, 2020.
10% wage subsidy
If an entity already claimed a benefit under the 10 per cent wage subsidy, that benefit will reduce the amounts eligible under the 75 per cent wage subsidy. In other words, using the 10 per cent subsidy doesn’t preclude you from using the 75 per cent subsidy, which we expected to be the case.
Work Share Program
If the entity has employees receiving benefits under the ‘work-share’ program, those benefits received will reduce the amount received by the employer under the 75 per cent wage subsidy—which makes sense because the employer has not dispensed those funds.
CERB and the Wage Subsidy
As noted above, no subsidy is available for an individual who is without remuneration by the eligible entity in respect of 14 or more consecutive days in the qualifying period. The Department of Finance backgrounder (updated April 11th, 2020) noted that the Government will consider implementing an approach to limit duplication. This could include a process to allow individuals rehired by their employer during the same eligibility period to cancel their CERB claim and repay that amount. This will need to be implemented in the future.
CPP and EI
If an employee is on paid leave, the employer is eligible to receive a reimbursement of 100 per cent of the employer paid CPP and EI, this is in addition to the 75 per cent wage subsidy to be received.
Anti-avoidance and penalties
An obvious anti-avoidance rule relates to multiple employers in a group—in this case the maximum subsidy that may be claimed in respect of an individual that is employed by multiple non-arm’s length employers, is limited to a claim that would be made as if they had one employer.
There are also anti-avoidance rules that prevent artificial increases in remuneration eligible for the subsidy. In addition, several rules have been proposed to target revenue manipulation that would entitle employers to the subsidy.
Should the Minister determine that there is abuse, the penalties are severe and include a new 25 per cent penalty for employers manipulating their revenues, as well as an existing penalty of 50 per cent of an excessive claim for false statements or gross negligence, or as much as a 200 per cent fine and five years’ imprisonment for fraud/tax evasion. The legislation also gives the CRA the ability to name applicants that abuse this subsidy.
As previously noted, the Canada Emergency Wage Subsidy legislation is complex and requires careful consideration to navigate. Should you require additional assistance, please contact a member of our team at any time. KRP is by your side and ready to support your organization in these challenging times.
Armando Iannuzzi, Co-Managing Partner