In late July, the government of Canada introduced significant changes to the Canada Emergency Wage Subsidy (CEWS), including, extending the CEWS for an additional 24 weeks (i.e., six more 4-week periods) and eliminating the bright line 30 per cent revenue decline test for periods commencing July 5, 2020 (CEWS 2.0).
Some of the critical changes to CEWS 1.0 are discussed below. Also refer to the Canada Revenue Agency’s frequently asked questions (FAQs) for more details on the changes introduced in CEWS 2.0.
CEWS 2.0 has expanded the definition of eligible entity. For the qualifying period beginning May 10, 2020 (Period 3), a trust, other than a trust that is exempt from Part I tax or is a public institution, will be eligible to claim CEWS.
CEWS 2.0 has extended the CEWS for additional six 4-week claim periods (i.e., from June 4, 2020 to Nov. 21, 2020; Periods 4 to 9).
Under CEWS 1.0, employees who were without remuneration from the eligible entity in respect of 14 or more consecutive days in a qualifying period, were not considered eligible employees and excluded for purposes of CEWS. CEWS 2.0 has eliminated this restriction effective Period 5 and subsequent periods. Refer to question 13 of the FAQs for additional information.
Revenue reduction threshold
Effective July 5, 2020, an employer is no longer required to meet the revenue reduction test. Rather, the amount of CEWS is tied to the employer’s revenue reduction for a particular qualifying period (subject to transition rules for Periods 5 and 6) and should be calculated as follows (for arm’s length employees):
(base percentage + top-up percentage) x eligible remuneration (up to $1,129 per week)
A special rule would apply for non-arm’s length employees. For Period 5 and subsequent periods, the wage subsidy for such employees would be based on the employee’s weekly eligible remuneration or pre-crisis remuneration, whichever is less, up to a maximum of $1,129. The subsidy would only be available in respect of non-arm's-length employees that were employed prior to March 16, 2020. Refer to question 20 of the FAQs for additional information on the computation of amount of CEWS.
Can a corporation formed as a result of amalgamation apply for CEWS?
Under CEWS 2.0, a new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation, except where the main purpose of the amalgamation is to cause the new corporation to qualify for the CEWS, or to increase the amount of the CEWS benefit. The new corporation will use the combined qualifying revenue of the predecessor corporations to calculate its qualifying revenue for each relevant reference period.
Asset sale and purchase
If an entity purchases all or substantially all (at least 90 per cent) of the assets used by another entity in carrying on business in Canada, CEWS 2.0 will deem the seller’s qualifying revenue, attributable to those assets, to be the qualifying revenue of the purchaser. Conversely, this assigned revenue should be subtracted from the seller's prior reference period or the current reference period, as the case may be.
According to the CRA’s FAQs, where a purchaser is buying a division from the seller who operates multiple divisions under one corporation, the purchaser must consider all the assets used in carrying on the business of all the divisions when determining whether the fair market value of the acquired assets constituted all or substantially all of the fair market value of the property used in the course of carrying on the business of the seller.
Summary of other changes
In addition to the key changes highlighted above, the following are the additional changes to CEWS:
- The safe harbour rule applies to periods from July 5 to Aug. 29, 2020 (Periods 5 and 6). This ensures that the eligible employer will receive at least the same amount that it would have received if CEWS 1.0 were still in effect. Refer to question 5-04 for a general description of the safe harbour rule.
- CEWS applications are now due before or on Jan. 31, 2021.
- Employers are no longer required to maintain a payroll account with the CRA. Employers whose payrolls are managed by an administrator are also eligible to claim CEWS.
- CEWS 2.0 allows entities that use the cash method to elect to use the accrual method for the CEWS – this election was not permitted under CEWS 1.0. Once a method is selected, it must be applied to all qualifying periods. Therefore, if an employer has already applied for CEWS (under CEWS 1.0) using a particular method, it should continue to use the same method to compute its revenues.
- For Period 5 and subsequent periods, employers have the flexibility to choose between the previous year’s comparable month, or January and February 2020, as their prior reference period. Once chosen, an employer must use the same approach for the remainder of the CEWS program.
- CEWS 2.0 has expanded the definition of baseline remuneration to include periods in 2019. Refer to question 18 for a general overview of the new baseline remuneration.
- CEWS 2.0 has amended the deeming rule. The new deeming rule no longer guarantees CEWS entitlement for two consecutive periods. Instead, it deems the revenue decline for one particular period to be equal to the actual revenue decline in the immediate preceding period where it is lower. Refer to question 5-03 in the FAQs for a general overview of the new deeming rule.
CEWS is beneficial
As of Aug. 26, 2020, the government has provided about $29 billion in financial support to approximately 900,000 eligible entities. This is extraordinary, and critical, financial assistance. While the improvements made to the CEWS 2.0 program will certainly help many more employers, there remain a few outstanding issues, in particular with respect to the owner-managed businesses. Continual improvements to the CEWS will help put Canada on the road to economic recovery.