Canada Emergency Wage Subsidy – Part IV

The wage subsidy is the most lucrative program offered by the federal government with wide appeal ranging from small to large businesses. The proposed wage subsidy program was originally introduced on April 1, 2020. It received a few modifications a week later with even further amendments as it passed through the House as Bill C-14 on April 11, 2020.

Well over a month since the introduction of the wage subsidy, we are now on round four of the amendments to the program. These amendments are titled “extending eligibility” by the Department of Finance.

The amendments extending eligibility come in three buckets:

1. Extending the length of the program,
2. Extending eligibility to more groups, and
3. Correcting technical issues, allowing more groups to qualify.

Extending the length of the program

The design of the legislation provided for three defined periods with the ability to create more periods as long as the program did not extend beyond September 30, 2020. With the May 15 announcement to extend the program, we now have the following periods for the Canada Emergency Wage Subsidy (CEWS):

The government will consult with key businesses and labour representatives over the next month on potential adjustments to the program to incent jobs and growth, including the 30 per cent revenue decline threshold.

Extending eligibility to more groups

The design of the legislation allowed for the government to regulate more eligible entities without the need for new legislation. It announced the introduction of five new categories of eligible entity, which are as follows:

The eligibility of these five new entity categories is implemented retroactively, back to the beginning of the first period starting March 15, 2020.

Correcting technical issues, allowing more groups to qualify

The previous two categories of changes are regulatory changes without legislative amendments. The following technical amendments require legislative approval to enact. These technical amendments relate to the following issues:

• Support for seasonal employees and employees previously on extended leave,
• Amalgamations, and
• Tax-exempt entities.

Support for seasonal employees and employees previously on extended leave

The formula used to calculate the wage subsidy for each employee consists of three components: eligible remuneration, baseline remuneration and the prescribed maximum limit of $847. Eligible remuneration is the amount of remuneration paid in respect of a qualifying period (see periods listed above). Baseline remuneration is the amount of remuneration actually paid during the period of January 1, 2020 to March 15, 2020.

The government is trying to address the issue of employees who were not working during the baseline remuneration period, resulting in zero baseline remuneration. The government has identified seasonal workers and employees who were on extended leave, but the change in legislation is not limited to these two situations.

Having zero baseline remuneration affects the calculation of the wage subsidy in two ways. If the eligible employee is not dealing at arm’s length with the eligible employer, then there is no wage subsidy for the non-arm’s length employee. If the eligible employee is dealing at arm’s length with the eligible employer, then the wage subsidy is limited to 75 per cent of the eligible remuneration.

To provide more flexibility, the government is proposing to allow eligible employers to choose one of two periods when calculating the baseline remuneration of their employees. Based on this proposed amendment, employers would now be able to choose, on an employee-by-employee basis, between the following two periods:

Amalgamations

In order to determine if an entity qualifies for the wage subsidy, it must meet the decline in revenue test. This test requires a comparison of the qualifying revenue between the current reference period and the prior reference period to ensure the appropriate decline in revenue is met. (For example, comparing April 2020 qualifying revenues for the entity to its qualifying revenues in April 2019.) An issue identified early on was an amalgamation of two or more companies resulting in a single entity in the current reference period. The original legislation was designed to compare the two respective periods of the single entity for a possible decline in qualifying revenue. The current reference period of an amalgamated group of companies was not legislatively comparable to its unamalgamated individual companies in the prior reference period.

The proposed legislative amendment will allow two or more predecessor corporations (or where a corporation is wound up into another), to calculate the decline in revenue test using the combined revenue of all amalgamated companies for both respective periods.

This proposed amendment retroactively applies back to the beginning of the first period, starting March 15, 2020.

Tax-exempt trusts

Trusts and corporations both qualify for the wage subsidy, but currently trusts are afforded more flexibility than corporations. As a result, the government proposes to amend the legislation to better align the tax treatment of trusts with that of corporations. As a result, trusts would continue to qualify, but are subject to the following proposed exceptions:

• In cases where the trust is a tax-exempt entity, it would only qualify if it is a registered charity or one of the other listed eligible tax-exempt entities.
• In cases where the trust is a public institution, it would only qualify if it is a prescribed organization.

Unlike the other proposals, this amendment only applies for period three and subsequent periods.

The CEWS continues to be revised as the government tries to minimize situations falling through the cracks. Entities that recently gained eligibility based on the May 15 proposed amendments can file applications for any period, as long as they are filed before October 2020.

Entities that already filed a claim for periods one or two may now find they face an unclaimed increase in wage subsidy due to the proposed amendments. These entities can file an amendment with the Canada Revenue Agency starting June 1, 2020.