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Sheryne Mecklai

Tax Partner at Manning Elliott Vancouver
by Sheryne Mecklai
September 24, 2020

Canada Emergency Wage Subsidy Update – CEWS 2.0

The CEWS update was announced on July 17, 2020 citing additional changes to the Canada Emergency Wage Subsidy (referred to as CEWS 2.0). Prior articles on CEWS including definitions of the terms used in this blog can be found in these articles.

CEWS 2.0, which is now enacted, attempts to manage shortcomings of the program by providing flexibility and more accessibility. Unfortunately, to meet all these requirements, the new legislation is more complicated than the first iteration or CEWS 1.0. 

CEWS 1.0

The original CEWS was legislated to run until December 31, 2020 but details of the program were only provided for claim periods ending before August 29, 2020.  

CEWS 2.0

The update includes changes in the requirements to qualify and the amount of the subsidy available from July 5, 2020 to November 21, 2020.

The CEWS update addresses:

  • The cliff effect (lessening the impacts to employers when the subsidy is no longer available)
  • Restrictions of the original revenue test (the bright line 30% decline in revenue test did not necessarily identify all employers who required a subsidy) 
  • And certainty (details on the CEWS process after August 29, 2020)

This blog will go through some significant changes in the CEWS update but will not cover all the changes made to the subsidy program. The Government of Canada has updated their CEWS website and has provided responses to Frequently Asked Questions (“FAQs”).

Qualifying Periods

The legislation provided 5 new periods (in orange).  The CEWS qualifying periods are:

 Period 1: March 15, 2020 – April 11, 2020
 Period 2: April 12, 2020 – May 9, 2020
 Period 3: May 10, 2020 – June 6, 2020
 Period 4: June 7, 2020 – July 4, 2020
 Period 5: July 5, 2020 – August 1, 2020
 Period 6: August 2, 2020 – August 29, 2020
 Period 7: August 30, 2020 – September 26, 2020
 Period 8: September 27, 2020 – October 24, 2020
 Period 9: October 25, 2020 – November 21, 2020

 

Period 10 is anticipated to begin on November 22, 2020 and end on December 19, 2020, which is when the wage subsidy was expected to end. On September 23, 2020, Prime Minister Justin Trudeau made his annual Throne Speech and announced that the CEWS would be extended until summer 2021. This has not been legislated as of the date of this blog.

The legislation permits employers to use the CEWS update rules applicable for periods 1 to 4 in calculating the CEWS for periods 5 and 6 (referred to as the safe harbor rule for periods 5 and 6). In some cases, it may be more beneficial for employers making claims in periods 5 and 6 to use the rules applicable for periods 1 to 4.

Determining the Revenue Reduction Percentage

Eligible employers who experience a reduction in their qualifying revenues may be eligible for CEWS. The revenue reduction is based on a formula:

1 – A/B.

A = The qualifying revenue for the current period.

B = The qualifying revenue for the same month in the prior year or, under the alternative approach, the average monthly qualifying revenue in January 2020 and February 2020.  

For claim periods 1 to 4, the revenue reduction percentage must be greater than 30% (unless the deeming rule applies). For period 5 and subsequent claims the revenue reduction percentage must be greater than 0% (unless the deeming rule applies).

For periods 1 to 4 the deeming rule allows the current period to qualify for CEWS if the prior period qualified. For periods 5 to 9, the deeming rule allows the eligible employer to determine the revenue reduction for the current period based on the greater of the actual revenue reduction for the current period and prior period.

Let’s go through an example of the deeming rule.

The revenue reduction percentage in period 5 is 45%, in period 6 is 25% and in period 7 is 10%. 

Under the deeming rule, the revenue reduction percentage in period 6 is 45%, which is the greater of the actual revenue reduction percentage in periods 5 and 6. For period 7, under the deeming rule, the revenue reduction percentage is 25%, which is the greater of actual revenue reduction percentage in periods 6 and 7. 

If the alternative approach is used (i.e. using the average of January and February 2020 for “B” in the calculation above) the alternative approach must be used consistently for periods 1 to 4 and for periods 5 to 9. Where an eligible employer used the general or alternative approach for periods 1 to 4, the CEWS update rules allow for an eligible employer to elect to use the alternative approach or use the general approach for all periods 5 to 9. Once an approach is chosen it must be applied for all periods 5 to 9.

Qualifying revenue includes the eligible employer’s ordinary activities from the sale of goods and services in Canada as calculated using the eligible employer’s normal accounting practices. An election can be filed by the eligible employer to use the cash method as opposed to the accrual method to calculate qualifying revenue. The methodology used must stay consistent for all claim periods.

Eligible employees

For periods 1 to 4, an eligible employee is an individual employed in Canada who has not been without remuneration from the eligible employer for 14 consecutive days or more in the claim period. For periods 5 to 9 an eligible employee is an individual employed in Canada. The exclusion of employees who do not receive remuneration for 14 consecutive days is not required for periods 5 to 9. There are special CEWS update rules for furloughed employees with respect to calculating eligible remuneration.

Additional Baseline Remuneration Periods

Baseline remuneration is the average weekly eligible remuneration paid to eligible employees (excluding any consecutive 7-day periods where the employee was not paid) over certain dates. Baseline remuneration is used to determine the amount of CEWS available for eligible employees.  

Employers can use the following dates to calculate the baseline remuneration. 

