COVID-19 Details on Canada 75% Wage Subsidy for Businesses with Employees (CEWS)
Employers who have employees that are on payroll (i.e. for whom deductions at source is being remitted and T4s/RL1s are being issued) are entitled to a Wage Subsidy of 75% of the employees’ gross payroll up to a maximum of $847 per week referred to as Canadian Emergency Wage Subsidy or CEWS:
Eligible employers with employees include:
Individuals
Trusts
Partnerships
Corporations
Non Profits
Charities
Ineligible (Excluded) employers are essentially public institutions such as:
Municipalities
Crown Corporations
Hospitals
Public Colleges/Universities/Schools
Basis for determining if you are eligible for CEWS:
1. If the business has experienced a revenue reduction of:
15% in March 2020 compared either to March 2019 or the average of January 2020 and February 2020 using the accrual method OR
15% in March 2020 compared either to March 2019 or the average of January 2020 and February 2020 using the cash method
If you determine that you qualify for the CEWS for one claim period, you will automatically qualify for the following claim period which means that the business will be eligible for CEWS, i.e. 75% subsidy of their total payroll for both periods from March 15th, 2020 to April 11th, 2020 and April 12th, 2020 to May 9th, 2020
The accrual method refers to the method of recording revenues (and expenses) based on the date is invoiced to the customer while the cash method of recording revenues is based on the date the payment was received. Many accounting software allow you to see reports based on both the accrual and cash method. (In Quickbooks online for example, the profit and loss report has an option for cash or accrual on the top section of the report)
(note that the once a method of comparison has been selected it must be used for calculation of every eligible period thereafter)
2. If the business has experienced a revenue reduction of:
30% in April 2020 compared either to April 2019 or the average of January 2020 and February 2020 using the accrual method (same basis as selected for March, if applicable)
30% in April 2020 compared either to April 2019 or the average of January 2020 and February 2020 using the cash method (same basis as selected for March, if applicable)
If the employer has a 30% reduction in revenues for April, then their total payroll for both periods from April 12th, 2020 to May 9th, 2020 and May 10th to June 6th are eligible for the 75% rebate/subsidy.
Charities and non profit organizations would use the same method as above except then can choose to exclude revenue from Government sources. Once a method is selected, it must be consistently applied.
Determining the eligibility of the business’ employees:
Business who pay employees that are paid a salary from which DAS are deducted and remitted to the government are eligible for the CEWS subsidy. This unfortunately excludes those earning dividend income only and sole proprietorships/partnerships who generally do not pay owners a salary. It also excludes subcontractors. It is important to note that any corporation owners who put themselves on a salary after March 15th will not be eligible for this subsidy (more on this below)
If an employee has been laid off, they can be hired retroactively and paid for the periods for which the subsidy is being claimed. In order to claim the subsidy they first have to be rehired and paid.
Salary, wages and commissions are all included for the purposes of determining the gross pay. Stock option benefits and personal use of a car are specifically excluded from this calculation.
Calculation of CEWS
A comprehensive breakdown of the calculation is available at CRA CEWS calculation page
A baseline renumeration has to be calculated for employees which is essentially the salary or wages paid to employees from the period from January 1st to March 15th. If any employee is paid a weekly gross salary of $750 for each week for this period, then the baseline renumeration calculation is simply $750 per week. However, if the wage paid fluctuates depending on the number of hours worked (for example) then the baseline would be the average over this period.
The simplest case would be for an employee who is being paid $1,129.33 per week or more during the claim period as they are entitled to the maximum amount of $847 per week, which represents 75% of the gross salary. This only applies to arms length employees, i.e. employees who are not related to the corporation. This means that the full amount of the subsidy is available for arms length employee, even if they were hired after March 15th
A non arms length employee, which includes someone who owns the business or controls a corporation or is part of that person’s immediate family eg. spouse, son, daughter is only eligible for the average baseline renumeration paid from January 1st to March 15th. For example if an owner was paid $500 per week for the period from January 1st to March 15th, 2020 they would only be entitled to 75% of this amount which is $375 per week, even if they raised their salaries after March 15th to $1,000 per week. In other words, owners and other non arms length employees would not be entitled a higher subsidy if they increased (or only started) paying their salary after March 15th.
