COVID-19, Taxes and the Circle of Life

COVID-19, Taxes and the Circle of Life

Most of us agree that we were not expecting 2020 to start out the way it has. COVID-19 has caused ruckus throughout the world and has governments trying to figure out financial solutions to keep the economy stimulated. It is commendable that different levels of government are working together to approve financial assistance packages to help people during these difficult times. I am surprised with the speed at which people are receiving money and often times, without much ask!

As commendable as this is, I am also confused how the government intends to manage the aftermath of all this. When I look six months or one year from today, I see us in a state of chaos where the government is trying to collect monies from individuals who, based on the criteria, did not qualify for it (rightfully or wrongfully). Remember that amounts being expended now, will be funded out of our pockets in some form (circle of life!).

Would personal and corporate taxes be going up? Likely, but when and how much is the question.

The changes to the CERB and CEWS programs are being announced rapidly. I will first do a brief overview of the main programs or changes currently available to business and individuals wanting to take advantage. Then, I will address some common questions I am being asked.

CERB (Canada Emergency Response Benefit)

  • Available to individuals personally (assuming they qualify personally)
  • Benefit is meant to assist those that have stopped working for at least 14 days due to COVID-19
  • Amount of benefit is $500/week for up to 16 weeks (everyone gets the same amount!)
  • Eligibility:
    • if you are over 15 years of age and
    • stopped working due to COVID-19 and
    • have not voluntarily quit your job and
    • had income of at least $5000 of employment and self-employment income (as well as some other types) in 2019 or in 12 months prior to the date of the applying and
    • you are expecting to be without employment for at least 14 consecutive days in the initial four-week period
  • Fastest way to apply is online through MyAccount with the CRA.
  • Recently it was confirmed that if you are in receipt of non-eligible dividends from a small business corporation of at least $5,000 in the previous 12 month period, you would be eligible for the CERB (this is a welcome change!).
  • Remember that this is a taxable benefit and you will be paying tax on this.
  • Review the below website for some great Q&A https://www.canada.ca/en/services/benefits/ei/cerb-application/questions.html

 

CEWS (Canada Emergency Wage Subsidy)

  • Available to employers (assuming they qualify)
  • Goal is to bring employees back onto payroll to reduce the burden on the CEWS and as per Department of Finance to “help better position Canadian companies and other employers to more easily resume normal operations following the crisis.”
  • See article I wrote discussing the wage Subsidy in detail HERE. Below I only discuss changes and updates on this.
  • Eligible employers would include those eligible that see a drop of at least 15% of their revenue in March 2020 (this is new!) and 30% for the following months.
    • Employers are allowed to calculate their change in revenue using an “alternative benchmark” to determine their eligibility to provide flexibility to those who don’t have benchmarks (high-growth firms, non-profits etc)
    • Allows employers to compare revenue using average of their revenue earned in January and February 2020 or year over year approach.
  • A special rule applies to employees that do not deal at arm’s length with the employer. The subsidy amount for such employees is limited to the eligible remuneration paid in any pay period between March 15 and June 6, 2020, up to a maximum benefit of the lesser of $847 per week and 75% of the employee’s pre-crisis weekly remuneration. The subsidy is only  available in respect of non-arm’s length employees employed prior to March 15, 2020.
  • Expanded to introduce a new 100% refund for certain employer paid contributions to EI and CPP (and QPIP if applicable).
    • This refund covers 100% of employer-paid contributions for eligible employees for each week throughout which those employees are on leave with pay and for which the employer is eligible to claim for the CEWS for those employees.  
    • This refund is not  subject to the weekly maximum benefit per employee of $847 that an eligible employer may claim in respect of the CEWS. There is no overall limit on the refund amount that an eligible employer may claim.

