A broadening of CEWS: Revisions and updates to the Canada Emergency Wage Subsidy

On July 21 the House of Commons passed Bill C-20, which extends the Canada Emergency Wage Subsidy program (CEWS), a key measure in Canada’s COVID-19 response plan. Bill C-20, initially released on July 17, substantially changes how the program operates and the amount of support that employers will be entitled to receive effective beginning July 5. Along with the extension and changes to the program going forward, Bill C-20 includes certain retroactive changes for all eligibility periods that, in general, address certain challenges faced by employers trying to access the CEWS during prior periods. The Senate is expected to consider Bill-20 in the coming days.

The government’s stated intention in implementing the CEWS program was to provide an incentive for “Eligible Employers” to continue paying “Eligible Employees,” including those who are either on paid leave or whose hours have been reduced, and to rehire workers previously laid off. 

Originally introduced for an initial 12-week period, from March 15 to June 6, 2020, the federal government added an additional 12 weeks to the program on March 15, extending eligibility to August 29. Bill C-20 extends the program until November 21, with the possibility of further extensions until December 31, 2020. For a general description of the CEWS program and its application, please see our updates from April 2 and April 12, 2020

What is new and what has changed?

The federal government has changed how the subsidy is calculated for the new qualifying periods (those starting on or after July 5, 2020). Rather than a requirement that Eligible Employers sustain a bright-line revenue decline of 30% to qualify for a 75% wage subsidy, the updated program allows an Eligible Employer with any level of revenue decline in the new qualifying periods to receive a subsidy proportional to the percentage of revenue decline.  

An additional “top-up subsidy” is available if the employer has experienced a decline in revenue of 50% or more. Certain distinctions between active employees and employees on leave with pay have also been introduced. The calculation of the wage subsidy amount for periods ending prior to July 5, 2020, has not changed. 

While the extension and the updated subsidy calculations are the most significant changes, the amendments to the CEWS program within Bill C-20 also include:

• accommodations in calculating eligible revenue and revenue declines of Eligible Employers that have purchased certain business assets, as well as corporations that have amalgamated, and
• the expansion of the meanings of Eligible Employers and Eligible Employees, and amendments to some additional procedural concerns that were raised regarding the original legislation.

Aside from these noted changes, the CEWS program, including who is eligible to benefit from the CEWS and how revenue is to be calculated, remains largely the same.

Updated CEWS program for July 5 onwards

Overview of New Subsidy Calculation

The most significant change to the CEWS program is in calculating the subsidy for qualifying periods starting on or after July 5, 2020. The original program (for qualifying periods from March 15 to July 4) provided a bright-line test, such that an Eligible Employer that experienced a revenue decline of at least 30% for a particular qualifying period (or 15% for period 1, being the period from March 15 to April 11) would be eligible for a wage subsidy equal to 75% of the wages paid to an Eligible Employee for a week in that period (up to $847 per week).

If the Eligible Employer failed to demonstrate the required bright-line revenue decline for a particular period or the immediately preceding period, it would generally not be entitled to any subsidy under the original program for that period.

For qualifying periods starting on or after July 5, the bright-line 30% revenue decline requirement and corresponding 75% wage subsidy is replaced by a sliding-scale subsidy that consists of two parts:

• a “base subsidy” for an Eligible Employer that has experienced any level of revenue decline for a particular period, and
• an additional “top-up subsidy” for Eligible Employers that have experienced a revenue decline of greater than 50% for a particular period.

The revenue decline for the top-up subsidy will be measured differently than from the base subsidy. The greater an Eligible Employer’s revenue decline is for an applicable qualifying period, the larger its subsidy entitlement will be, subject to limits imposed on the amount of subsidy available.

Safe Harbour Rules for Periods 5 and 6

The new subsidy calculations include a “safe-harbour” rule for periods 5 and 6 (being the periods from July 5 to August 1 and  August 2 to August 29, respectively), which allows an Eligible Employer that would have been entitled to a larger per-employee subsidy under the original bright-line rules to calculate its subsidy entitlement for periods 5 and 6 under the original rules (rather than adopting the new sliding-scale calculation).

Employees on Leave with Pay

Unlike the old bright-line rules, the new subsidy calculation rules apply differently to employees who are on “leave with pay.” If an Eligible Employee is on leave with pay during a week in periods 5 and 6, the amount of wage subsidy an Eligible Employer may receive for that Eligible Employee will be calculated under the old rules (no top-up will be available), but only a nominal revenue decline will be required (anything more than zero). This means an Eligible Employer will generally be eligible to receive 75% of the eligible remuneration paid to an Eligible Employee on leave with pay (up to $847 per week) while requiring only a de minimis revenue decline for periods 5 and 6.

If an Eligible Employee is on leave with pay during a week in periods beginning on or after August 30, 2020 (periods 7 to 9), the amount of wage subsidy an Eligible Employer may receive for that Eligible Employee will be based on the eligible remuneration paid to that Eligible Employee for the week. This amount will be capped by regulation (currently unreleased) and subject to further restrictions for non-arm’s length employees whose baseline remuneration is nil. The intention in periods 7 to 9 is that the wage subsidy received by an Eligible Employer for employees on leave with pay will mirror the benefits received by unemployed individuals receiving the Canada Emergency Response Benefit or Employment Insurance.

