The Canada Emergency Wage Subsidy 2.0

The Federal Government recently made significant changes to the Canada Emergency Wage Subsidy (CEWS) program. The legislation, passed into law on July 27, 2020, enhances eligibility to the program until November 21, 2020 (with intent to extend until December 31, 2020) and allows eligible employers with any reduction in revenue to obtain the wage subsidy.

Significant changes to the CEWS program effectively make the subsidy accessible to a broader range of employers by eliminating the requirement for a minimum 30 percent revenue decline. Further, it incorporates sliding scales to determine the amount of the subsidy based on need. The new CEWS rules, referred to as CEWS 2.0 in this article (as opposed to the original rules being referred to as CEWS 1.0), are effective beginning July 5, 2020. The application deadline for the CEWS program has also been extended until January 31, 2021.

CEWS Snapshot

*For Periods 5 and 6, a safe harbour rule exists to ensure eligible employers do not receive less under CEWS 2.0 that they would have received under CEWS 1.0.  

Wage Subsidy Determination

The wage subsidy in CEWS 2.0 is calculated using two components: a base subsidy and a top-up subsidy.

Base Subsidy: The base subsidy is available to eligible employers experiencing a decline in revenue. The amount of the base subsidy depends on the amount of revenue decline. The maximum base subsidy, available to eligible employers having a revenue reduction of greater than 50 percent, is 60 percent of remuneration paid for Period 5 (July 5–August 1). The base subsidy rate gradually decreases in subsequent qualifying periods. The maximum base subsidy is 20 percent for Period 9 (October 25–November 21). 

The base subsidy for eligible employers with a revenue reduction of less than 50 percent is based on a sliding scale formula that reduces the subsidy depending on the drop in revenue. The lesser the revenue reduction, the lesser the base subsidy. The highest base subsidy is received in Period 5 and is gradually reduced in subsequent qualifying periods with the lowest subsidy available in Period 9.

Top-up Subsidy: The top-up subsidy provides for an additional 25 percent of remuneration for those employers that have experienced a revenue drop of more than 50 percent. To access the full top-up amount, employers must have a revenue reduction of at least 70 percent. 

The CEWS amount received by an employer will be less in each qualifying period from July until the end of the year, assuming the same wages and revenue reduction, as both the base subsidy and top-up subsidy gradually decrease from Period 5 to Period 9.

For example, the maximum combined base and top-up subsidy is 85 percent for Period 5 (consisting of a 60 percent base subsidy plus a 25 percent top-up subsidy). However, the maximum combined base and top-up subsidy for Period 9 is 45 percent (consisting of a 20 percent base subsidy plus a 25 percent top-up subsidy). The maximum subsidy is only available to employers that have a revenue reduction of greater than 70 percent.  

Since the wage subsidy applies to remuneration of up to $1,129 per week per employee, the maximum subsidy available of 85 percent works out to $960 per week per employee and a subsidy amount of 45 percent works out to $508 per week per employee. The amount of the wage subsidy in CEWS 2.0 also depends on whether the employee is considered arm’s length or non-arm’s length with the employer.   Employers should therefore carefully evaluate the decreased subsidy when making cash flow projections and forecasting other business decisions.

There are safe harbour rules for Periods 5 and 6 (July 5–August 1 and August 2–August 29, respectively) to ensure eligible employers do not receive less under CEWS 2.0 than they would have received under the CEWS 1.0 rules. These rules will assist in providing some certainty to employers who have recently made decisions concerning their workforce. For clarity, an eligible employer will receive a subsidy of 75 percent in Periods 5 and 6 if they experience a revenue decline of more than 30 percent in those qualifying periods.  

There are also special rules for furloughed employees. The wage subsidy calculation remains the same for Periods 5 and 6 as it did for Periods 1 to 4. However, the calculation will change for Period 7 (August 30–September 26) and subsequent periods to better align the program with the Canada Emergency Response Benefit and Employment Insurance (EI). There is no change to the rule on the employer portion of contributions to Canada Pension Plan, EI, Quebec Pension Plan, and Quebec Parental Insurance plan for furloughed employees. These payments will continue to be refunded to employers.

