Canada: Federal Government Announces Changes To The CEWS And CERS Programs And Introduces The Canada Recovery Hiring Program

On April 19, 2021, Deputy Prime Minister and Finance Minister Chrystia Freeland tabled in the House of Commons the Liberal Government's first federal budget in more than two years, A Recovery Plan for Jobs, Growth, and Resilience ("Budget 2021"). Budget 2021 proposes to amend the Income Tax Act (Canada) (the "ITA") to (i) implement changes to the existing Canada Emergency Wage Subsidy ("CEWS") and Canada Emergency Rent Subsidy ("CERS") programs, and (ii) establish the new Canada Recovery Hiring Program ("CRHP"). On April 30, 2021, the Government introduced Bill C-30, Budget Implementation Act, 2021, No. 1., to implement these proposed measures. As of the time of writing, Bill C-30 is undergoing second reading in the House of Commons.

Also, on April 21, 2021, the Canada Revenue Agency ("CRA") announced that it would be accepting late-filed CEWS and CERS applications in certain circumstances, as more particularly described below.

Budget 2021 can be found here and the backgrounder relating to the CEWS, CERS and CRHP budget measures can be found here. Bill C-30 can be found here.

The CRA's webpage on frequently asked questions relating to the CEWS (the "CEWS FAQ") can be found here. The CRA's CERS webpage can be found here.

Our Firm's detailed commentary on the tax measures in Budget 2021 that are most relevant to businesses can be found here. Our past commentary on the CEWS can be found here, here, here, here, here, here, here, here, here, here, here, here and here, and commentary on the CERS can be found here, here, here and here.

Unless otherwise stated, all statutory references are to the provisions of the ITA.

Overview

As described more particularly below, Budget 2021 proposes to:

• effect the following changes to the CEWS:
  • extend the CEWS in respect of active employees to Period 20 (i.e., August 29, 2021 to September 25, 2021) and provide the Government the ability to further extend the CEWS to November 20, 2021;
  • implement a new base and top-up subsidy rate structure for Periods 17 to 20 (i.e., June 6, 2021 to September 25, 2021), with a gradual phase out of rates beginning in Period 18 (i.e., July 4, 2021 to July 31, 2021);
  • extend the CEWS in respect of furloughed employees to Period 19 (i.e., August 1, 2021 to August 28, 2021);
  • introduce a requirement for a publicly-listed corporation (or a corporation controlled by it) to repay CEWS amounts received where the aggregate remuneration for specified executives during the 2021 calendar year exceeds the aggregate remuneration for specified executives during the 2019 calendar year;
  • set out the reference periods for determining an eligible employer's decline in revenues with respect to Periods 17 to 20; and
  • allow an eligible employer to elect to use an alternative baseline remuneration period for purposes of computing an employee's baseline remuneration for Periods 17 to 20;
• effect the following changes to the CERS:
  • extend the CERS to Period 20 (i.e., August 29, 2021 to September 25, 2021) and provide the Government the ability to further extend the CERS to November 20, 2021;
  • implement a new base subsidy rate structure for Periods 17 to 20 (i.e., June 6, 2021 to September 25, 2021), with a gradual phase out of the rate beginning in Period 18 (i.e., July 4, 2021 to July 31, 2021);
  • set out the reference periods for determining an eligible employer's decline in revenues with respect to Periods 17 to 20; and
  • extend the current 25% top-up subsidy potentially available where public health restrictions apply ("Lockdown Support") to Period 20; and
• establish the new CRHP.

Additionally, on its CEWS FAQ and CERS webpages, the CRA has stated that it will accept late-filed amended and original CEWS and CERS applications in circumstances more particularly described below.

Amendments to CEWS

The following is a more detailed summary of the recent CEWS developments.

CEWS Extension

Budget 2021 proposes to extend the CEWS to September 25, 2021 by amending the definition of "qualifying period" in subsection 125.7(1) to add four new qualifying periods. The new qualifying periods are as follows:

• Period 17 - June 6, 2021 to July 3, 2021;
• Period 18 - July 4, 2021 to July 31, 2021;
• Period 19 - August 1, 2021 to August 28, 2021; and
• Period 20 - August 29, 2021 to September 25, 2021.

In addition, the proposed amendment to "qualifying period" allows the Government to further extend the CEWS to November 20, 2021. If so extended by the Government, the two further qualifying periods would be as follows:

• Period 21 - September 26, 2021 to October 23, 2021; and
• Period 22 - October 24, 2021 to November 20, 2021.

