Navigating COVID-19 relief programs over the past 12-months has been a challenge for many businesses. Your accountant or business advisor can help. One year later, what do the COVID-19 benefits mean for your business?
Canada Emergency Business Account (CEBA)
The CEBA is an interest-free loan of up to $60,000 to assist with expenses that cannot be deferred or avoided during the COVID-19 pandemic. If you repay the loan by December 31, 2020, the government forgives $10,000 of the first $40,000 and 50% of additional loans (up to another $10,000).
For tax purposes, the forgivable portion of the loan is taxable upon receipt of the loan.
The application deadline has been extended several times and is currently March 31, 2021.
The taxpayer’s financial institution administers the CEBA loan. To qualify, the borrower must:
- Be a Canadian business in operation on March 1, 2020
- Have a federal business number
- Have an active chequing account with its primary financial institution as of March 1, 2020.
- Intend to continue operating the business
- Agree to participate in post-funding surveys
Also, borrowers must apply through one of two streams:
If the borrower has employment income paid to employees in 2019 between $20,000 and $1,500,000, they can apply for the Payroll Stream.
Non-deferrable expenses stream
If the borrower does not have sufficient payroll but does have non-deferrable expenses between $40,000 and $1,500,000 in 2020, they can apply for this stream. They must also have a filed 2018 or 2019 tax return. The $40,000 in eligible expenses must be payable between March 1, 2020 and December 31, 2020 and not deferred beyond 2020.
Eligible non-deferrable expenses include:
- Wages to arm’s length parties
- Payments to independent contractors
- Rent or lease payments for real estate or business equipment
- Property taxes
- Telephone and utilities
- Debt payments
- Fees to maintain licenses, authorizations, or permissions to carry on business.
- Materials needed to create and produce a product to sell
Be sure to review the loan agreement with the financial institution to ensure that you meet all requirements concerning loan funds spending.
If the loan’s non-forgivable portion is not repaid by December 31, 2022, the government will forgive no amount. At that point, the loan converts to a three-year loan with a fixed 5% interest rate.
Find the CRA information page on the Canada Emergency Business Account here.
Temporary Wage Subsidy (TWS)
The government’s first wage program to assist with business payroll during the pandemic was the Temporary Wage Subsidy. This 10% subsidy was available by reducing income tax remittances in subsequent monthly remittance payments to CRA.
The subsidy, per employee, is the lesser of:
- $25,000; or
- 10% of remuneration paid to eligible employees between March 18, 2020 and June 19, 2020; or
- The number of eligible employees between March 18, 2020 and June 19, 2020 multiplied by $1,375.
To be eligible, the employer must:
- Employ one or more individuals in Canada
- Have a business number and payroll account as of March 18, 2020
- Be one or more of the following:
- A CCPC eligible for the small business deduction
- An individual (other than a trust)
- A non-profit organization (exempt from income tax due to Paragraph 149(1(l)) of the income tax act
- A registered charity
- A partnership where all members are one of the above four entities
Any subsidy the employer is entitled to is considered remitted to the government, and that amount can be reduced from the next remittance made. There is no exception for people related to the owner of the employee. H/owever, sole proprietors or partners of an unincorporated business are not considered employees and are not eligible for the TWS. Form PD27 is used to report the deemed payroll remittances and must be verified as accurate by the person submitting the form.
Find the CRA information page on the Temporary Wage Subsidy here.
Canada Emergency Wage Subsidy (CEWS)
The Canada Emergency Wage Subsidy can subsidize wages to a greater degree than the TWS so employers can retain employees during the pandemic. The subsidy is worth up to 75% of eligible remuneration paid up to $847 per week per eligible employee. This program changed many times since the inception in March 2020.
Please note that this is a brief overview of the CEWS program, a series of complications with my specific exceptions. If you have questions about the CEWS program, please contact one of our specialists!
The subsidy is available in four-week periods, beginning March 15, 2020 and scheduled to run until June 2021.
To qualify, you must be one of the following entities with eligible employees:
- An individual
- A corporation or trust not exempt from income tax
- A non-profit organization
- A registered charity
- Indigenous government-owned corporations carrying on a business
- Canadian Amateur Athletic Associations
- Registered Journalism Organizations
- Non-public colleges and schools
- A partnership consisting of at least 50% otherwise eligible employers above
As an eligible employer, you must have
- a payroll account on March 15, 2020; or
- another person or partnership that has made remittances on your behalf; or
- purchased the assets of another partnership or business that would otherwise be eligible above.
To be eligible, you must have experienced a decline in revenue in the application period over a prior ‘baseline’ period. The baseline period is generally either the same period a year prior or the average of January and February 2020.
This eligibility is based on “regular” revenue and would not generally include COVID-19 based government assistance. However, you may include other government assistance received on a regular and continuous basis. There are specific exclusions for ‘extraordinary’ income as well.
You can calculate revenue either on the “cash” basis (what you’ve received in the period) or the ‘accrual’ basis, which would also include amounts receivable but not collected. Once a method is chosen, all future applications must use it the same way.
