Business Law

What You Need to Know About the Canada Emergency Wage Subsidy


On Saturday April 11th, Parliament passed the Federal government’s wage subsidy legislation, formally known as COVID-19 Emergency Response Act, No. 2 (the “Act”), to enact the Canada Emergency Wage Subsidy (“CEWS”). The Act introduces additional details since Prime Minister Trudeau last announced changes to the CEWS.  Of particular note, the group of employers who qualify for the subsidy has been expanded in many respects. 

As there is an influx of information about COVID-19, businesses may have some questions about the CEWS and whether they are eligible for this program. We have put together a set of questions and answers to assist you in understanding the rules governing the CEWS.

What is the CEWS?

The CEWS is a $73-billion wage subsidy program offered by the Federal government to qualifying employers. The main purpose of the CEWS is for employers to keep employees on payroll during COVID-19 so as to reduce employees’ reliance on the Employment Insurance regime.

When is the CEWS available?

The CEWS subsidizes employers in respect of remuneration paid to employees in the 12-week period between March 15, 2020 and June 6, 2020. Under the Act, benefits under the program may be extended to remuneration paid up to September 30, 2020.

How does an employer apply for the CEWS?

Employers will apply for the program via the Canada Revenue Agency’s My Business Account portal. The application is expected to be available within the next few weeks. An eligible employer must file an application in respect of an eligible claiming period on or before September 30, 2020. As part of the application, the individual who has principal responsibility for the financial activities of the eligible employer (likely the chief financial officer or a similar role) must attest that the application is complete and accurate in all material respects.

Who can apply?

The subsidy is available to “eligible employers”.  An eligible employer must be one of the following types of entity:

  1. an individual,

  2. a taxable corporation, 

  3. certain tax-exempt organizations, (including a registered charity or not-for-profit organization, but not including government and public institutions, such as hospitals, school boards, universities, colleges and health authorities), and

  4. a partnership each member of which is an entity described above.

In addition, an eligible employer must have had a registered payroll account with the Canada Revenue Agency on March 15, 2020.  As a result, new employers are not eligible for the subsidy. 

What are the conditions for receiving the CEWS?

Payments under the CEWS will be made in respect of three separate “claiming periods”.  An employer who duly files a CEWS application on or before September 30, 2020 will qualify for benefits under the CEWS in respect of a particular claiming period: (a) if it meets the Revenue Reduction Test for that period, or (b) if it has met the Revenue Reduction Test for the immediately preceding claiming period. 

In general terms, an employer will satisfy the Revenue Reduction Test for a particular claiming period if its revenues in respect of that period fall below a threshold percentage of its revenues for either: (a) the corresponding month of 2019, or (b) the average of its monthly revenues for January 2020 and February 2020.  The employer may choose in its CEWS application whether the reference period for the Revenue Reduction Test is the period described in (a) or (b) above; however, once that decision is made it cannot be changed for future claiming periods.        

In particular, the Act provides that the Revenue Reduction Test for a claiming period is satisfied if:

  1. for the claiming period from March 15 to April 11, the entity’s March 2020 revenues are 85% or less of the employer’s choice of either (a) its March 2019 revenues, or (b) the average of its January 2020 and February 2020 revenues;

  2. for the claiming period from April 12 to May 9, the entity’s April 2020 revenues are 70% or less of the employer’s choice of either (a) its April 2019 revenues, or (b) the average of its January 2020 and February 2020 revenues; and

  3. for the claiming period from May 10 to June 6, the entity’s May 2020 revenues are 70% or less of the employer’s choice of either (a) its May 2019 revenues, or (b) the average of its January 2020 and February 2020 revenues.

How is revenue calculated for the purposes of the Revenue Reduction Test?

Employers may elect to calculate revenues using either the cash or accrual method when first applying for the CEWS, and are required to use that method for the duration of the program.

Members of affiliated groups may elect for each member’s revenues to be determined on a consolidated basis; selective consolidation of the revenues of some, but not all members of the affiliated group is not permitted.  Special rules apply to calculate the revenues of registered charities and other eligible tax-exempt organizations. 

Generally, revenue from non-arm’s length sources is excluded from the calculation for purposes of the Revenue Reduction Test.  However, eligible employers who earn all or substantially all (generally interpreted by the Canada Revenue Agency to mean 90% or more) of their revenues from persons or partnerships with whom they do not deal at arm’s length may elect for their eligibility for the CEWS to be determined based on the weighted average of their revenues of such non-arm’s length persons. 

