- April 2, 2020
- Posted by: Harpreet
- Category: Tax Tips
Canada Emergency Wage Subsidy (CEWS): Are we living in ‘la-la land’?
Harpreet Wadehra, CPA, CA
Details were released yesterday by the Finance Minister on the much awaited 75% wage subsidy offered to small businesses. Although I appreciate efforts are being made to assist small businesses, I am inclined to believe that the government is out of touch with realty when it comes to small business owners. Administration is one of the biggest barriers that small businesses face. The administration efforts required to calculate, apply, submit, “attest” and “prove” to the government may not prove to be worthwhile for several businesses.
I will first provide the details of the CEWS and then I will provide my thoughts. It is important to remember that there is still no legislation that has passed in regards to this. We expect additions/deletions to these items in the upcoming days/weeks.
Purpose of CEWS:
To assist businesses in keeping staff on their payroll and assist businesses in returning to regular operations.
Employers must make their best effort to top-up employees’ salaries to bring them to pre-crisis level (i.e. pay them their normal wages and cover 25% of the wages).
Who is eligible?
Eligible employers would include individuals, taxable corporations, and partnerships consisting of eligible employers as well as non‑profit organizations and registered charities.
How much would you get?
Generally, up to 75% of the amount of renumeration paid, up to a max benefit of $847/week. Further guidance with respect to how to define pre-crisis weekly remuneration for a given employee will be provided in the coming days.
A special rule will apply to employees that do not deal at arm’s length with the employer. The subsidy amount for such employees will be limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, up to a maximum benefit of $847 per week or 75 per cent of the employee’s pre-crisis weekly remuneration.
There would be no overall limit on the subsidy amount that an eligible employer may claim.
Note: This is a taxable subsidy
It is important to remember that the subsidy is not tied to employer payroll source deductions. Therefore, it appears that payroll deductions would need to continue to be paid to the CRA as regular payroll deductions. This will create significant cash flow differences!
This subsidy would be available to eligible employers that see a drop of at least 30 per cent of their revenue. Eligibility would generally be determined by the change in an eligible employer’s monthly revenues, year-over-year, for the calendar month in which the period began.
Each month must be examined independently to determine if the employer qualifies.
For eligible employers established after February 2019, eligibility would be determined by comparing monthly revenues to a reasonable benchmark.
In applying for the subsidy, employers would be required to attest to the decline in revenue.
How do you apply?
Eligible employers would be able to apply for the Canada Emergency Wage Subsidy through the Canada Revenue Agency’s My Business Account portal as well as a web-based application. Employers would have to keep records demonstrating their reduction in arm’s-length revenues and remuneration paid to employees.
It appears that the CRA will be administering this on behalf of the government.
Covers 75 per cent of salaries for qualifying businesses, for up to 3 months, retroactive to March 15, 2020
- My understanding of how the CEWS will be administered is that businesses will have to pay out staff wages at 100% and then wait for a “refund” to come through from the CRA. Obviously, there is a big administration burden that needs to be met before you can get access to the funds. Small business owners are already challenged with time and in addition to trying to get business back to normal, they will have to deal with the additional administration burden of this. I am convinced that many small business owners will say this process will not be worth it!
- Businesses also have to prove that revenues have declined by 30% year over year for the calendar month in which you are claiming the subsidy. This part really bothers me. Revenues are not always an indicator of how a business is doing, especially businesses that sell retail and/or wholesale products. An increase in revenues does not mean a business is making more money. The cost of the product may have gone up due to currency, product mix, type of product etc. Therefore, gross margins may have declined by 30% but not the sales and hence based on this merit alone, such small business owners would not qualify for the subsidy.
- The subsidy is taxable to businesses. Although I understand the reason for it being taxable, I think small business owners are already struggling to cover 25% of staff salaries, covering rent and other fixed costs during this period. Having to pay tax on the amounts you receive added with the additional administration burden, makes this subsidy unappealing to several business owners.
- I am still not clear what support the subsidy offers to small businesses that perhaps are family run. Often times, these individuals pay themselves a dividend, instead of a salary. It appears that such business owners would not be eligible for the CEWS. Taking a salary vs dividend is often purely tax driven and hence to provide subsidy to those people who have non-arm’s length individuals on payroll vs dividends, does not seem fair and equitable.
Perhaps we first need to define who small businesses are and then we can come up with a plan that truly helps and assists small business in getting through this pandemic. The government announcements do not truly assist small businesses and lets not pretend that they do.
The opinions expressed in this article are those of the author.
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