Tax Insights: Redesigned Canada Emergency Wage Subsidy program provides relief to more businesses and organizations

Issue 2020-30

In brief

On July 17, 2020, the federal government released draft legislative proposals that significantly revise the Canada Emergency Wage Subsidy (CEWS) program, and confirmed that the CEWS will be extended to December 19, 2020. The government’s goal is to “adapt the CEWS to support more workers and businesses, better protect jobs and promote growth, and effectively respond as the economy continues to reopen.” 

The legislative proposals contain details of the program that will apply from July 5, 2020 to November 21, 2020 (i.e. claim periods 5 to 9). Starting July 5, 2020, the CEWS will consist of:

• a base subsidy available to all eligible employers that experience a decline in revenues (i.e. the 30% revenue drop threshold required for claim periods 2 to 4 no longer applies), and
• a top-up subsidy of up to an additional 25% for employers that have been most adversely affected by the COVID-19 pandemic

This Tax Insights outlines the proposed changes to the CEWS program for July 5, 2020 to November 21, 2020, and highlights other significant changes contained in the draft legislation. 

In detail

Base CEWS and top-up CEWS rates for active employees

Effective July 5, 2020, the CEWS will consist of:

• a base CEWS amount ー available to all eligible employers that experience a decline in revenues, with the rate of the base subsidy determined based on the percentage decrease in an eligible employer’s monthly revenues (see Table 3 in the Appendix); the maximum base CEWS rate is:
  • available to employers with a revenue drop of 50% or more
  • gradually reduced from 60% in periods 5 and 6 to 20% in period 9

Employers with a revenue drop of less than 50% are eligible for a lower base CEWS rate that is gradually phased out as the revenue drop percentage declines from 50% to zero.

• a top-up CEWS amount ー available to eligible employers that experience a revenue drop exceeding 50% when comparing i) revenues in the preceding 3 months to those in the same months of the prior year; or ii) average monthly revenue in the preceding 3 months to the average monthly revenue in January and February 2020 (see Table 3 in the Appendix); the maximum top-up CEWS rate is 25% for employers with a 3-month average revenue drop of at least 70%

The base CEWS and top-up CEWS rates apply to eligible remuneration of up to $1,129 per week for active employees (see below for CEWS rates that apply to furloughed employees).

See Table 1 in the Appendix for how to calculate the base CEWS and top-up CEWS rates for periods 5 to 9 for active employees; and Table 2 in the Appendix for examples of how to calculate the total CEWS rate for period 7 for active employees.

A “safe harbour” rule also applies for periods 5 and 6, ensuring that eligible employers with at least a 30% revenue decline percentage in those periods can continue to receive a CEWS amount for each eligible employee in those periods that is no less than would have been calculated for that employee for periods 1 to 4.

CEWS for furloughed employees

For a furloughed employee (defined as an employee on leave with pay), the CEWS calculation for:

• periods 5 and 6 will remain the same as for periods 1 to 4, which is the greater of:
  • for an arm’s length employee, 75% of the amount of eligible remuneration paid, up to $847 per week
  • the lesser of:
    • the amount of eligible remuneration paid
    • 75% of the employee's pre-crisis weekly remuneration (“baseline remuneration”), and
    • $847
• periods 7 to 9 will be adjusted to align with the benefits provided through the Canada Emergency Response Benefit (CERB) and/or Employment Insurance (EI), to ensure equitable treatment of employees on furlough between both programs

Starting period 5, the CEWS for furloughed employees is available to eligible employers that qualify for either the base rate or the top-up for active employees in the relevant period. For these employers, their portion of contributions for Canada Pension Plan, Employment Insurance, the Quebec Pension Plan and the Quebec Parental Insurance Plan relating to furloughed employees will continue to be refunded to the employer as part of the CEWS claim.