CEWS 1.0 included a qualification that an employee without remuneration for 14 or more consecutive days in a qualifying period was excluded from the calculation of the CEWS. This rule required eligible employers effected by COVID-19 to carefully evaluate the timing of when an employee was hired or dismissed. Effective Period 5, this restriction no longer exists, allowing eligible employers to make hiring and dismissing decisions based on business realities.  

Revenue Reduction Test and Prior Reference Period

Under the CEWS 1.0 rules for Periods 1 to 4, an employer that met the revenue reduction test in one period automatically met the revenue reduction test for the immediately following period. This rule has been changed for CEWS 2.0: beginning in Period 5 and continuing for all subsequent periods, an eligible employer is able to use the greater of its percentage revenue decline in the current period and that in the previous period for the purpose of determining its qualification for the base CEWS, as well as its base CEWS rate in the current period.

For example, assume your practice experiences a revenue reduction in August 2020 of 27 percent (compared to August 2019) but recorded a revenue reduction in July 2020 of 33 percent (compared to July 2019). As the August revenue decline is less than that of the immediately preceding period, you may use the July revenue reduction for purposes of your CEWS calculation in August.

Eligible employers may calculate their revenue reduction, beginning in Period 5, by either of the following methods:

• General approach: The current month to the same month in 2019 (for example, August 2020 over August 2019) OR the previous month to the same month in 2019 (for example, July 2020 over July 2019); or
• Alternative approach: The current month (for example, August 2020) to the average revenue earned in January/February 2020 OR the previous month (for example, July 2020) to the average revenue earned in January/February 2020.

Eligible employers had to choose either the general or alternative approach for the first four qualifying periods under CEWS 1.0. Under CEWS 2.0 they can choose either the general or alternative approach for subsequent qualifying periods, starting with Period 5, providing they use the same approach from Period 5 through Period 9.

CEWS 2.0 also allows eligible employers using the cash method of accounting to elect to use accrual- based accounting when computing their revenue reduction.

Additional Changes

• Cost-sharing/paymaster arrangements were not eligible for the subsidy under CEWS 1.0. Employers that participate in these legal arrangements may now be eligible under CEWS 2.0. This change is retroactive to the start of the program, or March 15, 2020.
• There have also been rule changes to provide continuity where an eligible employer purchased assets or amalgamated businesses.
• Included in the updated legislation is an appeal process, allowing taxpayers to formally object to an assessment and also appeal to the Tax Court of Canada.

What This Means for You and Your Practice

Professionals should consider the following in light of CEWS 2.0 in managing their practice:  

1. If your practice did not previously qualify for the subsidy, it is important to review your eligibility under the expanded rules. You should be eligible to receive at least some level of subsidy support if you have experienced any decline in revenue.
2. As your practice enters the restart phase, staffing (hiring and dismissing) should be made in light of the CEWS changes. It is no longer necessary to count the number of days an employee is without remuneration. As such, staffing decisions should be made on the demands of the practice and not how it impacts your eligibility for the wage subsidy.
3. Consideration should be given to cash management if your practice is once again required to temporarily close or scale back due to COVID-19 given the gradually decreasing base CEWS.
4. If you operate your practice through a cost-sharing arrangement, speak with your advisor to see if you are now eligible for the CEWS.
5. For professionals who have or may be considering a consolidation of practices during one of the qualifying periods, the revised asset acquisition and amalgamation rules should be revisited when making a claim.
6. If you have made a CEWS claim and were denied there is now a formal appeal process to file an objection.

The updated CEWS has enhanced eligibility and allows for virtually every employer with a reduction in revenue to qualify for the subsidy. However, the rules are difficult to navigate, and the calculations are highly complex.