Temporary 10% Wage Subsidy

  1. For eligible small employers a temporary wage subsidy for a period of three months equal to 10% of renumeration paid during that period to a max subsidy of $1,375 per employee and $25,000 per employer.
  2. An eligible employee is an individual who is employed in Canada.
  3. Businesses will be able to reduce remittance of income tax withheld on their employee’s renumeration. Note You cannot reduce your remittance of CPP contributions or EI premiums from your payroll deductions (employee or employer portion)
  4. For employers that are eligible for both the CEWS and the 10% Temporary Wage Subsidy for a period, any benefit from the Temporary 10% Wage Subsidyfor remuneration paid in a specific period will generally reduce the amount available to be claimed under the CEWS in that same period

Note: Payroll remittances are not subject to deferral as part of the tax measures to help support those affected by the COVID-19 outbreak. You must continue remitting payroll deductions by your remittance due date.

 

Canada Emergency Business Account (CEBA)

  • Provides credit for small businesses to pay for immediate operating costs such as payroll, rent, utilities, insurance, property tax or debt service.
  • 100% funded by government of Canada
  • Available to Canadian employers with $50,000 to $1million in total payroll in 2019 and operating as of March 1, 2020.
  • Interest free loan of $40,000 to those eligible businesses.
  • If government repaid by December 31, 2022, 25% (up to $10k) will be forgiven.
  • If not able to repay, will convert into a regular loan 3 year term at 5%.
  • Program is being administered through your financial institutions and credit unions

My thoughts…

I still have fundamental issues with government giving out funds to individuals via the CERB, with no verification of their eligibility. Majority of the tax returns are prepared electronically and processed electronically. Is there not a way to filter data and information so that the first tier of individuals that qualify are identified? We can then work on those whose situations have changed? If this is not possible, then the CERB should be available to everyone. Asking people to give these monies back a few months from now due to them not being eligible, seems impractical. Frankly, some individuals may have spent or used the money and may not be able to repay.

The CERB is available only if you are without work for at least 14 consecutive days. One common question I get asked is if someone works via a corporation and does not pay themselves from their corporation (dividend or salary), would they be eligible for the CERB?  I think the answer to this question is, NO, they should not be eligible for the CERB as they are still working. I think this is misunderstood by a lot of people who continue to experience reduced income, but don’t qualify for any of the other business benefits available for various reasons. I think clarity on this is a must as this is not clear from the current guidelines.

Furthermore, those that are taking dividends from their corporation appear to be “left-out” of the business assistance packages. The interest-free loan of $40,000 is only available to those that have a minimum of $50,000 of payroll in 2019. What about someone that has employees on T4 (just shy of $50,000 gross payroll) and remunerate themselves via a dividend? These individuals do not qualify for the loan. Furthermore, the CEWS only applies to wages (which may include a spouse that was previously working for the corporation). What if someone was paying a dividend to a spouse as they were actively involved in the business? Why does the CEWS provide a subsidy for the spouse in this case but not in the case of a dividend?

Another common question I am asked is, what if a taxpayer’s spouse is given a salary instead of dividend, would the CEWS be available? I think the answer is No.  There is a special rule for employees that are dealing at arms-length with the employer. CEWS is only available ‘…in respect of non-arm’s length employees employed prior to March 15, 2020.’ I interpret this to mean that if you spouse was not on payroll prior to this date, then the CEWS would not be available on salaries paid to them. I again don’t understand why we are differentiating someone who takes compensation via a salary vs dividend in this situation? TOSI already deals with payments of “reasonable” dividends to family members.

Furthermore, it is vital to note that an employer receiving the CEWS for an employee implies that the employee is on the payroll of the employer. One cannot claim both the CEWS and the CERB for the same individual.

As you can see, this is complicated. I understand that the government is making ongoing changes rapidly and regularly and it is refreshing to see that our politicians are concerned with the well-being and state of our economy and people. With that being said, however, I think a lot of small businesses are not able to take advantage of these packages and are frustrated as they do not know how to seek help.  I would request that clarity be provided on these questions, and several others which remain unanswered.

