Written By Jordan Fremont, Carl Cunningham, Anu Nijhawan and Katelyn Weller

This blog was updated on April 23, 2020.

On Saturday April 11, 2020, the COVID-19 Emergency Response Act, No. 2 received Royal Assent, thereby amending the Income Tax Act (Canada) to give effect to the Canada Emergency Wage Subsidy (CEWS) framework that the federal government had previously proposed. The legislation is largely consistent with the details of the CEWS that had previously been announced (see our previous blog postings, Canada Emergency Wage Subsidy for Employers Impacted by COVID-19 from March 30, Additional Details on the Canada Emergency Wage Subsidy for Employers Impacted by COVID-19 from April 1, and The Proposed Canada Emergency Wage Subsidy Takes Another Turn from April 8), but also includes notable clarifications and additions that enhance the ability of employers to access the CEWS.

The CEWS provides "eligible entities" with a wage subsidy of up to 75 percent of "eligible remuneration" paid to an "eligible employee" per week for a 12-week period between March 15 and June 6, 2020, up to a maximum of $847 per week. The CEWS is deemed by the legislation to be an overpayment of tax by the eligible entity and, as such, is expected to operate to reduce future tax payable by the eligible entity or to generate a refund. As adopted, the key concepts are as below.

Eligible Entities

The CEWS is available to a broad range of employers that are "eligible entities", including individuals, taxable corporations (including public and private corporations), certain tax-exempt organizations, and partnerships between eligible entities. As previously announced, the CEWS is not generally available to public bodies, including municipalities, Crown corporations, public universities, colleges, schools and hospitals.

Although broad, it is important to note that not all common business forms are included in the term "eligible entity". A notable example is a partnership the members of which include a tax-exempt pension fund or an aboriginal band. It remains to be seen whether such partnerships or other entities will be prescribed by regulation as eligible entities. Entities which do not fall squarely within the listed entities are encouraged to consult with their legal and tax advisors to determine next steps, including seeking clarity through future regulations.

In order to qualify for the CEWS, eligible entities must be able to evidence a reduction in "qualifying revenue" of at least 15 percent in March or 30 percent in April or May by comparing revenue to the corresponding period in 2019. To provide flexibility for new businesses and businesses in expansion mode, eligible entities are permitted, in the alternative, to calculate changes in revenue by comparing revenues in each of March, April and May to an average of their revenues earned in January and February 2020. If this alternative method of calculating a revenue reduction is used, it must be used for any future qualifying period.

The qualifying periods and available approaches to measuring revenue changes are as follows:

Claim Period	Required Reduction in Revenue	Reference Period for Reduction in Revenue
March 15 to April 11, 2020	15%	March 2019 or, by election, the average of January and February 2020.
April 12 to May 9, 2020	30%	April 2019 or, if elected above, the average of January and February 2020.
May 10 June 6, 2020	30%	May 2019 or, if elected above, the average of January and February 2020.
Other qualifying periods may be prescribed by regulation.

An eligible entity that qualifies in one qualifying period will be deemed to qualify for next subsequent qualifying period. This measure was, we understand, adopted to provide certainty that, if an eligible entity qualifies for the March 15 to April 11 period, it will also be deemed to qualify for the April 12 to May 9 period. The language of the deeming rule suggests that re-qualification would nevertheless be necessary for the May 10 to June 6 period.

Qualifying Revenue

For the purposes of calculating the reduction in qualifying revenue, revenue is defined as the revenue (cash, receivables, or other consideration) from the eligible entity's ordinary business activities carried on in Canada, provided such amounts are derived from arm's-length persons or partnerships. Extraordinary items are excluded.

The legislation includes specific elective rules governing the computation of revenue where substantially all (generally 90 percent or more) of an eligible entity's revenue is derived from non-arm's length transactions. Such provisions are expected to apply, for example, where an eligible entity sells all of its production to a related company that in turn earns arm's length revenue but does not itself have employees.

Qualifying revenue is to be determined in accordance with the eligible entity's normal accounting practices, subject to certain rules adopted for flexibility. For example, while revenue is generally determined on an accrual basis, an eligible entity may elect to use the cash method. Eligible entities that normally prepare consolidated financial statements are able to compute revenue on a consolidated basis (where an election is made) or a separate basis, provided every member of the group is consistent.

