In our previous update we identified several concerns and unanswered questions about the Canada Emergency Wage Subsidy (CEWS). That update can be found HERE. Very briefly, the CEWS is wage subsidy of up to 75% of wages for Canadian employers that have seen a drop of 15% in arm’s length revenue in the month of March, or a 30% drop in arm’s length revenue in April or May 2020. On Saturday April 11, 2020 the legislation was rushed through the legislative process and received Royal Assent on that same day.
The legislation provided some clarity on the subsidy for non-arm’s length employees and businesses that earn all or most of their income from non-arm’s length parties. The revenue reduction tests were also relaxed from what was previously announced.
Applications will be available in 2 to 5 weeks through an employer’s online “My Business” account or through an online portal.
Non-Arm’s Length Employees
An employee will generally be deemed to be non-arm’s length if they are related to the person or group that controls the employer, although the definition can include unrelated parties that are not acting independently. Our fear that the CEWS would not be available for owner-managers that did not receive a wage in the January 1 to March 15 2020 period (the “baseline remuneration”) unfortunately proved to be correct. The rules limit the CEWS in relation to non-arm’s length employees for a particular pay period between March 15 and June 6, 2020 to the least of:
- $847 per week;
- 75% of the employee’s baseline renumeration; and
- The amount of eligible remuneration paid to the eligible employee for that week.
This calculation adversely affects an owner-manager if they received dividends as remuneration or their only wage is a one-time annual bonus that was not paid in the baseline period. It is unfortunate that the same criteria for the CERB program was not used as that would have considered the prior 12 months wages and included non-eligible dividends as prior earnings.
The subsidy is only available to non-arm’s length employees employed before March 15, 2020. An employer cannot be subsidized for renumeration paid to non-arm’s length employees hired after the crisis began.
Corporate Groups and Revenue from Related Parties
The information published previously indicated that CEWS restricted the revenue test to arm’s length revenue. This could have eliminated many employers from the CEWS simply due to how their business organization is structured. The legislation allows potential relief in two ways.
First, a group of affiliated entities is allowed to elect to calculate consolidated revenue and each employer in the group may utilize the consolidated amounts for the revenue test. This will assist groups where the loss in revenue may not be in the company that has the employees or where some companies in a group are more affected than others. Conversely, those companies in groups that only determine revenue on a consolidated basis will be allowed to separate them. In either case, all employers in a group must use the same method.
Second, where all or substantially all of an employer’s revenue is from other non-arm’s length entities the rule generally allows the entity to determine its decline in revenue based on the decline in arm’s length revenue experienced by non-arm’s length entities from which it earned revenue. This will be useful for organizations that separate the payroll from the revenue generating activities such as a management company structure. This provision requires the revenue generating company to use worldwide revenues rather than Canadian revenues to see if there has been a reduction.
For example, if a manufacturer sells all of its products to a related company, Salesco, and Salesco in turn sells to arm’s length parties, the manufacturer would be allowed to determine its revenue decline based on the decline in Salesco’s arm’s length revenue.
Other New Information
The following new information was also included in the legislation:
- If an employer qualifies for one of the March or April periods, they will also qualify for the next one automatically;
- Special rules for joint ventures were included;
- The person who certifies the application must be the individual with principal responsibility for the financial activities of the employer and will have to attest that the application is complete and accurate in all material respects and that the eligible entity has realized the required decrease in revenues to qualify for the subsidy; and
- The names of those who apply for the program can be published. This ability to do this may be limited to the government’s statement they will “name and shame” those that abuse the program.
Further updates will be provided once available. We are happy to discuss any questions you may have about these matters. To review any of our previous updates on COVID-19 please see our website.
This summary deals with proposed matters that are complex and may not apply to particular facts and circumstances. As well, the material and the references contained therein reflect laws and practices which are subject to change. For these reasons, this material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter.
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