Reference periods for the “drop-in-revenues” test

For periods 5 to 9, the reference periods used to determine the revenue decline percentages for both the base CEWS and top-up CEWS can be chosen by an eligible employer as follows:

• a “general” approach (see option A in Table 3 in the Appendix) based on current monthly revenues compared to the same months' revenues in the prior year, or 
• an “alternative” approach (see option B in Table 3 in the Appendix) based on current monthly revenues compared to the average of January and February 2020 revenues

An eligible employer must use the same reference period approach to determine its revenue drop percentage for periods 5 to 9, and this approach must be used for determining both the base CEWS and the top-up CEWS. Note, though, that an employer does not have to continue using the same approach that it had used previously for periods 1 to 4.

For periods 5 to 9, however, an eligible employer’s base CEWS revenue decline percentage in the current period will reflect the greater of its percentage revenue decline in the current period and that in the prior period. (This is intended to provide some certainty for employers, and is a modification of the current deeming rule that applies for periods 1 to 4, which allows an employer that meets the revenue decline test in one period to automatically qualify for the next period.)

See Table 3 in the Appendix for a guide on how to determine the applicable reference periods for the “drop-in-revenues” test.

Other legislative changes

The draft legislative proposals also implement the following:

• Eligible remuneration ー Starting period 5, the CEWS for active employees will no longer include a factor referencing baseline remuneration, except for non-arm’s length employees; for period 4, baseline remuneration can be calculated as the average weekly remuneration paid to the employee from January 1, 2020 to March 15, 2020, from March 1, 2019 to May 31, 2019 or from March 1, 2019 to June 30, 2019; and for period 5 and subsequent periods, baseline remuneration can be calculated as the average weekly remuneration paid to the employee from January 1, 2020 to March 15, 2020 or from July 1, 2019 to December 31, 2019 (employers can select which baseline period to use on an employee-by-employee basis). (The removal of the baseline remuneration factor from the CEWS calculation for arm’s length active employees for period 5 and subsequent periods will [subject to the safe harbour rule for periods 5 and 6] prevent an eligible employer from continuing to receive a 100% subsidy for eligible remuneration of certain employees [i.e. an eligible employer with an employee who had baseline remuneration of at least $1,129 per week could have paid the employee up to $847 per week in periods 1 to 4 and received a 100% subsidy for that employee’s pay].)
• Eligible employees ー Starting period 5, an employee who is without remuneration for 14 or more consecutive days in a period is no longer excluded from being an eligible employee for that period.
• Qualifying revenues of a business acquired in an asset purchase ー Effective March 15, 2020, a continuity rule is provided for calculating an employer’s drop in revenues in certain situations when the employer acquired all or substantially all of the assets used in carrying on business by a seller.
• Charities and non-profit organizations (NPOs) ー Effective March 15, 2020, certain charities and NPOs that were made eligible for the CEWS despite being “public institutions,” as announced by the Department of Finance on May 15, 2020, can choose whether to include government-source revenue for the purpose of computing their reductions in qualifying revenue.
• Technical amendments ー Effective March 15, 2020, amendments to ensure that the CEWS applies appropriately to certain situations (e.g. measures announced on May 15, 2020, for corporations formed on the amalgamation of two predecessor corporations; and eligible entities using payroll service providers).

The takeaway

The proposed redesign of the CEWS for July 5, 2020 to November 21, 2020 addresses many of the concerns raised by stakeholders during the public consultation held late May/early June. The redesigned CEWS will benefit many more businesses and organizations that have been negatively impacted by the COVID-19 pandemic by removing the 30% revenue decline threshold, allowing eligible employers that have experienced even a 1% revenue decline to qualify for a CEWS amount. The redesigned CEWS will also help businesses as they continue to grow and rehire, without the concern of a sharp drop in financial support, by allowing them to qualify for some portion of the CEWS as economic activity returns.

Appendix

Table 1 - How to calculate the base CEWS and top-up CEWS rates for periods 5 to 9 for active employees¹

Table 2 - Examples - How to calculate the total CEWS rate for active employees - Period 7 (August 30 to September 26, 2020)

Table 3 - Reference periods for the base CEWS and top-up CEWS drop-in-revenues test