Expansion of Eligible Employees

Under the old CEWS rules, an employee could not be without remuneration for 14 or more consecutive days in a qualifying period. This restriction has been removed for periods beginning on or after July 5, 2020, such that an Eligible Employee (for which an employer may claim the CEWS), now means any individual employed in Canada in a qualifying period. This change removes the onus from the employer for determining which employees had received the Canada Emergency Response Benefit (CERB) in the qualifying period. This does not appear to alter any liability employees may have to pay back funds received under the CERB program if they subsequently start working during the relevant period.

How Much Will an Eligible Employer Receive Under the New Wage Subsidy Calculation?

The amount of the wage subsidy that an Eligible Employer may receive per employee is no longer 75% of eligible remuneration paid to the employee. Rather, for periods beginning on or after July 5, 2020, (subject to the safe harbor rule mentioned above) an Eligible Employer will be entitled to a percentage of eligible remuneration paid to an employee that is directly tied to the employer’s revenue decline for a particular qualifying period. Subject to limits for non-arm’s length employees (described below), the amount the employer may receive is calculated by the formula:

(Base Percentage + Top-up Percentage) x Eligible Remuneration (up to $1,129 per week)

The meanings of “eligible remuneration” and “qualifying revenue” (used below) for purposes of the wage subsidy calculation are unchanged from the original rules.

Base Percentage

Base percentage is calculated for the relevant qualifying period based on the Eligible Employer’s “revenue reduction percentage,” which is generally the amount by which the employer’s revenue in a current reference period has declined from its revenue in a prior reference period.

Revenue reduction percentage = 1 – (current reference period qualifying revenue) / (prior reference period qualifying revenue)

The base percentage is determined for each qualifying period by multiplying the revenue reduction percentage by a set multiple (starting at 1.2 and declining during each qualifying period), capped at a set percentage where the revenue reduction percentage exceeds  50%. The table below outlines how the base percentage is calculated for each relevant period and the maximum weekly base subsidy per employee.

Base Percentage

Base Percentage

Top-Up Percentage

The top-up percentage is calculated for the relevant qualifying period based on an Eligible Employer’s “top-up revenue reduction percentage,” which is generally the amount by which the employer’s average revenue over a current three-month period has declined from its average revenue over the corresponding period in 2019 If elected, the Eligible Employer may also use the revenue from January and February 2020 instead of the corresponding three-month period in 2019. 

Top-up revenue reduction percentage = 1 – (average monthly qualifying revenue for the last three calendar months ending before the applicable current reference period) / (average monthly qualifying revenue for the applicable prior reference period (or January and February 2020 if the alternative approach has been elected))

For each qualifying period, the top-up percentage is the lesser of 25% or the amount determined by the formula (but in no case less than 0):

Top-up percentage = 1.25 x (top-up revenue reduction percentage – 50%)

An Eligible Employer will therefore have a top-up percentage of 0 unless its revenue reduction over the relevant three-month period is greater than 50%. The table below provides examples of how the top-up percentage is calculated.

What are the Relevant Time Periods for Determining the New Base Subsidy and Top-up Subsidy?

The table below outlines the additional qualifying periods and the respective reference periods for determining the revenue reduction for determining the base subsidy and the top-up subsidy. 

Notwithstanding the above, the new CEWS calculation rules will allow an employer to determine its revenue reduction percentages for one qualifying period based on the revenue reduction percentages of the immediately preceding qualifying period. 

What is the Maximum Amount an Employer may Receive Under the Updated CEWS Program?

The maximum amount of CEWS to which an Eligible Employer is entitled for remuneration paid to its employees depends on the particular period, as the base subsidy declines in each period from and after July 5, 2020. 

If an Eligible Employer has a revenue reduction in the particular qualifying period of greater than 50% and has a three-month average revenue decline of over 70%, then the maximum per-employee weekly benefits are as follows:

How is CEWS Calculated for Non-arm’s Length Employees?

As with the original CEWS program, the per-employee amount of CEWS an Eligible Employer may receive for amounts paid to an employee who does not deal at arm’s length with the employer is limited by the employee’s baseline remuneration, which is either the average weekly eligible remuneration paid to the eligible employee during the period that begins on January 1, 2020, and ends on March 15, 2020, or the alternative time periods will be March 1, 2019, to May 31, 2019, for the first three qualifying periods, March 1, 2019, to June 30, 2019, for the fourth qualifying period, and July 1, 2019, to December 31, 2019, for all remaining qualifying periods. 

That an employee does not deal at arm’s length with the Eligible Employer should not, in itself, affect the employer’s access to either the base subsidy or the top-up subsidy.

Retroactive amendments and changes affecting all qualifying periods

In addition to changes in calculating the wage subsidy amount for qualifying periods beginning on or after July 5, 2020, the federal government introduced certain retroactive amendments that apply to all qualifying periods. In certain instances, these amendments may cause employers and employees who were previously ineligible for CEWS to become eligible.