  Without an Election
 Periods 1 to 3 Weekly eligible remuneration paid between:
 January 1, 2020 to March 15, 2020
 Period 4 Weekly eligible remuneration paid between:
 January 1, 2020 to March 15, 2020
 Periods 5 to 9 Weekly eligible remuneration paid between:
 January 1, 2020 to March 15, 2020
 
  With an Election
 Periods 1 to 3 Weekly eligible remuneration paid between:
 March 1, 2019 to May 31, 2019
 Period 4 Weekly eligible remuneration paid between   March 1, 2019 to May 31, 2019 or 
 March 1, 2019 to June 30, 2019
 Periods 5 to 9

 Weekly eligible remuneration paid between 
 July 1, 2019 to December 31, 2019

 
Base Wage Subsidy

The base wage subsidy available for eligible employers is based on a maximum weekly eligible remuneration of $1,129 per eligible employee paid during periods 5 to 9. The base wage subsidy rate available will depend on the revenue reduction percentage of the eligible employer.

For periods 5 to 9, there is no need to have a revenue reduction percentage of 30% or more to be eligible for CEWS – any revenue reduction percentage will allow the eligible employer to be eligible for a subsidy. The maximum amount of the base wage subsidy available will decrease from Period 5 to 9. The base wage subsidy claimed by an eligible employer on eligible remuneration for remuneration up to $1,129 per week per employee for periods 5 to 9 is determined as follows:
 

 Revenue Reduction Periods 5 and 6 Period 7
  50% or more 60% 50%
  Less than 50%

1.2 x revenue reduction percentage

1.0 x revenue reduction percentage

 

 Revenue Reduction Period 8 Period 9
  50% or more 40% 20%
  Less than 50%0.8 x revenue reduction percentage0.4 x revenue reduction percentage

 

If the eligible employer has a revenue reduction percentage of 50% or more, the maximum base wage subsidy available per week per employee is:

 Periods 5 and 6Period 7
Maxiumum base wage subisdy$677 (60 % x $1,129)$565 (50% x $1,129)

 

 Period 8Period 9
Maxiumum base wage subisdy$452 (40% x $1,129)$226 (20% x $1,129)

 

For example, in period 5 an employer with a 20% revenue reduction percentage will be eligible for CEWS and will be able to receive a baseline subsidy of a maximum of $271 per week per employee ($1,129.00 x 1.2 x 20%). If the eligible employer’s revenue reduction percentage was 70% in period 5, the eligible employer will be able to claim a base wage subsidy of $677 (i.e. 60% of $1,129.00).  

Top-Up Subsidy

In addition to the base wage subsidy, the eligible employer can also receive a top-up subsidy if the eligible employer’s qualifying revenues have decreased by more than 50% over a three-month average.  The top-up subsidy is equal to the lesser of 25% and 1.25 of the top-up revenue reduction percentage over the three-month average in excess of 50%.  

For example, an eligible employer with a three-month revenue reduction of 65% would be eligible for the top-up rate of 18.75% (1.25 x (65% – 50%)).

The top-up revenue reduction percentage for the top-up subsidy is calculated as follows:

1 – A/B.

A = The average monthly qualifying revenue for the last three calendar months that ended prior to the current reference period.

B = The average monthly qualifying revenue in January 2020 and February 2020 if the alternative approach was used to calculate the revenue reduction percentage, or the average monthly qualifying revenue for the same three calendar months in the prior year.

The eligible employer may be eligible for the top-up subsidy even if the revenue decrease in the current reference period is less than 50% as the calculation of the top-up revenue reduction percentage is based on the last three calendar months ending prior to the current reference period. 

Here are some examples:
Example 1

In period 7 (Aug 30,2020 to Sept 26, 2020) an eligible employer’s three-month revenue reduction percentage in June, July and August 2020 compared to June, July and August 2019 was 80%. In this case, the top-up percentage is 25% which is the lesser of 25% and 37.5% (1.25 x (80% – 50%)).  

If the eligible employer had one eligible employee and paid eligible remuneration to that employee of $600 for one week in period 7, the top-up subsidy will be $150 ($600 x 25%).

Example 2

In period 8 (September 27, 2020 October 24, 2020) an eligible employer’s three-month revenue reduction percentage in July, August and September 2020 compared to July, August and September 2019 was 61.11%.  In this case, the top-up percentage will be 13.89%, which is the lesser of 25% and 13.89% (1.25 x (61.11% – 50%)). 

If the eligible employer had one eligible employee and paid eligible remuneration to that employee of $600 for one week in period 8 then the top-up subsidy would be $600 x 13.89% or $83.34.

Overall Subsidy

The overall CEWS rate would be equal to the top-up subsidy plus the base wage subsidy. The following are maximum combined base and top-up subsidies:

TimingPeriods 5 and 6Period 7
Base wage subsidy$677$565
Top-up subsidy (50% or more)$282$282
Maximum weekly benefit per employee$959$847

 

TimingPeriod 8Period 9
Base wage subsidy$452$226
Top-up subsidy (50% or more)$282$282
Maximum weekly benefit per employee$734$508

 

Under the safe harbor rules for periods 5 and 6, if the eligible employer has a revenue reduction greater than 30% but an average three month revenue decline less than 62%, they may be better off claiming the 75% wage subsidy (i.e. rules for CEWS 1.0) rather than calculating the base wage subsidy and the top-up subsidy under the CEWS update.

We Are Here to Help

If you have any questions about CEWS update, Manning Elliott is here to help. To assist business owners in navigating through these trying times, visit our blog to stay up to date on the most recent activity related to COVID-19.


The above content is believed to be accurate as of the date of posting. Canadian tax laws are complex and are subject to frequent changes. Professional tax advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained herein.