75% Canadian Emergency Wage Subsidy

• April 4, 2020
• by Ramez Said

The Department of Finance released this backgrounder yesterday (April 1, 2020) regarding the 75% Canadian Emergency Wage Subsidy (CEWS) which contains many of the details we’ve been waiting for, but is still rife with issues. Here’s a summary of the release with some analysis.

Eligibility and other details of the program

• The subsidy is available to individuals, taxable corporations, partnerships, NPOs, and Charities who employ people.
• It is not available to public bodies like municipalities, crown corporations, public universities, colleges, schools and hospitals. Publicly Traded Companies appear to be eligible.
• The subsidy is available for wages paid between March 15, 2020, and June 6, 2020.
• If employers received a subsidy under the 10% Wage subsidy for any period, such amounts received would reduce the amount of CEWS received for that period.
• If you are not eligible for the CEWS, you may still be eligible for the 10% Wage subsidy. Details about that subsidy can be found in our other blog by clicking here.
• An employer cannot claim the CEWS for remuneration paid to an employee for any week that falls within a 4-week period in which the employee is eligible for the Canadian Emergency Response Benefit (CERB).
• Employers who are not eligible for the Canada Emergency Wage Subsidy could still furlough employees who may apply to receive $2,000 a month under the CERB.
• Employers will be eligible for the CEWS subsidy for existing and new employees.

Analysis: New employees will not have pre-crisis weekly remuneration (discussed below), so the reimbursement appears to be limited to 75% of their wages received during the eligible period. This may be adjusted if Finance includes some formula for new employees when they release the details around pre-crisis remuneration in the coming days.

• The employer must have experienced a 30% decline in revenues when compared to the same month in 2019.
• The government has indicated they are working on a unique program explicitly for start-ups who had no revenues during the comparable periods in 2019.
• The revenue numbers used in the calculation must be:
  • From business carried on in Canada and earned from arm’s length sources.
  • Calculated using the employer’s normal accounting methods.
  • Exclude revenues from extraordinary items and amounts on account of capital.

Analysis: We would like to see some clarification on what ‘extraordinary items’ are for the purposes of this calculation. For example, if a marketing company has lost 80% of their regular recurring clients (and has laid off most of their staff) but has picked up a single, large, web design project (keeping one or two of their employees busy) is that web-design project considered “extraordinary”?

• Employers must renew their claim (and re-attest) monthly, meaning they should have up-to-date books and records to attest to their decline in revenues.

Analysis: We do not have any indication of what the ‘attest’ will entail or what records might be required to verify the ‘attest’. The government has said that this program will be largely based on the ‘honour system’, however ‘stiff and severe’ penalties will apply to those who take advantage of the system. This may deter some eligible employers from applying and simply opt to lay people off. Many more details are required.

Employers should work to maintain their accounting records in real-time. The table below shows that employers can apply for the benefit 11, 9, and 6 days after month-end. For many employers, this means that their accounting needs to be up-to-date to attest to their drop in revenues. There has never been a better time to move your accounting to the cloud, and have us manage it remotely to ensure that your books are always up-to-date and accurate.

• The eligible periods are as follows

	Claiming Period	Reference period for Eligibility
Period 1	March 15 – April 11	March over March 2019
Period 2	April 12 – May 9	April 2020 over April 2019
Period 3	May 10 – June 6	May 2020 over May 2019

Analysis: Using a ‘decline in revenues compared to the same month last year’ model is flawed. This will prevent many employers who need access to this subsidy from receiving it. For example, a client of ours moved their office and retail location and was substantially closed for most of March 2019, so their drop in revenues for Period 1 is not 30%; however, they have shuttered their doors and may be forced to lay off their staff.

Another one of our clients has experienced tremendous growth over the last 7-months and has added 8-members to their team. Due to a drop in sales, 6 of them had to be laid off. Their revenue for March 2020 ended up being higher than in 2019. However, their revenues are not enough to cover salaries.