Revenues from non-arm’s length parties are generally not included unless the business derives all or substantially all revenue from non-arm’s length parties.
There are additional detailed rules for affiliated groups of companies, groups that consolidate financial statements for several companies, and other specific situations.
The amount of the subsidy has changed several times since the implementation of the CEWS program. Currently, the amount of the subsidy is calculated as follows, to a maximum of $874 per employee per week:
If the percentage revenue decline over the prior period (noted as R% from now on) is less than 50%, the subsidy is 0.8 x R%.
If the revenue decline is greater than 50%, the subsidy calculates as 1.75 x (R% – 50%) + 40%, to a maximum of 75% of eligible wages paid.
It is easier to see using a few examples:
For a revenue decline of 70% = 1.75 x (70% – 50%) + 40%
= 1.75 x 20% + 40%
=35% + 40%
=75% of eligible wages
For a revenue decline of 55% = 1.75 x (55% – 50%) + 40%
= 1.75 x 5% + 40%
=8.75% + 40%
=48.75% of eligible wages
These amounts include the ‘Top-up Wage Subsidy’ for businesses that have experienced revenue declines greater than 50% over the reference period.
No amount is available for non-arm’s length employees if wages were not regularly paid before March 15, 2020, regardless of wages paid after that date.
What qualifies as eligible remuneration for the subsidy is as follows:
- Amounts earned an employee as salary, wages, and other remuneration that an employer would be required to make payroll deductions on to be remitted to CRA. These deductions do not include dividends, severance pay, stock option benefits, and non-cash taxable benefits.
- Amounts do not have to be paid in the period necessarily but must be before applying for the subsidy.
If an employer received both the Temporary Wage Subsidy and the Canada Emergency Wage Subsidy, the CEWS reduces by any amounts claimed under the TWS for the application period.
Amounts received (or receivable) under the CEWS program are taxable income for the business. CEWS is receivable as of the CEWS 4-week application period, even if not received until a later date.
Find the CRA information page on the Canada Emergency Wage Subsidy here.
Canada Emergency Rent Subsidy
The CERS subsidizes rental and property expenses based on revenue declines. It covers up to 65% of eligible expenses from September 27, 2020, to June 2021. It is available to both those renting property (without landlord participation) and property owners.
To be eligible, like the Canada Emergency Wage Subsidy, you must have experienced a decline in revenue over a prior ‘baseline’ period. This baseline period is generally either a comparison to the same period a year previous or the average of January and February of 2020. Also, you must have at least one of the following:
- A CRA business number on September 27, 2020; or
- A payroll account on March 15, 2020 (or another person or partnership made remittances on your behalf; or
- Purchased the business assets of another person or partnership who meets the previous condition (payroll) and have made the necessary special election
The subsidy amount depends on the severity of revenue decline during the application period compared to the baseline period (denoted as R% from now on):
- For revenue declines under 50%, the subsidy is 0.8 x R% x eligible expenses.
- For revenue declines of between 50% and 70%, calculate the subsidy by:
- 25 x (R% – 50%) + 40%.
- For example, if the revenue decline were 60%, the calculation would be 1.25 x (60%-50%) + 40% = 52.5% of eligible expenses
- For revenue declines over 70%, the subsidy is 65% of eligible expenses.
The following counts as an eligible expense for the subsidy –
- Commercial rent paid to an arm’s length (unrelated) party
- Utilities, Common Area Maintenance fees, and property insurance
- Property taxes
If the landlord is a related party, rent is not an eligible expense. In this case, utilities, property insurance and property taxes may be eligible if the lease or rental agreement explicitly outlines that the tenant is responsible for these expenses. Pay these to a third party.
Tenants must reduce subsidy claims for any income from subleasing.
For property owners, expenses incurred to earn rent from arm’s length (unrelated) tenants are NOT eligible for the CERS. If the tenant is related (non-arm’s length), the following are qualified expenses:
- Interest on a mortgage
- Property taxes
- Property Insurance
Property owners must reduce subsidy claims for any income received from arm’s length tenants.
Capped expenses for each qualifying period (four weeks each) are $75,000 per location. There are also additional rules for affiliated parties with multiple entities eligible for the CERS – contact our offices for more information.
Lockdown Support for Businesses
In the event of a government-mandated lockdown, there is an additional 25% rent subsidy available. This subsidy does not depend on the percentage revenue decline. Instead, to qualify for the extra 25% Lockdown support:
- You must qualify for the base CERS and;
- The location, under order from public health, must either:
- completely shut down, or
- cease some or all activities. It is reasonable to assume that when compared to pre-pandemic revenue, at least 25% of the revenue decline attributes to the restricted activities.
The restrictions must be in place for at least seven days, and the location cannot enter lockdown or restricted because of violating public health rules.
If the entity enters lockdown for only a portion of the four-week qualifying period, the Lockdown Support prorates for the number affected of days for the location.
Information on the CERS from the CRA can be found here, including a calculator to assist with revenue decline subsidy calculations.