The COVID-19 emergency wage subsidy: Read the fine print
Law firms and businesses applying for the new wage subsidy will need to ensure their accounting is consistent.
Law firms will be among those businesses eligible for the federal government's $71-billion Canada Emergency Wage Subsidy for employers. The program is intended to help businesses keep employees on the payroll during the COVID-19 pandemic. Many details are still being worked out, and the money won't flow for six weeks, but non-publicly funded businesses of all sizes can apply, whether they are
Canadian-controlled private corporations, individuals (other than trusts), partnerships, non-profit organizations or registered charities.
However, members of the Joint Committee on Taxation of the CBA and CPA are cautioning entities to examine the program's requirements carefully.
"There is the potential for some issues that are unique for professional corporations that are members of a partnership, and how the wage subsidy would be applied in that context," says Heather Evans, executive director and CEO of the Canadian Tax Foundation. "There are some narrower technical issues, potentially, that would have to be considered."
According to Angelo Nikolakakis, a partner at EY Law LLP and chair of the CBA Taxation Law Section, there are questions around how limited partnerships or complex structures, such as a corporate group with multiple corporations, will be considered for the subsidy. Bruce Ball, a vice-president at the Chartered Professional Accountants of Canada, also points to a stipulation that the eligibility test is based on revenue from "arm' s-length" sources. That likely precludes intra-company cash transfers, he says.
The wage subsidy program will run for the period starting March 15 until June 6. Eligible employers must demonstrate a decline in gross revenues of at least 30 per cent in March, April or May when compared to 2019. Employers must reapply for the subsidy every month.
Ball and Evans say firms must make a consistent revenue comparison between the relevant months. "I think they're more worried about making sure you do it the same way, this year and last year," says Ball.
"I think you have to be very cautious about deviating from what you've done in the past. I think it would be viewed in a very negative light," says Evans, noting that the government has warned of significant penalties for abuse. Employers, including their directors and officers who provide false or misleading information, could face monetary penalties and jail time.
The proposed subsidy would cover 75 per cent of the first $58,700 of income typically earned by employees, up to a maximum of $847 per week. The government says that employers must attest that they are making every effort to pay the remaining 25 per cent, although it's unclear in what form.
The federal government has also deferred tax payments to give firms some cash flow relief. The Canada Revenue Agency will allow businesses to defer the payment of personal or corporate tax amounts that become owing on or after March 18, 2020, and before September 2020. Larger entities that have amounts owing up to the end of February may still have to make payments, however. And businesses will be able to defer their GST/HST remittances until June.
Organizations that do not qualify for the new wage subsidy — such as new businesses or firms that had no revenue at the relevant point a year ago — can qualify for the previously announced wage subsidy of 10 per cent of remuneration paid from March 18 to before June 20 for up to 18 employees.
Since it could take six to eight weeks to pay out the subsidy, Ball says the 10 per cent program could provide some initial cash flow relief for firms by decreasing remittances to the federal government.
"We're telling people to make sure they still keep claiming under the original 10 per cent, because you can deduct that against the source deductions and get a benefit now," says Ball. "It's subject to a cap, but to the extent that you don't hit the cap, you might as well start with that one because you can start getting an immediate benefit."
The subsidy is available to businesses by applying through a CRA online portal. Morneau is encouraging all businesses to set up direct deposit with the agency to get funds more quickly.
Firms also need to make careful decisions about billing, as there are still questions surrounding write-offs and unbilled fees. "Some of these firms will actually bill, and then they won't get (the subsidy). And then they'll be treated harshly compared with a company that doesn't try to bill in the first place because they know the client is unable to pay," says Ball.
Nikolakakis suggests that the government consider suspending a rule it implemented in recent years on how professional services firms can account for work in progress. If firms are unable to bill for a period of time, they will be unable to deduct expenses and "paying tax on money they don't actually have.
Ball says the accounting required by the subsidy program could be a struggle for small businesses in general. "They've been so busy just trying to deal with their clients and their business issues, and my big concern is doing accounting is probably not one of the big priorities right now," he says.
He noted that many small or even medium-sized businesses without formal month-end accounting could find it challenging determining when revenue was generated in 2019 to make the 2020 comparisons. "They didn't know last year that they may have had to have accurate monthly data."
The Canada Emergency Business Account will also provide funding to eligible financial institutions so that they can provide up to $40,000 to businesses with payrolls of less than $1 million. A quarter of this loan (up to $10,000) is eligible for complete forgiveness. The federal government is also encouraging banks and financial institutions to extend credit to larger firms to see them through the crisis.