Denmark – by comparison – requires companies to attest that they must lay off at least 30% of its workforce or attest that they must fire at least 50 people in order to access Denmark’s wage subsidy program. While those thresholds might not be right for Canada, we believe their approach better reflects the spirit of the program than a decline in revenues approach.

Amount of the benefit

• For employees of the company, the amount is calculated as the greater of:
  • 75 % of remuneration paid, up to a maximum of $847/week; and
  • The amount of remuneration paid, up to a maximum of $847/week OR 75% of the employees’ pre-crisis weekly remuneration, whichever is less.

Analysis: Employers who are ‘topping employees up’ to pre-crisis income levels will be entitled to a 75% reimbursement (maximum of $847/week). Employers who can’t afford to pay their staff anything can pay them reduced pay (75% of pre-crisis income, max $847/week – provided they have sufficient working capital to do so) and can expect to be fully reimbursed by the government. The inherent problem in this is that these employers can’t afford to pay their staff anything, so many will not be able to bridge the gap until the government wage reimbursement comes through; forcing layoffs and putting these companies at a competitive disadvantage to those who have more access to capital.

• Owner managers (and other non-arm’s length employees) who pay themselves remuneration are also eligible for the program. Their benefit is:
  • A maximum benefit of $847/week or 75% of pre-crisis remuneration.

Analysis: This program excludes business owners who regularly pay themselves dividends. This is unfortunate because if dividends are your only source of income through 2019/2020, you will not be eligible for the CEWS, the CERB, or EI. If your company doesn’t pay at least $50k / year in salaries to other employees, you will not be eligible for the CSBA ($40k government-backed loan). This (large) subset of business owners have been excluded from nearly all government assistance programs to date, which we find unfortunate.

• “Pre-crisis weekly remuneration” is not yet defined by the government. Details will be provided in the coming days.

Analysis: We presume that this is being put in place to prevent employers from 1) giving employees of the company a raise to access greater benefits under the program 2) preventing owner-managers who receive dividends from ‘switching’ to salaries in order to receive the benefit.

• Eligible remuneration:
  • Includes: Wages, Salaries, and other pay that the employer would have had to withhold amounts from.
  • It does not include things like severance pay, stock option benefits, personal use of a corporate vehicle, etc.…
• There is no upper limit on the amount of subsidy that a single employer can claim. Meaning if your company has 2,000 employees – your company’s claim will not be capped at some upper limit (like the $25,000 limit on the 10% wage subsidy).
• Employers must do their best to “top-up” employees’ salaries to pre-crisis levels and must attest (monthly) that they are doing so.

Analysis: What are ‘best efforts’ to top up salaries? How is this defined? How little effort is considered ‘too little effort’ and what are the penalties for not applying ‘best efforts’.

How to apply

• Applications will start in approximately 3-weeks and can be made through CRA’s My Business Account. If you aren’t registered yet, it’s time to register. Here’s the link to do so.
• Payouts will begin in 6-weeks and will include reimbursements for salaries paid by employers after March 15.

Analysis: Many employers do not have sufficient working capital available to pay their staff for the next 6-weeks, which will – unfortunately – lead to layoffs. Given this time lag, layoffs will become a reality for many employers, and those who do have working capital may be at a strategic advantage to hire competitor’s employees who have been laid off during this waiting period.

• Penalties for fraudulent claims will be stiff and severe and may include fines and imprisonment.

Analysis: We hope that the government provides enough details about the program that the application criteria are exact and easy to apply. For example, the ‘drop-in-revenues’ test is worrisome and could potentially exclude businesses that should be eligible to receive the benefit under the spirit of the program. Clarity around ‘extraordinary’ revenues would be appreciated. Our view is that this flawed eligibility criterion needs to be revisited before it is passed into law, and certainly before the government attempts to accuse business owners of committing fraud based on ambiguous metrics when all they are trying to do is help their employees and save their businesses during a forced economic shutdown.

As always, please reach out if you’d like to talk about how these announcements will impact your business. We’re here to help.