Active Employees

Budget 2021 proposes to amend the definitions of "base percentage" and "top-up percentage" in subsection 125.7(1) to implement a new base and top-up subsidy rate structure for Periods 17 to 20 (i.e., June 6, 2021 to September 25, 2021). Beginning in Period 18 (i.e., July 4, 2021 to July 31, 2021), the subsidy rates will be gradually phased out.

The following table summarizes the base percentage and top-up percentage rate structure described above:

Furloughed Employees

Budget 2021 proposes to extend the CEWS in respect of furloughed employees (i.e., employees who are on leave with pay throughout a particular week during a qualifying period) to the end of Period 19 (i.e., August 28, 2021). The weekly CEWS in respect of a furloughed employee will continue to be the lesser of:

• the amount of eligible remuneration paid in respect of the particular week; and
• the greater of:
  • $500; and
  • 55% of the employee's baseline remuneration for that week, up to a maximum amount of $595.

This rate structure is intended to ensure that the CEWS in respect of furloughed employees remains aligned with Employment Insurance. Employers will continue to be able to claim employer-paid contributions in respect of the Canada Pension Plan, Employment Insurance, the Québec Pension Plan and the Québec Parental Insurance Plan for furloughed employees. As proposed in Budget 2021, the CEWS in respect of furloughed employees will not be available for Period 20 and onwards.

Requirement to Repay CEWS Amounts

Beginning in Period 17 (i.e., June 6, 2021 to July 3, 2021), publicly-listed corporations (i.e., corporations whose shares are listed or traded on a stock exchange or other public market) and eligible employers controlled by such corporations will be required to repay CEWS amounts received if the aggregate remuneration for specified executives during the 2021 calendar year exceeds the aggregate remuneration for specified executives during the 2019 calendar year.

"Executive remuneration" will be defined in subsection 125.7(1) as:

• the total amount of compensation reported in the publicly-listed corporation's or eligible employer's Statement of Executive Compensation for Named Executive Officers pursuant to National Instrument 51-102 Continuous Disclosure Obligations;
• where such entity does not file such form but is required to make a similar disclosure to shareholders under the laws of another jurisdiction, the amount of total compensation reported in that disclosure, using the five most highly compensated individuals; or
• where neither of the above applies, the amount that would be required to be reported by such entity if it were required to prepare a Statement of Executive Compensation.

The term "Named Executive Officer" is a securities law term which generally refers to the chief executive officer, chief financial officer and the next three highest paid executive officers.

In general terms, the amount of CEWS that must be repaid is equal to the lesser of (i) the amount by which the executive remuneration of the eligible employer or the publicly-listed corporation that controls the eligible employer for the 2021 calendar year exceeds the executive remuneration for the 2019 calendar year and (ii) the total of all Period 17 and subsequent CEWS amounts for active employees received by the publicly-listed corporation and all eligible employers controlled by it.

Eligible employers within a corporate group will be able to file an agreement with the Minister of National Revenue (the "Minister") to apportion a percentage of the amount of CEWS that must be repaid to any eligible employer within the group.

If an eligible employer's (or, in the case of an eligible employer that is controlled by a publicly-listed corporation, the publicly-listed corporation's) fiscal year end does not coincide with the calendar year, the executive remuneration for a calendar year will be prorated based on the number of days of such entity's fiscal period in the calendar year.

Reference Periods

Budget 2021 specifies the reference periods for determining an eligible employer's decline in revenues for Periods 17 to 20. Employers must continue to use the same approach (i.e., general approach or alternative approach) that was used in prior periods.

The following table outlines the relevant reference period under the general approach and the alternative approach for determining the revenue reduction percentage in respect of such qualifying periods:

Baseline Remuneration

Budget 2021 proposes to amend the definition of "baseline remuneration" in subsection 125.7(1) to allow an eligible employer to elect to use an alternative baseline remuneration period for purposes of computing an employee's baseline remuneration for Periods 17 to 20. For Period 17, the alternative baseline remuneration period is March 1, 2019 to June 30, 2019 or July 1, 2019 to December 31, 2019. For Period 18 and onwards, the alternative baseline remuneration period is July 1, 2019 to December 31, 2019.

