Canada Emergency Wage Subsidy (CEWS 2.0)

On July 17, 2020, the federal government announced significant changes to the Canada Emergency Wage Subsidy (CEWS), which we will refer to as CEWS 2.0. Prior to July 17, the government consulted stakeholders seeking input for modifications needed to the program as the government’s response to the COVID-19 pandemic continues to evolve.

The government responded by writing amendments that significantly alter the inner workings of the program to make it more flexible and relevant. Of course, anytime flexibility is inserted into tax legislation, there is usually an added element of complexity, and this is no exception.

The draft legislation introduced technical amendments to the overall program, as well as extending the program to December 2020. The extension of the program resulted in five additional 4-week claim periods (periods 5 to 9) with a final claim period (for December) to be determined later. 

Period 5 – July 5, 2020 to August 1, 2020
Period 6 – August 2, 2020 to August 29, 2020
Period 7 – August 30, 2020 to September 26, 2020
Period 8 – September 27, 2020 to October 24, 2020
Period 9 – October 25, 2020 to November 21, 2020
Period 10 – a prescribed period that ends no later than December 31, 2020¹

The program for claim periods 1 to 4 was designed as an all or nothing wage subsidy based on obtaining a decline in revenue of at least 30 per cent (15 per cent for March) per calendar month, whereas the revised program for claim periods 5 to 9 is designed to accommodate different percentage levels of revenue decline per calendar month. The calculation of the wage subsidy for claim periods 5 to 9, which began on July 5, 2020, was a result of feedback during the consultation period to make the wage subsidy accessible to more eligible employers. The wage subsidy for the new claim periods consists of two parts:

1. Base subsidy percentage rate – available to all eligible employers that are experiencing a decline in revenue, with the wage subsidy amount varying depending on the scale of revenue decline; and
2. Top-up subsidy percentage rate – an additional rate to a maximum of 25 per cent for eligible employers that have been most adversely affected by the COVID-19 crisis.

This two-part subsidy will apply with respect to the remuneration of active employees only. A separate subsidy calculation is available for furloughed employees.

1. Base subsidy

To calculate the base subsidy percentage rate for each claim period, first calculate the revenue reduction percentage by comparing the qualifying revenue in the current reference period to the qualifying revenue in the prior reference period. This would result in a comparison of qualifying revenues in a particular month in 2020 to either that same month in 2019 or the average of January and February of 2020² (see table 1).

The eligible employer is deemed to have a revenue reduction percentage equal to the greater of the amount calculated in the current period and the immediately previous period.

The maximum base subsidy is obtained if the revenue reduction percentage calculated is 50 per cent or greater. Otherwise, the subsidy is based on a sliding scale (see table 3).

2. Top-up subsidy

To calculate the top-up subsidy percentage rate for each claim period, first calculate the top-up revenue reduction percentage by comparing the qualifying revenue in the current reference period to the qualifying revenue in the prior reference period. This would result in the comparison of qualifying revenue for a three month average in 2020 to either the same three month average in 2019 or the average of January and February of 2020³ (see table 2).

The maximum top up subsidy is obtained if the top-up revenue reduction percentage calculated is 70 per cent or greater. Otherwise, the subsidy is based on a sliding scale (see table 4).

Active vs. furloughed employees

The wage subsidy received is treated differently between eligible active employees and eligible furloughed employees for claim periods 5 to 9.

Eligible active employees:

If the employee is an active employee for the claim period you are applying for, then the aggregate wage subsidy percentage (base subsidy plus top-up subsidy) would be applied to the least of the following amounts:

1. Eligible remuneration of the active employee,
2. $1,129, and
3. If a non-arm’s length employee - baseline remuneration.

As the program transitions to the new rules, claim periods 5 and 6 were designed with a little more flexibility than the other claim periods. Thus, if the decrease in the base subsidy revenue reduction percentage is 30 per cent or more for claim periods 5 and 6, then the wage subsidy amount will be the greater of:

• The wage subsidy as calculated above, or
• The wage subsidy using the original calculation formula for periods 1 to 4 (see table 5).

Basically, for claim periods 5 and 6, this “safe harbour” rule ensures an eligible employer receives the higher wage subsidy amount as long as the revenue reduction percentage is at least 30 per cent.

Eligible furloughed employees:

To claim a wage subsidy for a furloughed employee (defined as an employee on leave with pay), the eligible employer must meet additional criterion. This additional criterion requires that the eligible employer have a decrease in the revenue percentage of more than zero per cent for either base wage subsidy percentage or top-up wage subsidy percentage.

If the eligible employer meets this criterion, then the wage subsidy calculation for the furloughed employee is as follows:

• Periods 5 to 7 – Calculated using the same formula for periods 1 to 4 (see table 5).
• Periods 8 and 9 – The lower of eligible remuneration and an amount prescribed in the regulations (TBD). If an employee does not deal at arm’s length with the eligible employer and has no baseline remuneration, then that employee does not qualify for the wage subsidy.

For periods 5 to 9, an eligible employer can apply for a refund of employer paid payroll contributions for any furloughed employees, however the refund is only available if the criterion above is met.

Concluding comments

The redesigned Canada Emergency Wage Subsidy for claim periods 5 to 9 has added some complexity in order to be more flexible and accessible to all eligible employers for their eligible employees. The deadline for filing a CEWS application in respect of claim periods 1 to 9 has been extended from September 30, 2020 to January 31, 2021.

It is highly recommended that you consult your Baker Tilly advisor to ensure that the wage subsidy for a given claim period is properly calculated.

Table 1 – Base subsidy - revenue reduction comparison

* The average of January and February of 2020 can be used as the prior reference period upon election.

Table 2 – Top-up subsidy – revenue reduction comparison

* The average of January and February of 2020 can be used as the prior reference period upon election.

Table 3 – Base subsidy percentage calculation

Table 4 – Top-up subsidy percentage calculation

Table 5 – Original wage subsidy calculation