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COVID-19: Practical Strategies to Mitigate Risk and Access the CEWS Erin R. Kuzz Shana French Kyle B. Lamothe Ian Humphries Phone: 416-603-6242 Phone: 416-458-1289 Phone: 416-855-6539 Phone: 604-602-4215 erkuzz@sherrardkuzz.com


  1. COVID-19: Practical Strategies to Mitigate Risk and Access the CEWS Erin R. Kuzz Shana French Kyle B. Lamothe Ian Humphries Phone: 416-603-6242 Phone: 416-458-1289 Phone: 416-855-6539 Phone: 604-602-4215 erkuzz@sherrardkuzz.com sfrench@sherrardkuzz.com kblamothe@thor.ca ihumphries@thor.ca

  2. Revised Canada Emergency Wage Subsidy (“CEWS 2.0”)

  3. Canada Emergency Wage Subsidy (CEWS) • Most significant economic relief measure enacted in response to COVID-19 • Intended to encourage employers to re-hire workers previously laid off as a result of COVID-19, avoid future job losses, and allow fast resumption after crisis • Amounts received are a “refundable tax credit” • Employer deemed to have overpaid its income tax, is granted a refund • Credit is taxable to the employer, but remuneration paid to employees should offset for no new taxable income • Is “government assistance” that counts against scientific research and experimental development (SR&ED) claims

  4. Overview of July ly 27, 2020 Legislative Changes • Wholesale reform of the existing framework affecting all employers who have suffered a decline in qualifying revenues • Three broad categories: • Previously-announced measures (aka legislative fixes); • Substantive changes; and • Administrative and consequential changes • Result: • CRA : “it’s quick and easy!” • Taxpayers : “…???”

  5. Previo iously ly-Announced Measures Payroll Service Providers • Pre-Existing Regime • Applicant needed to have a registered payroll account with the CRA as of March 15, 2020 • Problematic in situations where payroll services provided by a third party • CEWS 2.0 - Applicant can qualify if: • on March 15, 2020: • it had at least one employee; • the payroll for its employees was administered by another person or partnership; and • the “payroll service provider” had a registered payroll remittance account at that time; and • the payroll service provider used its payroll remittance account to make remittances in respect of the employer’s employees.

  6. Previo iously ly-Announced Measures Amalgamated Corporations • Pre-Existing Regime • No rule to adjust revenue decline calculations when the employer was formed as the result of an amalgamation in either 2019 or 2020. • Could cause otherwise eligible employers to not qualify since no ability to compare a year- over-year revenue decline. • CEWS 2.0. • New provision deems amalgamated entity to be the same entity as its predecessor entities for the purposes of the CEWS. • Subject to anti-avoidance rules if amalgamation undertaken to take advantage of CEWS.

  7. Previo iously ly-Announced Measures Baseline Remuneration • Pre-Existing Regime • Employer could calculate their subsidy on the basis of average weekly remuneration paid to employee between January 1 st , 2020 and March 15 th , 2020. • Intention was to not penalize employers who had temporarily decreased their remuneration paid to arm’s length employees as a result of pandemic. • CEWS 2.0. • New provision permits employer to elect for different baseline remuneration periods for each employee. • Intended to remedy unintended results in the case of seasonal employees or employees on parental or disability leave.

  8. Previo iously ly-Announced Measures Baseline Remuneration (c (continued) • Suggests employers should carefully review each individual employee ’ s circumstances as part of their application Qualifying Period Regular Base seline Remunerati tion Period Ele lected Base seline Remuneration Period March 15 – April 11, 2020 April 12 – May 9, 2020 January 1, 2020 - March 15, 2020 March 1, 2019 - May 31, 2019 May 10 – June 6, 2020 March 1, 2019 - May 31, 2019 June 7, 2020 - July 4, 2020 January 1, 2020 - March 15, 2020 OR March 1, 2019 - June 30, 2019 July 5, 2020 - August 1, 2020 August 2, 2020 - August 29, 2020 August 30, 2020 - September 26, 2020 January 1, 2020 - March 15, 2020 July 1, 2019 – December 31, 2019 September 27, 2020 - October 24, 2020 October 25, 2020 - November 21, 2020