Late-filed CEWS Applications

On its CEWS FAQ page, the CRA has stated that it will accept (i) a late-filed amended CEWS application to increase the CEWS amount claimed, or (ii) a late-filed original CEWS application, in certain circumstances. Applicants are directed to contact the CRA Business Enquiries phone line to make such requests within 30 calendar days following the later of (i) April 21, 2021, and (ii) the applicable filing deadline. The request to late-file cannot be made as a result of professional advice where the fee structure depended upon the CEWS claim amount.

The CRA has stated that it will accept a late-filed amended CEWS application to increase the subsidy amount claimed in the particular qualifying period in the following circumstances:

• an error was made in filing the wage subsidy application prior to the filing deadline as a result of an arithmetic or transposition error, or unintended omission of additional business activities or employment expenses;
• inaccurate information provided to the taxpayer inadvertently by the CRA was relied upon and directly affected the taxpayer's ability to file its amended wage subsidy application on time;
• there was an identified outage of CRA secure portals that prevented the taxpayer from filing the amended application prior to the applicable deadline; or
• there was undue delay on the part of the CRA in processing an application or providing required guidance impacting the particular application.

The CRA has stated that it will accept a late-filed original CEWS application only in the following "exceptional" circumstances:

• it is evident that the taxpayer attempted to file its application before the applicable deadline but there was an identified outage of CRA secure portals that prevented the taxpayer from filing the application prior to the applicable deadline;
• it is evident that the taxpayer attempted to file its application before the applicable deadline but its specific account was temporarily suspended or there was some other account limitation that prevented the filing of the application prior to the applicable deadline;
• it is evident that the taxpayer attempted to file its application before the applicable deadline, and there was undue delay on the part of the CRA in receiving and processing the wage subsidy application before the deadline; or
• inaccurate information provided to the taxpayer inadvertently by the CRA was relied upon and directly affected the taxpayer's ability to file its original wage subsidy application on time.

Amendments to CERS

The following is a more detailed summary of the recent CERS developments.

CERS Extension

Budget 2021 proposes to extend the CERS to September 25, 2021 (i.e., Periods 17 to 20), and to permit the Government to further extend the CERS to November 20, 2021 (i.e., Periods 21 and 22).

All new qualifying periods align with those previously described for the CEWS program.

Subsidy Rates

Budget 2021 proposes to amend the definitions of "base percentage", "rent subsidy percentage" and "top-up percentage" in subsection 125.7(1) to implement a new base subsidy rate structure for Periods 18 to 20 (i.e., July 4, 2021 to September 25, 2021). Beginning in Period 18 (i.e., July 4, 2021 to July 31, 2021), the base subsidy rates will be gradually phased out.

For Period 17, the current base rent subsidy rates in effect for Periods 8 through 16 will apply. For Periods 18 to 20, the base rent subsidy rates will be computed in a similar manner to the subsidy rates in respect of active employees under the CEWS.

The following table summarizes the base percentage rate structure:

Revenue-Decline Calculation

Budget 2021 specifies the reference periods for determining an eligible employer's decline in revenues for Periods 17 to 20. Employers must continue to use the same approach (i.e., general approach or alternative approach) that was used in prior periods.

The following table outlines the relevant reference period under the general approach and the alternative approach for determining the revenue reduction percentage in respect of such qualifying periods:

Purchase of Business Assets

To qualify for the CERS, an eligible entity must have a business number. Budget 2021 proposes to introduce a deeming rule in proposed paragraph 125.7(4.2)(d) to provide that, where an eligible entity purchases the assets of a seller and those assets constituted all or substantially all of the fair market value of the property of the seller used in the course of carrying on business in Canada and other conditions are met, the eligible entity will be deemed to meet the business number requirement as long as the seller met such requirement. The proposed rule would apply retroactively to the commencement of the CERS (i.e., September 27, 2020).

Lockdown Support

Budget 2021 proposes to amend the definition of "rent top-up percentage" in subsection 125.7(1) to extend the current 25% rate for the Lockdown Support for Periods 17 to 20 (i.e., June 6, 2021 to September 25, 2021).

Late-filed CERS Applications

Consistent with its CEWS FAQ page, the CRA has stated on its CERS webpage that it will accept late-filed amended and original CERS applications in the same circumstances as applicable for late-filed amended and original CEWS applications, as described above.

Establishment of CRHP

The CRHP is aimed at providing eligible employers with relief for increased salary and wage expenses incurred as businesses reopen and recover from the pandemic. The CRHP is intended to encourage eligible employers to hire additional employees or increase the number of hours worked by their employees.