Notably, the reduction in revenue test is computed on an entity-by-entity basis. Thus, where an eligible entity carries on more than one business, the CEWS may not be available where the reduction thresholds are not met for the entity as a whole, even where one particular business line does so qualify. Entities which may be in this position are encouraged to review their organizational structures with their legal and tax advisors to determine eligibility.

Specific rules apply to the revenue computation for charities and non-profit organizations, which are allowed to include or exclude government funding in their revenues for the purpose of applying the revenue reduction test. Once selected, the same approach will apply for the duration of the program.

Scope and Duration

For eligible entities, the CEWS will cover up to 75 percent of "eligible remuneration" paid to new hires (up to up to a maximum benefit of $847 per week) who are employed in Canada. For current employees who are employed in Canada, the amount of the CEWS for a given employee will be the greater of:

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

For non-arm's length eligible employees (for example, employees of family corporations and professional corporations), the subsidy amount will be limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, to a maximum benefit of $847 per week and 75 percent of the employee's pre-crisis weekly remuneration (whichever is lower), and will only be payable in respect of non-arm's length employees who had been employed prior to March 15, 2020.

Eligible employees are all individuals employed in Canada by the eligible entity in the qualifying period, other than individuals who are not remunerated for 14 or more consecutive days in such period. Two items are noteworthy in respect of this definition:

• Where an employee has been subject to a temporary layoff or other unpaid leave of absence, it should be noted that the CEWS will not be available for a qualifying period in respect of that employee if the employee has been recalled to employment after having been without remuneration for 14 or more consecutive days in respect of that qualifying period. In this regard, the government published additional information on April 21, which indicates that the CEWS will be available to laid off employees who are rehired/recalled on a retroactive basis, as long as their retroactive pay and status meet the eligibility criteria for the claim period. Although reference is not made to how this statement interacts with the 14-day period in the definition of eligible employee, in calls with Canada Revenue Agency personnel it has been suggested that an employer could qualify for the CEWS in respect of an employee who has been on lay off or furlough without pay for 14 or more consecutive days in a qualifying period if the employee is retroactively recalled and paid such that, once retroactively recalled and paid the employee would not be without remuneration for 14 or more consecutive days in the qualifying period. In other words, if an employee commenced a temporary lay-off on March 17, 2020, and the employer recalled the employee on April 27, 2020, effective as of March 18, 2020, and paid the employee retroactively from March 18, 2020 (and such payment being made prior to the employer applying for the CEWS), the employer should be eligible for the CEWS in respect of that employee retroactive to March 18, 2020. However, any Canada Emergency Response Benefit (CERB) amounts received by such employee in respect of the same qualifying period may have to be repaid. 
• Although uncertainty exists on the issue, this might be interpreted to include non-residents of Canada who perform employment services in Canada and who have eligible remuneration that is subject to withholdings for Canadian income tax purposes.

Eligible remuneration generally includes salary, wages, fees, commissions and other remuneration (such as taxable benefits) that are typically subject to income tax withholdings, but excludes retiring allowances, stock option benefits, and certain other amounts. Notably, there is an express exclusion for amounts that can be expected to be paid or returned, directly or indirectly, to the eligible entity or a non-arm's length person. This exception could, for example, be read as applying where an owner/manager typically contributes salary back to the employer entity for working capital purposes. Any such arrangements should be scrutinized carefully as part of the CEWS analysis. Eligible remuneration also excludes any accelerated remuneration paid to an employee that is in excess of such employee's baseline remuneration where one of the main purposes for the accelerated payment is to increase the amount of the CEWS.

Although previous announcements had emphasized that employers would be expected to, where possible, maintain employees' remuneration at pre-crisis levels, there does not appear to be a legislative requirement to do so.

Notably, the legislation does not contemplate providing CEWS amounts in respect of owners/managers of small businesses who have remunerated themselves and any other non-arm's length employees solely through dividends rather than employment income, or who do not receive eligible remuneration in the baseline remuneration period of January 1, 2020, through March 15, 2020.

