[Updated April 28]
There’s still a lot of uncertainty around new government programs, and the information that’s available continues to evolve. The Canada Emergency Wage Subsidy (CEWS) is available for qualifying businesses affected by the COVID-19 crisis. The government subsidy opens for applications on April 27th and will provide 75% of employee wages for up to 12 weeks.
Since this is a brand new program, business owners understandably have a lot of questions. Namely, does your business qualify? How much relief do you qualify for? What do you need to apply? And when will these financial questions cease so you can just go back to doing what you do best—running your business? Well, we may not have an answer to that last one, but we can help you out with your burning CEWS questions.
Are we eligible for CEWS?
If you are a business incorporated in Canada, then most likely, yes. For the full list of eligible employers please refer to CRA website.
What revenue reduction is required to qualify for CEWS?
There are 4 options of revenue reduction that we can compare to determine if you qualify for CEWS:
- Compare accrual-based sales to the same month in 2019
- Compare cash-based sales to the same month in 2019
- Compare decline in revenue to average accrual-based sales for Jan-Feb 2020 period
- Compare decline in revenue to average cash-based sales for Jan-Feb 2020 period
If you’re asking yourself what the difference is between cash-based sales and accrual-based sales, you’re not alone. The main difference between the two is the timing of when you recognize revenues.
A cash-based sale is more immediate. You only recognize that a sale has occurred when you have the cash in your hands. If you sell something in March but don’t receive the cash until April, you would record the sale as having occurred in April. This method is simpler and preferred by small businesses and for managing personal finances. All you need to determine your sales is the bank statement.
An accrual-based sale is recognized when the service is performed or goods leave your hands. If you complete a service in March and send out an invoice to be paid in May, you would still record the sale as having occurred in March. This method includes accounts receivable, and provides a more accurate estimation of the long-term profitability and success of a company.
For the purpose of claiming CEWS, you can elect using a cash-based or accrual method. Once selected, you have to stick to it throughout the period of the program. For example, you cannot use an accrual-based sales reduction to qualify for the subsidy in March and then use a cash-based reduction in sales for the subsidy in May.
What rate of revenue reduction is required for the subsidy?
Eligible employers can claim the subsidy if their business has suffered a 15% revenue reduction in March or a 30% reduction in April and May 2020, compared to either the same month last year or average Jan-Feb revenues of 2020.
To qualify for the March subsidy, your revenue must have dropped by 15%. If you qualify for March, you automatically qualify for April, too. You will need to reapply for the subsidy in May, where your revenue drop must now be 30%. To reapply, you must use the same revenue calculation method (cash-based or accrual-based) as you used the first time.
If you don’t qualify for March, you can apply for the April subsidy, where the required revenue reduction is increased to 30%. If you qualify for April, you automatically qualify for May.
Is it better to apply for CEWS or IAP? Can you apply for both?
IAP (Innovation Assistance Program) is meant for technology-driven, innovative companies that don’t qualify for CEWS. If you qualify for CEWS, you should apply for that funding. You will not be able to receive both.
Does the subsidy apply to newly hired employees?
Yes. The subsidy covers recently hired employees as well as new employees you hire over the duration of the program. Employers will be eligible for up to 75% of salaries and wages paid to new hires up to maximum $847 per week per employee.
Does the subsidy apply to employees who were temporarily laid off?
If you have employees who were temporarily laid off, they will be eligible for the subsidy once you bring them back on your payroll. One of the goals of the subsidy is to help employers bring previously laid off workers back on payroll.
Employees who have been laid off or furloughed can become eligible retroactively, as long as you rehire them and their retroactive pay and status meet the eligibility criteria for the claim period. You must rehire and pay such employees before you include them in your calculation for the subsidy
Does the subsidy apply to non-arm’s length employee wages?
An employee may be considered non-arm’s length if the circumstances of the employment are different from those of the other employees for no justifiable reason. For example, if a husband was employed by their wife. A non-arm’s length employee could also be a founder of a startup who has the power to make decisions about their employment conditions.
The subsidy will only apply to non-arm’s length employees who were employed prior to March 15th, 2020. For these employees, the amount of the subsidy will be limited to whatever is the lesser of the following two options:
- 75% of the pre-crisis (baseline) remuneration OR
- A maximum subsidy of $847 per week.
The Canadian government has put these measures in place to prevent businesses from trying to increase their entitlements under the CEWS by hiring or increasing the salary for non-arm’s length individuals.
How does the CEWS affect the previous 10% wage subsidy?
The 10% Temporary Wage Subsidy allows eligible employers to reduce payroll deductions required to be remitted to the CRA. If you qualified for the 10% Temporary Wage Subsidy, your CEWS claim will be reduced by the amount claimed.
What employee information is needed to calculate the subsidy?
The CRA has a calculator that will help you find out how much your wage subsidy may be.
You will need to know how much you paid each employee per week pre-crisis, as well as what you are paying them now. In general, employers are eligible for 75% of pre-crisis remuneration, to a maximum of $847 per week per employee.
For example, if your employee was paid $1,500 per week pre-crisis, you would only be entitled to the maximum $847 per week. If your employee was paid $750 per week pre-crisis, 75% of wages would equal a $562.50 subsidy per week.
If an employee received a reduction in pay and is now making less than $1,129.32 a week, you could receive 100% of their current reduced weekly gross pay during the claim period. For example, if your employee was paid $1,000 a week pre-crisis but is now only making $500 a week, you are eligible for a subsidy of $500 (100% of their weekly gross pay during the claim period.) This is because they are already receiving a reduced amount that is below 75% of their previous pay.
What information will we need to provide to the CRA?
The application for CEWS opened on April 27th. Before you begin your application, ensure you have the following:
- Payroll Account Number (obtained prior to March 16th, 2020)
- Payroll Web Access Code (not required if filing via My Business Account or Represent a Client)
- Period covered by this claim
- Number of employees
- Payroll information
Follow the Government of Canada’s Emergency Wage Subsidy application guide for more information.
What records do we need to keep to prove eligibility later?
Ensure you keep records and supporting documents that show your reduction of revenue as well as records of the remuneration you paid to employees in case the CRA requests to review them. General record keeping rules apply. You need to keep records for six years from the end of the tax year they relate to.
What other resources are available about emergency relief?
Your primary resource should be the CRA website. They have the most up to date information about the application process and who qualifies as well as a calculator that can determine the amount of your wage subsidy.
NRC IRAP (The National Research Council of Canada Industrial Research Assistance Program) offers support for tech companies that don’t qualify for CEWS.
CPA produced a webinar that takes an in-depth look into CEWS. The Q&A session addresses many of the questions business owners are facing.
Element CPA Can Answer Your Questions
Support is on the way, but many of the details remain unclear. If you have other questions about the CEWS or any other government relief program, don’t hesitate to reach out to our team. We offer a free 30 minute financial support call to anyone who needs assistance during this pandemic.
We’re here to help you ride out this storm. Contact Element CPA to begin your free 30 minute financial support session.
About Element CPA
Element CPA is an innovative accounting partner that’s 100% focused on helping Canadian startups and small businesses get their books in order, operate more efficiently and plan for the future. We handle the day-to-day financial operations that make your business run, tell the story behind your numbers and provide advice as you grow.