The CRHP would provide eligible employers with a subsidy on the incremental remuneration paid to eligible employees between Periods 17 and 22 (i.e., June 6, 2021 and November 20, 2021). As described more particularly below, the CRHP is computed using the "recovery wage subsidy rate", which is a maximum of 50% and is gradually reduced from Periods 19 to 22.

It is important to note that, in a particular qualifying period, an eligible employer is able to claim either the CEWS or CRHP. Pursuant to proposed subsection 125.7(9.2), an eligible employer will receive relief under the program that provides the greatest benefit and no relief under the other program.

Who is eligible to receive the CRHP?

The CRHP is available to a "qualifying recovery entity", which is proposed to be defined in subsection 125.7(1) to mean an "eligible entity" which meets certain conditions.

An "eligible entity" has the same meaning for purposes of the CERS and CEWS, and includes:

• a corporation or trust, other than a corporation or trust that is exempt from tax under Part I of the ITA or a "public institution" (as described below);
• an individual (other than a trust);
• a registered charity, other than a public institution;
• a person, other than a public institution, that is exempt from tax under Part I of the ITA because of the application of paragraph 149(1)(e), (j), (k) or (l) (i.e., certain agricultural organizations, boards of trade and chambers of commerce, labour organizations and fraternal benefit societies, and certain non-profit organizations);
• partnerships that are up to 50% owned by non-eligible members (e.g., public institutions); and
• certain other prescribed organizations, such as indigenous government owned corporations exempt under paragraph 149(1)(d.5) and their subsidiaries, and non-public educational and training institutions.

The term "public institution" is defined to mean an organization described in any of paragraphs 149(1)(a) to (d.6) (e.g., certain government entities, municipalities, municipal or public bodies performing a function of government, and various subsidiary entities), as well as an organization that is a school, school board, hospital, health authority or public university or college.

As for the additional conditions an eligible entity must meet in order to be a qualifying recovery entity:

• It must be a "qualifying entity" for the qualifying period. A qualifying entity is defined as an eligible entity that: (i) files an application (which the individual who has principal responsibility for the financial activities of the eligible entity must attest is complete and accurate in all material respects) with the Minister, in the prescribed form and manner, 180 days after the end of the qualifying period, and (ii) had (or is deemed to have had), on March 15, 2020, a business number and payroll program account with the CRA (or had one or more Canadian employees, the payroll for which was administered by a payroll service provider that had a business number and payroll account which the provider used to make payroll remittances in respect of the entity's employees).
• It must meet a decline in revenue test for the relevant period as described below.
• If the eligible entity is a corporation (other than a corporation exempt from Part I tax), it must be a Canadian-controlled private corporation (a "CCPC") or a cooperative corporation that is eligible for the small business deduction.
• If the eligible entity is a partnership, no greater than 50% of the interests in the partnership (based on FMV) may be held by (i) one or more persons or partnerships other than an eligible entity, or (ii) a corporation (other than a corporation exempt from Part I tax, a CCPC or cooperative corporation that is eligible for the small business deduction).

Who is an eligible employee?

The CRHP program uses the same definition of "eligible employee" as the CEWS program. In general terms, an "eligible employee" as defined in subsection 125.7(1) of an eligible entity in respect of a week in a qualifying period means an individual employed by the eligible entity primarily in Canada throughout the qualifying period or the portion of the qualifying period throughout which the individual was employed by the eligible entity. Unlike the CEWS, the CRHP is not proposed to apply in respect of furloughed employees.

On its CEWS FAQ page, the CRA has stated that a furloughed employee is generally considered to mean an employee on leave with pay throughout a week if that employee is remunerated by the eligible employer for that week but does not perform any work for the employer in that week.

According to the CRA, an employee generally will not be considered a furloughed employee where:

• they continue to perform any of their employment duties during the week, including only minimal duties;
• they are on a period of paid absence (i.e., vacation leave, sick leave or a sabbatical); or
• where the employer pays wages in lieu of termination notice or where the employment relationship continues to exist but the employee is receiving salary continuance payments (i.e., on working notice).

What remuneration is eligible for the CRHP?

