Canada proposes sweeping changes to Canada Emergency Wage Subsidy

On July 17, 2020, the Canadian federal government proposed sweeping changes (“Proposals”) to the Canada Emergency Wage Subsidy (“CEWS”) to:

• extend the CEWS from August 29, 2020 to December 19, 2020;
• make the CEWS available to every eligible employer with any revenue drop (versus the current general 30% threshold) and tie the subsidy amount to the revenue drop amount; and
• address various technical issues raised by stakeholders during the consultation period.

Extension to December 19, 2020

The Proposals would (further) extend the CEWS from August 29, 2020 to December 19, 2020, but only provide program details until November 21, 2020.

The current and proposed claim periods would be: ‎¹‎

• Period 1: March 15 - April 11, 2020
• Period 2: April 12 - May 9, 2020
• Period 3: May 10 - June 6, 2020
• Period 4: June 7 - July 4, 2020
• Period 5: July 5 - August 1, 2020
• Period 6: August 2 - August 29, 2020
• Period 7: August 30 - September 26, 2020
• Period 8: September 27 - October 24, 2020
• Period 9: October 25 - November 21, 2020

Elimination of 30% revenue drop threshold and introduction of variable subsidy rate structure

For Periods 1 - 4, to be eligible, an employer must generally have a 30% (monthly) revenue drop (15% for Period 1).² An employer that does not meet the applicable revenue drop test is not eligible for any subsidy, while an employer that does meet the test is eligible for a flat base subsidy (generally 75% of weekly eligible remuneration up to $847 per employee) irrespective of the employer’s actual revenue drop. In other words, the current rules provide for an all-or-nothing approach. 

In contrast, under the Proposals, for Period 5 and onward, the CEWS would have two parts: ³

• the “base subsidy”, which would be available to eligible employers with any (monthly) revenue drop and vary based on the revenue drop (up to a maximum of 60%⁴ of weekly eligible remuneration up to $1,129 per employee for employers with a revenue drop of 50% or more); and

• the “top-up subsidy”, which would be available to eligible employers with a (3-month average) revenue drop of more than 50% and vary based on the revenue drop (up to a maximum of 25% of weekly eligible remuneration up to $1,129 per employee for employers with a revenue drop of 70% or more).

The Proposals also include a “safe harbour rule” for Periods 5 and 6 to ensure eligible employers receive a subsidy at least equal to what they would receive under the current rules.

Base Subsidy - Rate Structure

The following table shows the general calculation of the base subsidy rate:

Base Subsidy - Revenue Comparison

The Proposals adopt the current approaches for comparing revenue for determining revenue drop (i.e. the “general approach” compares revenue in the current month to revenue in the same month in the preceding year, while the “alternative approach” compares revenue in the current month to average monthly revenue in January and February 2020), but provide additional flexibility by allowing employers to compare revenue based on either the current or prior month, whichever provides a greater revenue drop.

For Period 5 and onward, employers can either continue to use the approach used in prior periods or switch to the other approach, but whichever approach is chosen must be used for Period 5 and onward and for the base subsidy and top-up subsidy.

The following table shows the base subsidy revenue comparison reference periods:

New Top-Up Subsidy - Rate Structure

The following table shows the top-up subsidy rate structure for selected revenue drops:

New Top-Up Subsidy - Revenue Comparison

There would be two approaches for comparing revenue for determining revenue drop:

• the general approach, which would compare revenue in the preceding 3 months to revenue in the same 3 months in the preceding year; and
• the alternative approach, which would compare average monthly revenue in the preceding 3 months to average monthly revenue in January and February 2020.

The following table shows the top-up subsidy revenue comparison reference periods:

Eligible employees and eligible remuneration

• Eligible employees. For Period 5 and onward, employees without remuneration for 14 or more consecutive days in a claim period would no longer be excluded.

• Eligible remuneration. While no changes are proposed to the definition of “eligible remuneration”, for Period 5 and onward:

- for active arm’s length employees, the subsidy would be based only on actual remuneration paid, without reference to the pre-crisis (i.e. “baseline”) remuneration concept used for prior periods; and

- for active non-arm’s length employees employed before March 16, 2020, the subsidy would be based on the lesser of weekly actual eligible remuneration paid and pre-crisis ‎(i.e. “baseline”) remuneration, up to $1,129.⁵

Miscellaneous technical changes

In response to various technical issues raised by stakeholders during the consultation period, the Proposals also include changes that would:

• provide an appeal process to the Tax Court of Canada based on the existing procedure for notices of determination;
• provide continuity rules for calculating revenue drop where the employer purchased all or substantially all of the assets used in carrying on business by the seller;
• allow registered charities and non-profit organizations to choose whether to include government funding for calculating revenue drop; and
• allow entities that use the cash method of accounting to elect to use the accrual method for calculating revenue drop.

Previously announced changes

The Proposals also include certain previously announced changes that would:

• allow employers that use payroll service providers to qualify;
• allow certain tax-exempt trusts to qualify;
• allow corporations formed on an amalgamation (or wind-up) to use combined revenue for calculating revenue drop; and
• allow employers to choose different periods for calculating an employee’s pre-crisis (i.e. “baseline”) remuneration.

Please contact any member of our National Tax Group or National Labour and Employment Group if you have any questions about any of the Proposals or the CEWS generally. 

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.

[1] The Proposals only provide program details until November 21, 2020. Presumably Period 10 would be ‎November 22 to December 19, 2020, but this is not confirmed.‎‎
[2] Subject to a special rule that deems an employer that meets the applicable revenue drop test for a particular claim period to automatically meet it for the immediately following claim period.
[3] The proposed rate structure would only apply to active employees. The subsidy for furloughed ‎employees (i.e. employees on leave with pay) would continue as it currently is for Periods 5 and 6, and ‎be adjusted to align with the Canada Emergency Response Benefit and Employment Insurance for ‎Period 7 and onward.‎ The employer portion of Canada Pension Plan, Employment Insurance, Quebec ‎Pension Plan, and Quebec Parental Insurance Plan contributions for furloughed employees would ‎continue to be refunded to the employer. ‎‎
[4] The 60% maximum rate would be reduced to 50% for Period 7, 40% for Period 8, and 20% for Period 9. ‎‎
[5] Pre-crisis (i.e. “baseline”) remuneration would be based on average weekly remuneration (excluding any ‎period of 7 or more consecutive days without remuneration) from (i) for Period 4, January 1 to March 15, ‎‎2020, March 1, 2019 to May 31, 2019, or March 1, ‎‎2019 to June 30, and (ii) for Period 5 and onward, ‎January 1 to March 15, 2020 or July 1, 2019 to December 31, 2019. ‎Employers would be able to choose ‎which period to use on an employee-by-employee basis. ‎‎