The opinions expressed in this article are those of the author.

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Connect with Harpreet by calling 905.790.0657 Or email info@wadehrapc.ca or visit us www.wadehrapc.ca



35 Comments

  • Good article and explains a lot of things but how do we find the answers to the things that are not clear?

  • Kim

    Can a person who’s business qualifies for CEBA also apply for CERB?

    • Harpreet Wadehra

      The CEBA is meant to assist with overhead costs. The CERB is if you are not working. I don’t think one precludes you from the other.

  • Sonia Taranu

    Thank you, Harpreet for taking the time to write this article. Your effort is appreciated.

    • Harpreet Wadehra

      Thank you, Sonia. The struggles for business owners are very real. I wish there was more support offered to them directly.

  • Geoffrey Taylor

    Thanks Harpreet!
    You’ve done a better job at explaining these programs than the media or government has.

    Today’s the fifteenth and i’m going to pay my source deductions.
    I’m currently at 0 revenue. I’m still paying my staff their salaries. I’ve applied for CEBA and as soon as I can, I’ll apply for the wage subsidy. I hope (pray) that if I can get some of this help from the Government I make it through.
    We’ll see how long we can hang on!

    • Harpreet Wadehra

      The struggles for business owners are so paramount. I personally think the wage subsidy will be a very administrative process which would make it very unappealing to a lot of business owners!

  • Sumi

    Hi Harpreet
    my question is that my husband is owner operator (truck driver)and from last 4 weeks he only did 2 trips which is less than 10 hours per 1 trip. evey 14 days he got 1 trip. He didn’t get work because of covid 19. so is he eligible for CERB?

    • Harpreet Wadehra

      Hi Sumi.
      I believe the CERB criteria was just updated for those working part time. Essentially I believe they have to be earning less than $1000 a month to qualify for the CERB

      • Kwame

        Please,my question is this. If someone has a small business and received the CEBA $40,000 governmant loan can he still apply for CERB?

  • Sarab

    Can a small business holder, who is giving divined as income to family members instead of salary, is eligible for CEBA..??

    And what about new business which just started in last month of 2019, how can they show their pay roll of 2019 more than 20k? But still they are going through same situation..due to covid 19

    • Harpreet Wadehra

      The CEBA is unfortunately only available to those that have payroll in 2019 of at least $20k.
      Dividends is not part of the eligibility criteria and unfortunately the CEBA does not support new businesses or those who truly are small and have payroll under $20k due to various reasons.

  • KJ

    Hi Harpreet, thanks for your work on this. Im in slightly complex situation wondering if you could shed some light.

    I currently have a CCPC with my brother and I as shareholders, but since COVID-19 that CCPC revenue is down 90%. We normally accumulate profits throughout the year and pay ourselves dividends at the end of year.

    In this instance, since we aren’t employees, but just shareholders, and never got paid a salary before, I take it we cannot get the CEWS subsidy since there is no remumeration paid due to having no employees. Is this correct? Hope that makes sense

    Thanks for your time

    • Harpreet Wadehra

      Hi KJ.
      I agree with your conclusion above that since you are taking a dividend you will not be eligible for the CEWS. I have lot of other clients in a similar situation and its unfortunate that such business owners are excluded from all the small business support that is being offered.

  • Marni

    Hi Harpreet,

    Do you know if employees are eligible for CERB after they have been on CEWS? If I accept CEWS now, through my employer and receive that for12 weeks, would I then be able to apply for CERB after that? Definitely worst-case-scenario, but just want to be prepared. I do understand that this is a fluid situation, that things can change, and end dates could be extended.

    Thank you

    • Harpreet Wadehra

      Hi Marni.
      My understanding is that the CERB and CEWS eligibility is determined every month. Therefore, if you stop getting paid from your employer and are not working due to COVID-19 you should be eligible for the CERB.

  • Hasmukh

    I am an emloyee of my own company which is badley effected by the corvid-19, I do not draw any income from my business hence could I apply for the CERB program.

