In summary, the proposed changes contemplate (i) a base subsidy for all eligible employers experiencing a decline in revenue (of any amount), at a rate that would vary depending on the scale of the revenue decline, and that would be gradually reduced as the program winds down, and (ii) a top up subsidy at an additional rate of up to 25% for eligible employers experiencing a revenue decline of more than 50%. Despite this sliding scale, a 'safe harbour' rule is proposed for periods 5 (5 July to 1 August 2020) and 6 (2 August to 29 August 2020), so that employers with a revenue decline of 30% or more would generally continue to receive a subsidy rate of at least 75% for these periods. Special rules would apply to furloughed employees and to non-arm's length employees.
As previously indicated by the Canada Revenue Agency, the eligibility requirements and calculation of the subsidy amount for the claim period from 7 June to 4 July 2020 (period 4) are proposed to remain generally the same as for the initial three periods.
Base Subsidy Rate
The below chart indicates the proposed base subsidy rates in respect of active arm's length employees for claim periods 5 to 9. The relevant rate would apply to each eligible employee's weekly eligible remuneration, up to CAD 1,129 per week.
||Period 5* (5 July - 1 Aug)
||Period 6* (2 Aug - 29 Aug)
||Period 7 (30 Aug - 26 Sept)
||Period 8 (27 Sept - 24 Oct)
||Period 9 (25 Oct - 21 Nov)
|Revenue drop of 50% or more
|Revenue drop of less than 50%**
||1.2 x revenue drop %
||1.2 x revenue drop %
||1 x revenue drop %
||0.8 x revenue drop %
||0.4 revenue drop %
*A special 'safe harbour' rule would apply to periods 5 and 6, so that an eligible employer would generally be entitled to a subsidy rate that is at least as high as under the old rules (after taking into account both the base subsidy rate and top up subsidy rate). As such, an eligible employer who experiences a revenue decline of at least 30% in period(s) 5 and/or 6 should be entitled to a subsidy rate of at least 75% for such period(s). **For example, if an eligible employer experienced a revenue drop of 20% in period 8, the eligible employer would have a base subsidy rate of 16% (0.8 x 20%).
Base Subsidy Reference Periods
It is proposed that the revenue drop for each claim period would generally continue to be calculated by comparing qualifying revenue in respect of a "reference" calendar month to the same calendar month in 2019.
Eligible employers who used the alternative approach (i.e., comparing qualifying revenue to average qualifying revenue in January and February 2020) for periods 1 to 4 would be able to elect to continue to use the alternative approach for the remainder of the program, or convert to the general approach for period 5 and subsequent periods. Conversely, employers who used the general approach for periods 1 to 4 would be able to elect to use the alternative approach for period 5 and subsequent periods.
In addition, for period 5 and subsequent periods, an eligible employer would be able to calculate its base subsidy rate for a period by reference to the greater of its revenue drop for that period, and its revenue drop for the immediately preceding period (determined without reference to this rule). This rule replaces the rule for periods 1 to 4 that deems an employer who meets the revenue test in one period (without reference to this rule) to meet the revenue test in the immediately following period.
The below chart indicates the proposed reference periods for periods 5 to 9, under the general and alternative approaches (incorporating the rule permitting calculation of the base subsidy rate by reference to the revenue drop for the prior period).
|Period 5: 5 July - 1 Aug 2020
||July 2020 over July 2019 or June 2020 over June 2019
||July or June 2020 over average of Jan and Feb 2020
|Period 6: 2 Aug - 29 Aug 2020
||Aug 2020 over Aug 2019 or July 2020 over July 2019
||Aug or July 2020 over average of Jan and Feb 2020
|Period 7: 30 Aug - 26 Sept 2020
||Sept 2020 over Sept 2019 or Aug 2020 over Aug 2019
||Sept or Aug 2020 over average of Jan and Feb 2020
|Period 8: 27 Sept - 24 Oct 2020
||Oct 2020 over Oct 2019 or Sept 2020 over Sept 2019
||Oct or Sept 2020 over average of Jan and Feb 2020
|Period 9: 25 Oct - 21 Nov 2020
||Nov 2020 over Nov 2019 or Oct 2019
||Nov or Oct 2020 over average of Jan and Feb 2020
Top Up Subsidy
Top Up Subsidy Rate
An additional top up subsidy rate is proposed for eligible employers who experience a revenue reduction in a claim period of more than 50%. The top up subsidy rate would be 1.25 times the percentage revenue drop in excess of 50%, up to a maximum top up rate of 25% (attained at a 70% revenue decline). The top up subsidy rate would apply (in addition to the base subsidy rate) to each active arm's length eligible employee's weekly eligible remuneration, up to CAD 1,129 per week.
Top Up Subsidy Reference Periods
To calculate revenue decline for the purpose of determining the top up subsidy rate, it is proposed that, under the general approach, average monthly qualifying revenue for the three calendar months preceding the reference month for the claim period (e.g., for period 5, the three months preceding July 2020, being April, May and June 2020) would be compared to average monthly qualifying revenue for the same three months in 2019. If the eligible employer has elected under the alternative approach, the comparison would be to average monthly qualifying revenue in January and February 2020.
For furloughed employees (i.e., employees on leave with pay), the subsidy calculation is proposed to remain the same for claim periods 5 and 6. That is, an eligible employer would be able to claim a weekly subsidy amount for eligible furloughed arm's length employees equal to the greater of (i) 75% of eligible remuneration paid to the employee for the week, up to a maximum subsidy of CAD 847, and (ii) the least of 75% of the employee's weekly pre-crisis remuneration, CAD 847, and the eligible remuneration paid to the employee for the week.
For claim periods 7 to 9, it is proposed that the subsidy amount for arm's length furloughed employees would be aligned with the Canada Emergency Response Benefit (a benefit of CAD 500 a week offered to certain employees who experienced a loss or reduction in employment due to COVID-19). Further details are pending.
It is proposed that eligible employers would continue to receive a refund of the employer portion of Canada Pension Plan/Quebec Pension Plan and Employment Insurance/Quebec Parental Insurance Plan contributions paid in respect of an eligible employee for a week throughout which the employee was on leave with pay.
Other notable proposed changes include (i) a proposal that, effective for claim period 5 and subsequent periods, employees who are without remuneration in respect of 14 or more consecutive days in the period would no longer be excluded from the subsidy, (ii) proposed continuity rules for the calculation of an employer’s drop in revenue in certain circumstances where the employer purchased all or substantially all of the assets used in carrying on business by the seller, and (iii) a proposed extension of the application deadline to 31 January 2021.
Should you have questions regarding how the proposed changes may impact you, please do not hesitate to contact the writer or any member of your Canadian tax team.