Relief Related to Purchases and Reorganizations

Under the original CEWS rules, certain employers were ineligible for CEWS because their 2020 revenue could not be properly compared to their 2019 revenue. This was a particular problem for employers who had acquired a new business through an asset purchase transaction, undergone an amalgamation or wound up a subsidiary, resulting in an increased business in 2020 by reason of the combination of existing businesses. Bill C-20 provides some relief for these employers. 

Under Bill C-20, corporations formed on the amalgamation of two or more predecessor corporations (or where one corporation is wound up into another) are permitted to calculate their benchmark revenue for the purposes of the CEWS revenue decline test using the combined revenues of all predecessor corporations. This rule was previously introduced as draft legislation on May 15, but was not passed by Parliament at that time. 

The Bill C-20 also includes new rules regarding asset purchases. Where an Eligible Employer has acquired assets that form all or substantially all of a business carried on in Canada by a seller and made the required election, the entity may, in determining its qualifying revenue, elect to include qualifying revenue of the seller in respect of the prior reference period and current reference period for a particular qualifying period. The Eligible Employer will be required to file a prescribed election form for each qualifying period for which it seeks to file on this basis, and the seller must jointly elect with the eligible entity if the seller is in existence during the qualifying period.

Loosening of the Payroll Number Requirement

Under the original CEWS rules, an Eligible Employer was required to have a payroll account registered with the CRA to make remittances for employee remuneration. This requirement stymied certain employers who use a payroll provider to fulfill this obligation.

Under Bill C-20, the definition of qualifying entity has been expand_ed to include entities without a payroll account as long as their payroll is administered by a payroll service provider that does have a registered payroll account and who makes remittances for the employees of the qualifying entity.

Notice of Determination

Bill C-20 introduces some clarity regarding the CRA’s ability to issue notices of determination regarding a wage subsidy amount paid under the CEWS program. Previously, the CRA announced that CEWS applicants would be subject to possible audits and other compliance obligations at some point in the future, but it was unclear how the CRA might reassess applicants or how taxpayers could contest CRA decisions.

Under these new rules, the minister may, at any time, issue a notice of determination that will determine or vary the wage subsidy amount for which a taxpayer may be eligible. Objections to a notice of determination will be governed by the existing procedure for objections and appeals under the Income Tax Act. Applicants should therefore maintain detailed records supporting their claims for CEWS or risk a lengthy audit process

Revision of Eligible Entities

Previously, partnerships did not qualify as eligible entities and were precluded from claiming the CEWS if any non-eligible entity held an interest in the partnership. The federal government has announced that upcoming regulatory changes will permit partnerships to be eligible entities as long as the fair market value of interests in the partnership held by non-eligible entities at all times in the qualifying period does not exceed 50% of the fair market value of all interests in the partnership.

These regulatory changes also expand the definition of eligible entities to include a number of previously excluded entities. This includes Indigenous government-owned corporations that are carrying on a business and their subsidiaries, national-level registered Canadian amateur athletic associations that are tax-exempt under paragraph 149(1)(g) of the Income Tax Act, registered journalism organizations that are tax-exempt under paragraph 149(1)(h) of the Income Tax Act, and non-public educational and training institutions.

In addition to these above expansions to the meaning of eligible entity, the federal government has also narrowed the definition of eligible entity to exclude trusts that are exempt from Part I tax or are public institutions.

These changes apply retroactively to all qualifying periods. 

Ability to Elect to Use Cash or Accrual

The prior rules had allowed employers to elect to compute their revenue declines using a cash accounting method where they would have otherwise relied on an accrual method. The new rules also now allow an employer to elect to compute its revenue declines using an accrual accounting method where it would have otherwise relied on a cash method, thereby increasing the flexibility afforded to employers.

Exceptions for Extended Leaves and Seasonal Employees

The amount of the wage subsidy that a qualifying entity may claim for each employee is limited based on a number of factors, including the particular employee’s “baseline remuneration.” Under the original CEWS rules, the baseline remuneration meant the average weekly eligible remuneration paid to the eligible employee during the period that begins on January 1, 2020, and ends on March 15, 2020. However, this excluded certain employees who might not have been working during this period.

To better capture seasonal employees and employees returning from extended leaves, such as parental leave, Bill C-20  permits eligible entities to elect to use alternative time periods from 2019 to calculate the employee’s baseline remuneration. In particular, the alterative time periods will be March 1, 2019, to May 31, 2019, for the first three qualifying periods, March 1, 2019, to June 30, 2019, for the fourth qualifying period, and July 1, 2019, to December 31, 2019, for all remaining qualifying periods.

Extension of Application Deadline

The deadline to file an application for the CEWS for any qualifying period (including qualifying periods 1 to 4) has been extended to January 31, 2021.

List of Recipients

Under the original CEWS rules, the federal government reserved the right to publish the name of any entity that applied for the CEWS. Although not part of Bill C-20, applicants should be aware that the federal government has since indicated it will be publishing a public list of all CEWS recipients.