The COVID-19 emergency wage subsidy: What to consider

The program is intended to help businesses keep employees on the payroll during the COVID-19 pandemic. Non-publicly funded businesses of all sizes can apply.

The wage subsidy program initially covered the period of March 15 to June 6, although the federal government recently announced a 12-week extension to August 29. Eligible employers must demonstrate a decline in gross revenues of at least 15 per cent in March (initially set at 30 per cent). In April and May, a 30 per cent drop when compared to 2019 is required to qualify. Firms that don't have comparable 2019 figures can use January or February 2020 revenues as their baseline.

Once an employer is found eligible for a specific period, it will automatically qualify for the next period of the program. Applicants must have an open payroll program account with the CRA as of March 15, 2020.

The subsidy covers 75 per cent of the first $58,700 of income typically earned by employees, up to a maximum of $847 per week.

More than an honour system

Heather Evans, executive director of the Canadian Tax Foundation, describes the CEWS as a "high-trust" program. The government expects employers to use consistent accounting and not take advantage of it. "You have to be very cautious about deviating from what you've done in the past. I think it would be viewed in a very negative light," she says.

CRA is accepting applications under both cash-based and accrual accounting. Firms that use accrual accounting can switch to cash-based, but cash-based accounting cannot be changed to accrual. Angelo Nikolakakis, a partner at EY Law LLP and chair of the CBA Taxation Law Section, says that applicants need to be prepared for CRA to review their submissions and audit them.

The government has also indicated that it will publish the names of subsidy recipients.

"If you're claiming it, you better accept the idea that the name of your business is going to be made public," says Bruce Ball, vice-president, Taxation at the Chartered Professional Accountants of Canada. "People shouldn't game the system; that's the bottom line."

Employers found to have overstated their revenue loss to quality for the CEWS will have to reimburse the government and face a penalty of 25 per cent of the amount claimed. A false claim could incur a 50 per cent penalty based on the difference between the amount claimed and the amount entitled. Fraudulent claimants also risk fines or imprisonment. Penalties can also be levied against third parties that assist others with false statements or omissions.

Ball says that firms must calculate the Temporary Wage Subsidy for Employers, which allows employers to reduce their federal remittances by 10 per cent between March and June. When the CEWS is paid, the government will reduce the amount paid by that 10 per cent.

"Your 75 per cent entitlement is reduced automatically by whatever entitlement you might have under the 10 per cent whether you claim it or not. You better claim it, otherwise you're losing that money," says Nikolakakis.

Nikolakakis has also suggested that the government consider suspending a rule it implemented in recent years on how professional services firms can account for work in progress. If firms are unable to bill for a period of time, they will be unable to deduct expenses and "paying tax on money they don't actually have."

Benefits and pensions: Check with your carrier

Employers need to look at their own "particular facts," says Terra Klinck, chair of the CBA National Pensions and Benefits Section. If they want to keep workers covered, they need to understand how changing the employment relationship could affect access to benefits and pensions.

"Make sure any changes that you make to terms and conditions of employment don't have unintended consequences," she says.

Before making personnel decisions, she suggests checking with benefit providers about hours-worked requirements, so coverage such as short-term and long-term disability is not affected if employee hours are reduced. She says benefit carriers are being inundated with inquiries from their clients but are being very helpful in working through the implications. 

"Because the CEWS keeps the employment relationship intact, as the starting point pensions and benefits will remain intact," says Klinck. "Whereas, if you lay people off, the default is that there's no continued pension and a lot of time, no benefits either."

Klinck says many firms are looking at the option of temporarily reducing or suspending payments to their defined contribution pension plans to free up cash flow. "That is permissible. You just have to amend your plan to do that, either under a savings plan or under a formal pension plan," says Klinck.

"I think the general view is, it is better to do that. You can see the desirability of stopping to make retirement contributions for three months rather than not providing other benefits."

Meanwhile, the federal government has announced expanded eligibility for the Canada Emergency Business Account. Sole proprietors, businesses that use contractors and family-owned businesses that pay employee through dividends instead of payroll are now eligible. Loans of up to $40,000 can be used for non-deferrable operating expenses, including payroll, rent, utilities, insurance, property tax and regularly scheduled debt service.