The calculation of revenue excludes revenue from extraordinary items and amounts the employer receives from other subsidy programs.

What is the total amount that an eligible employer can receive under the CEWS?

For the duration of the program, eligible employers may receive a subsidy of up to $847 per week per eligible employee. There is no overall cap on the aggregate subsidy that  an employer may receive. The subsidy is  reduced by any payments that the employer receives under other COVID-19 relief programs, including the previously announced 10% temporary wage subsidy program.

Who is an eligible employee?

An eligible employee is an individual who, during the relevant claiming period, was employed in Canada by the eligible employer and was not without pay for more than 14 consecutive days. 

No subsidy is available in respect of amounts paid to an independent contractor since an independent contractor is not an employee..

How is the amount of the subsidy calculated for each employee?

Generally, where the employee’s “Baseline Remuneration” (which, as described below, is effectively pre-crisis weekly remuneration) was at least $58,725 per year, the employer is entitled to a subsidy for the full amount paid to the employee, up to a maximum of $847 per week.

In other cases, where wages are maintained at 75% or higher of their pre-crisis levels, the subsidy is equal to the wages actually paid, subject to a cap of the lesser of: (a) 75% of Baseline Remuneration, and (b) $847 per week.  Where wages are less than 75% of their pre-crisis levels, the subsidy is equal to 75% of the amount paid, up to a maximum of $847 per week.

For employees hired after March 15, 2020 (i.e., for whom the Baseline Remuneration is nil), the subsidy is calculated as 75% of the amount of remuneration paid, up to a maximum of $847 per week.

Special rules apply where the employee does not deal at arm’s length with the employer.  In particular, the subsidy in respect of such an employee who was hired before March 15, 2020 is the least of the following three amounts:

  • the weekly remuneration actually paid to the employee;
  • 75% of the employee’s Baseline Remuneration; and
  • $847 per week.

No subsidy is available in respect of a non-arm’s length employee hired on or after March 15, 2020.

For these purposes, remuneration includes salary, wages, fees, commissions or other amounts for services of the eligible employee, but does not include retiring allowances, stock option benefits, or amounts that can be expected to be returned to the employer.  An anti-avoidance rule also prevents the undue inflation of salary paid during a claiming period that is offset by a corresponding reduction in a future period.

As detailed above, to determine the amount of a subsidy in respect of a particular employee, an employer might be required to calculate the employee’s “Baseline Remuneration”.  For these purposes, an employee’s “Baseline Remuneration” is equal to their average weekly remuneration for the period from January 1, 2020 to March 15, 2020, excluding any consecutive 7 day period for which the employee was not paid.

Will eligible employers receive a refund for certain employer-paid contributions?

Yes.  In addition to the subsidy provided above, employers eligible for the CEWS will be entitled to receive a 100% refund for certain employer-paid contributions to Employment Insurance, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan. This refund will apply to the entire amount of employer-paid contributions in respect of employees who are on leave with pay in a period where the employer is eligible for the CEWS. An employee will be considered to be on leave with pay throughout a week in which that employee receives remuneration but does not perform any work for the employer.  

Will anyone know if an employer applies for the CEWS?

Possibly.  The Act permits the Canada Revenue Agency to publicize the name of any person or partnership who applies for the CEWS.

How is the subsidy treated for income tax purposes?

The subsidy available to employers under the CEWS is considered government assistance and is included in the employer’s taxable income, subject to the employer making an election to reduce deductions claimed in respect of certain expenditures or the tax cost of certain assets.

What are the anti-avoidance measures and penalties for non-compliance?

An employer who is subsequently determined not to have been entitled to amounts received under the CEWS is required to return such amounts and, in circumstances amounting to gross negligence, may be subject to a penalty of 50% of the overpayment.

The Act includes certain anti-avoidance measures to ensure, among other things, that employers are not artificially reducing revenue to qualify for the CEWS. An employer who engages in such activities will be required to repay the full subsidy that was improperly claimed and is subject to a penalty equal to 25% of the value of the subsidy claimed.

The crisis in Canada and throughout the world is continuing to evolve. We are carefully monitoring changes to tax legislation and policy and are committed to advising our clients of developments as they unfold. Please do not hesitate to contact a member of our team with your questions about the impact of COVID-19 on your tax compliance obligations. For more information about dealing with COVID-19, please visit our COVID-19 Resource Center.

We wish all our clients, friends and colleagues good health during these exceptional circumstances.