Although the calculation (and spreadsheet) can appear complex or a little overwhelming, generally the employers are entitled to 75% of the gross salary/wages paid to each arms length employee during the claim period up to a a maximum of $847.
If you pay your employees monthly, you would have to extrapolate the amounts to determine the weekly amount. For example:
Gross MONTHLY salary (wage) = $4,000
Gross ANNUAL salary (wage) = $4,000 X 12 = $48,000
Gross WEEKLY salary (wage) = $48,000 /52 = $923.08
If payroll is paid semi monthly, the multiplier in 2 above would be changed from 12 to 24.
When calculating the CEWS amount, the temporary wage subsidy amount of 10% per employee up to a maximum of $1,375 must be deducted whether or not it was claimed.
Businesses who have employees who are still being paid but are actually on leave may also claim 100% of the EI, CPP, QPP and QPIP paid. This applies to employees who are being paid by the employer but not performing any work during that time. If an employee is working at a reduced or part time schedule then the employer is not eligible to claim these amounts.
Other Notes:
Businesses can generally expect to receive their CEWS payments within the 10 days of application.
The program is currently expected to be available for three 4 week periods from March 15th, 2020 to June 6th, 2020. It is however possible that this is extended to September.
The deadline to apply for CEWS for all eligible periods is October 1st. Business owners who don’t have time in the short term or for whom cash flow is not a pressing issue can wait and claim for all periods at the same time. It might also make sense to wait if the accounting is not up to date and analyze the best comparative period (either same month in the previous year or average of January and February 2020) and accounting method (cash vs accrual)to use
There is no maximum for the total amount that can be claimed under CEWS. Only the individual amounts are capped at $847 per employee.
The application opened on April 27th and is available through CRA My Business account.
Representatives can also apply for their clients through “Represent My Client” although it should be noted that certain attestations have to be made which in many cases can only be made by the client themselves.
Direct deposit information should be reviewed and updated if necessary as this will ensure faster processing of claims
There is no change to the schedule or extension of deadlines for the monthly or period deductions at source payments. Whereas the temporary wage subsidy was claimed by reducing the DAS owing to CRA, the CEWS will be paid directly by businesses into their bank account
A new account should be set up in the business accounting which can be called the Wage Subsidy or CEWS. For better tracking this should be separate from the Temporary Wage Subsidy account. This would be a sub account of the payroll or salaries account as it will be a net reduction of the salaries expenses and an increase in taxable income for the business.
Journal entry to record the CEWS wage subsidy:
Upon calculation and submission of subsidy
Debit: Accounts Receivable CRA
Credt: Wage Subsidy/CEW account
Upon receipt of subsidy
Debit: Bank
Credt: Accounts Receivable CRA
Details on reporting on the T4 and RL1 will be provided by the end of the year. It is important to keep a record/spreadsheet of each employee for whom CEWS is calculated and the corresponding amount by pay period as this might be required on each employees individual T4.
Penalties for false or fraudulent reporting are severe so businesses should ensure that their representations are honest and accurate and that they actually qualify for the subsidy as there will likely be audits and request for informations. Please see more about compliance ond penalties and how CRA plans to enforce it.
Those who are collecting CERB and are rehired by their employers might have to repay a pro rata portion of the amount collected under CERB to the extent that it overlaps with their rehire date.
CEWS should prove to be very helpful to businesses who don’t want to let employees go but due to reductions (or complete stoppage) of revenues may not be able to afford to pay them. It provides for business continuity and financial relief to a significant subsection of the population that most need it.
Ronika Khanna is a Montreal accountant who helps small businesses achieve their financial goals. To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here. You can also follow her on Facebook or Twitter.