Similar to the CEWS, only "eligible remuneration" as defined in subsection 125.7(1) is eligible for the CRHP. Eligible remuneration of an eligible employee of an eligible entity is defined to mean amounts described in paragraph 153(1)(a) (i.e., salary, wages or other remuneration) or paragraph 153(1)(g) (i.e., fees, commissions or other amounts for services), other than:

• a retiring allowance;
• stock option benefits under (or because of) any of paragraphs 7(1)(a) to (d.1);
• any amount that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever, to the employer, a person or partnership not dealing at arm's length with the employer for purposes of the ITA, or any other person or partnership at the direction of the employer; and
• any amount that is paid in respect of a week, if, as part of an arrangement involving the eligible employee and the employer: (i) the amount is in excess of the eligible employee's baseline remuneration, (ii) after the qualifying period, the eligible employee is reasonably expected to be paid a lower weekly amount than the baseline remuneration, and (iii) one of the main purposes of the arrangement is to increase the amount of the CEWS in respect of the eligible employee.

What amount of subsidy is available under the CRHP?

The amount of CRHP subsidy available to a qualifying recovery entity in respect of a qualifying period is computed as:

A x (B - C)

where

A is the "recovery wage subsidy rate" for the qualifying period;

B is the qualifying recovery entity's "total current period remuneration" for the qualifying period, and

C is the qualifying recovery entity's "total base period remuneration".

The recovery wage subsidy rates for Periods 17 to 22 are as follows:

The amount of CRHP subsidy available to a qualifying recovery entity in respect of a qualifying period depends upon its incremental remuneration in the qualifying period, which is the difference between the eligible entity's "total current period remuneration" paid to eligible employees for the qualifying period and the "total base period remuneration".

The "total current period remuneration" of an eligible entity in respect of a qualifying period is the total of all amounts, each of which is for an eligible employee in respect of a week in the qualifying period, equal to the least of:

• $1,129;
• the eligible remuneration paid to the eligible employee in respect of the week;
• the baseline remuneration of the eligible employee in respect of the week where the employee does not deal at arm's length with the eligible entity in the qualifying period; and
• nil where the employee is on leave with pay in the week.

The "total base period remuneration" is determined in the same manner, but with respect to Period 14 (i.e., March 14, 2021 to April 10, 2021).

What revenue reduction percentage is required to qualify for the CRHP?

To qualify for the CRHP in respect of Period 17, an eligible entity must have a revenue reduction percentage greater than 0%. To qualify for the CRHP in respect of Period 18 and onwards, an eligible entity must have a revenue reduction percentage greater than 10%.

An eligible entity's revenue reduction percentage for purposes of the CRHP is computed in the same manner as under the CERS and CEWS. The eligible entity can choose either the general approach or alternative approach, but must continue to use the same approach it used for the CERS and CEWS.

The reference periods to determine an eligible entity's decline in revenues for Periods 17 to 20 are the same reference periods used for the CERS and CEWS. The reference periods for Periods 21 and 22 are as follows:

When are applications with respect to a qualifying period due?

In respect of a particular qualifying period, the eligible entity must file an application in the prescribed form and manner with the Minister no later than 180 days after the end of the qualifying period.

How is the CRHP paid?

Like the CERS and CEWS, the CRHP operates as a deemed "overpayment" of an eligible entity's liability for tax under Part I of the ITA.

The amount of any deemed overpayment in respect of the CRHP for a particular qualifying period is expressly limited to the amount claimed by the eligible entity in its application for that qualifying period.

Subsection 125.7(3), as amended, would provide that, despite its character as an overpayment of tax, the amount received by an eligible entity under the CRHP will be considered government assistance received immediately before the end of the qualifying period to which it relates for all purposes of the ITA other than section 125.7. Government assistance is generally included in a taxpayer's taxable income under paragraph 12(1)(x).

Anti-avoidance

Proposed subsection 125.7(6.1) contains an anti-avoidance rule, the effect of which is to disqualify an eligible entity from entitlement to receive the CRHP if:

• the eligible entity, or any person or partnership that is not dealing at arm's length for purposes of the ITA with the eligible entity, enters into a transaction, participates in an event (or series of transactions or events) or takes an action (or fails to take an action) that has the effect of reducing the qualifying revenues of the eligible entity for the current reference period; and
• it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause an eligible entity to qualify for the CRHP in respect of that qualifying period.

If the anti-avoidance rule applies, the employer will be required to repay the amount paid to it under the CRHP for that qualifying period, and will also be liable to a penalty under proposed subsection 163(2.902) equal to 25% of the disallowed CRHP.

Practical Considerations

Eligible entities should compare the potential benefits available under the CEWS and CRHP to determine which program will provide the better result, having regard to their own particular circumstances. Where the combined base percentage and top-up percentage under the CEWS is less than the recovery wage subsidy rate under the CRHP and the eligible entity's salary and wage expense has increased, the CRHP may be preferable.

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