Refund for Certain Payroll Contributions

Employer-paid contributions to Employment Insurance (EI), the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in respect of an employee will be added to the amount of the CEWS payable to an eligible entity for the period of time that the employee is on paid leave (i.e., not performing any work). Eligible entities are not eligible to be paid any amounts in respect of employer-paid contributions for employees who are actually working during the period that the employer is eligible to claim the CEWS.

Employers are required to continue collecting and remitting employer and employee contributions to EI, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan as usual.

Anti-Avoidance Measures and Penalties

The legislation includes two anti-avoidance rules that, if applicable, will deny the CEWS and potentially expose the entity to penalties. This is further to the Department of Finance's statements that employers that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS would be subject to a penalty equal to 25 percent of the value of the subsidy claimed, in addition to the requirement to repay in full the subsidy that was improperly claimed.

The legislation contains a targeted anti-avoidance rule which will deny the CEWS to an otherwise eligible entity where: (A) the employer, or a non-arm's length person or partnership, enters into a transaction or participates in an event (or a series of transactions or events) or takes an action (or fails to take an action) that has the effect of reducing the qualifying revenues of the employer for a reference period; and (B) it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause the employer to qualify for the CEWS. The breadth of this rule—referring to actions or failure to take actions—is perhaps necessary given the scope of the relief provided, but, prior to applying for the CEWS, we recommend that eligible entities review, with their legal and tax counsel, any out-of-the ordinary transactions or events which could potentially be caught by the rule.

Further, any eligible entity subject to the above provision is liable to an additional penalty of 25 percent of the value of the CEWS amount claimed.

Interactions with Other Programs

• 10% Wage Subsidy: Employers that do not qualify for the CEWS may continue to qualify for the previously announced wage subsidy of 10 percent of remuneration paid (from March 18 to before June 20) up to a maximum subsidy of $1,375 per employee and $25,000 per employer. For employers that are eligible for both the CEWS and the 10 percent wage subsidy for a period, the CEWS will generally be reduced by any amount paid through the 10 percent wage subsidy.
• Canada Emergency Response Benefit (CERB): Eligibility for the CEWS in respect of an employee’s remuneration is limited to those employees who have not been without remuneration for more than 14 consecutive days in the claim period (i.e., from March 15 to April 11, from April 12 to May 9, and from May 10 to June 6).
  
  If an employee has been laid off for 14 or more consecutive days within a claim period without remuneration in respect of that period, the employer will not be eligible to receive the CEWS for the employee in respect of the same claim period. The objective is to avoid an overlap between payments under the CEWS and the CERB, for same period of time and for the same employee. However, it appears that the CEWS will be available to laid off employees who are rehired/recalled on a retroactive basis, as long as their retroactive pay and status meet the eligibility criteria for the claim period, and in earlier announcements the government had indicated that it will consider other approaches that might limit duplication, including a process to allow individuals rehired by their employer during the same eligibility period to cancel their CERB claim and repay that amount. 
• Work-Sharing Program: For employers and employees that are participating in a Work-Sharing program, EI benefits received by employees through the Work-Sharing program will reduce the benefit that their employer is entitled to receive under the CEWS.

The CEWS (i.e., 75% subsidy) or 10% subsidy will be considered government assistance and included in the employer's taxable income. Either subsidy will reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.

How to Apply

Eligible entities will be required to file an application before October 2020, and will need to attest that the revenue reduction thresholds are established. To receive the CEWS, the entity must, as of March 15, 2020, have been registered to make payroll remittances. Eligible entities will be able to apply for the CEWS through the Canada Revenue Agency's My Business Account portal as well as a web-based application, with the application process opening up on April 27, 2020, and the first payments being made beginning on May 5.

Notably, eligible entities will need to maintain evidence as to their qualification for the CEWS, although such documentation will not generally need to be submitted to the CRA at the time of making an application.

It should also be noted that the CRA is permitted to publish the name of any person or partnership that makes an application for the CEWS. 

Conclusion

While the passage of the COVID-19 Emergency Response Act, No. 2 marks a crucial step in making the CEWS relief widely available, there remain many important outstanding issues, some of which may be dealt with through future regulations. For employers looking to structure their business affairs in ways that will best allow them to utilize the assistance available through the CEWS and/or other programs, there is no one-size-fits-all approach. 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 the COVID-19 pandemic.

In addition, please visit our COVID-19 Resource Centre for other COVID-19-related materials.