    • Harpreet Wadehra

      Unfortunately there are tons of businesses in a similar boat such as yours. They are also frustrated, helpless and aggregated with the situation and lack of assistance for them. Hopefully the government will acknowledge small businesses such as yours and provide some relief as well.

  • Marni

    Thanks, Harpreet. I appreciate your advice. Do you know if CEWS or CERB payments would be taken into consideration when calculating EI payments? Are income support programs generally included in these calculations?

    Thanks again

    • Harpreet Wadehra

      Hi Marni. I am not sure i fully understand your question. You would either qualify for the CERB or EI, not both. If you are already receiving EI regular benefits, you will continue to receive these benefits until the end of your benefit period.

  • Andrea Casasola

    Case: Company owned by Children Trust. The company is operated by the father who is not an owner.
    Can the father pay himself a bonus for 2019 and then be able to apply for the $40K loan?
    I understand that the payroll account cannot be started retroactively but CRA allows to issue T4 and T4 Sum for 2019 and pay the deductions in 2020.

    • Harpreet Wadehra

      Hi Andrea. I don’t know how the CRA will treat situations like these where it is difficult to prove the intention of paying the bonus in 2019 (which also has to be reasonable as the father is not the owner?). Please consult your accountant for detail advice.

  • Ron Denomy

    They say CEBA will result in a loan forgiveness of $10,000 will this be taxable income ?

    • Harpreet Wadehra

      Hi Ron.

      My understanding is that, if you repay the loan balance on or before December 31, 2022, there will be a loan forgiveness of 25 percent (up to $10,000). I am pretty sure the $10k will be taxable to the corporation. Please visit the website below for conditions on how the $40k is to be used.

      https://ceba-cuec.ca/

  • Balbir

    Can a truck owner operator having payroll for 2019 more than $20k apply for CEBA ,CERB or both if meeting eligibility criteria?

  • Armand

    Can a person who’s business qualifies for CEBA also apply for CEWS?

  • Sam

    Hi Harpreet,
    I am a sole proprietorship ,made more than $20,000 last year.Can I apply for the CEBA?
    Thanks.

    • Harpreet Wadehra

      Hi Sam.
      To be eligible for the CEBA you need an active business/chequing/operating account opened prior to March 1, 2020.

  • Hi Harpreet,

    Thank you for all of your hard work interpreting these benefits for us. To carry on with the thread from Sam on May 3rd. I do have an active business checking account, GST account but am a sole proprietor so pay myself via bank transfer and not a formal T4 (I guess I could have but have never gone this route). I claim the income received from my business as self-employed income vs. from a T4. 1). Could my biz qualify for the CEBA? I still have operating expenses that are ongoing and no income foreseeable for a number of months to come. 2). As an individual could I also claim the CERB? Thanks.

    • Harpreet Wadehra

      Hi Cherly.
      The government has indicated that they will be expanding the CEBA so that individuals such as yourselves may qualify. More details are to come on this in the next few weeks.
      CERB you can only claim if you are not working, or working and receiving under $1000/month of income

  • Steve

    Hello Harpreet,

    I own as small business which has been affected by COVID. I applied succesfully for CEBA (40k loan) which will ensure that the business survives the current economic situation. It’s my understanding that this loan can be used for immediate payments and the funds are used to pay my salary (I am the owner and no employees) and other expenses that require immediate payment. I think I will be able to pay the loan back within a year or so.

    Also, since the revenue declined 30% + the corporation can apply for CEWS.

    Would it be OK to apply for both or would it be considered double dipping … since I will be using the CEBA loan to pay for my salary, which I will be getting a subsidy for under CEWS.

    Please advise, Thank you.

    Kind regards,
    Steve | Toronto

    • Harpreet Wadehra

      Hi Steve.
      The CEBA and CEWS are meant to compliment each other, therefore, you should be able to access both.

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