  9. Substantive Changes New Qualifying Perio iods Current t Pri rior Re Reference New / / Old ld Specified Maximum Base se Qualifying Period Reference Period Period Formula Percentage % 85% #1 March 15 – April 11, 2020 March 2020 March 2019 Old N/A (15% decline) 70% #2 April 12 – May 9, 2020 April 2020 April 2019 Old N/A (30% decline) CEWS 1.0 70% #3 May 10 – June 6, 2020 May 2020 May 2019 Old N/A (30% decline) 70% #4 June 7 – July 4, 2020 June 2020 June 2019 Old N/A (30% decline) “Safe Harbour #5 July 5 – August 1, 2020 July 2020 July 2019 Both (30% decline) 60% #6 August 2 – August 29, 2020 August 2020 August 2019 Both (30% decline) 60% Periods” August 30 – September 26, #7 September 2020 September 2019 New N/A 50% 2020 September 27 – October 24, #8 October 2020 October 2019 New N/A 40% 2020 October 25 – November 21, CEWS 2.0 #9 November 2020 November 2019 New N/A 20% 2020 Prescribed Period ending no #10 TBD TBD TBD TBD TBD later than December 31, 2020 Extension to Summer 2021?

  10. Substantive Changes New Formula – Application to Qualifying Peri riods • Periods 1-4 (March 15 – July 4) = Old Formula • Periods 5-6 (July 5 – August 29) = Greater of: • Old Formula; and • New Formula • Periods 7-9 (August 30 – November 21) = New Formula

  11. Substantive Changes New Formula – Overv rview • Fundamental distinction is whereas an employer’s revenue decline previously affected that employer’s eligibility for the CEWS, that revenue decline now affects the amount of that employer’s wage subsidy claim. • Two distinct components • Base percentage subsidy intended for most employers with a revenue decline no matter how small. • Top up subsidy intended for employers with the most significant revenue declines. • Elements of the formula decline overtime reflecting an intention to “wean” employers off CEWS.

  12. Substantive Changes Calculation for Active Arm’s Length Employees • High-Level Calculation (Per Employee) = (Base percentage + top-up percentage) * eligible remuneration (subject to cap) MAXIMUM WEEKLY SUBSIDY PER EMPLOYEE Base se Percentage 20% 20% 40% 40% 50% 50% 60% 60% 0% 0% $225.80 $451.60 $564.50 $677.40 Percentage 5% 5% $282.25 $508.05 $620.95 $733.85 Top-up 10% 10% $338.70 $564.50 $677.40 $790.30 Top 15% 15% $395.15 $620.95 $733.85 $846.75 20% 20% $451.60 $677.40 $790.30 $903.20 25% 25% $508.05 $733.85 $846.75 $959.65 • Employers who are not eligible for the top-up subsidy maximum weekly wage subsidy on a per- employee basis would range from $225 to $677 • In most cases, only employers who have suffered a 65%+ revenue decline (using a three-month average analysis) will be better off using the “New Formula” in the Safe Harbour Periods.

  13. Substantive Changes Calculation for Other Employees • Furloughed Employees – subsidy does not vary based on revenue decline • Non- Arm’s Length Employees – based on employee’s baseline remuneration, rather than current remuneration • Pay-Reduced Employees – No special rules in New Formula Type of f Employee Qualif lifying Period Formula Active Safe Harbour Qualifying Periods Old Formula or New Formula Active New Qualifying Periods New Formula Old Formula, with no 30% revenue decline Furloughed Safe Harbour Qualifying Periods needed Lesser of (i) eligible remuneration and (ii) Furloughed New Qualifying Periods prescribed amount. Old Formula or New Formula Non- Arm’s Length Safe Harbour Qualifying Periods Limited by Baseline Remuneration New Formula Non- Arm’s Length New Qualifying Periods Limited by Baseline Remuneration d Reduced Pay Safe Harbour Qualifying Periods Old Formula or New Formula Reduced Pay New Qualifying Periods New Formula

  14. Substantive Changes Asset Purchase Ele lections • CEWS 1.0 = Problem in situations where employer had acquired a new business after prior year period, since revenue decline was artificially reduced (or eliminated). • CEWS 2.0 = Election to include prior year-revenues of the business IF: • acquired assets constituted all or substantially all (generally 90% or greater) of the fair market value of the property used by the seller in the course of carrying on business; and • Both buyer and seller elect. • Result = revenue from business “assigned” to buyer and excluded by seller for the purposes of CEWS and calculating revenue decline • Key Takeaway = consider election protocols in any asset purchase agreements going forward

  15. Administrativ ive and Consequential Changes • Binding Effect of Elections restricted to first five qualifying periods • Filing Deadline moved from October 1, 2020 to February 1, 2021 • Broadening of category of eligible employees to include employees without remuneration for a 14-day period • Cash employers (farmers and fisherman) can elect to use accrual method • Continuity Rule for Revenue Declines

  16. CEWS Administration Update • Audit Activity Commencing • “standard” audit letter can be 7 -page request list, with 10-15 day turnaround period • Higher Burden than expected • Significant potential for administrative errors in initial qualifying periods

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