Tax Insights: CEWS update ─ Audits, more clawbacks and expanding lockdown support

Issue 2021-33

In brief

The Canada Revenue Agency (CRA) has recently restarted actively auditing Canada Emergency Wage Subsidy (CEWS)¹ claims. If your organization has received CEWS, and has not yet been audited, your organization could potentially be subject to a CEWS audit and should start getting ready to manage these time-consuming audits.  

Also, newly enacted legislation² implements the federal government’s COVID-19 financial support measures that were announced on October 21, 2021. Included in this legislation are amendments to the CEWS clawback provisions that could reduce or eliminate wage subsidy claims for publicly traded companies, and their subsidiaries, when common share dividends are paid to individual shareholders. 

On December 22, 2021, the federal government announced that eligibility for the Local Lockdown Program and the Canada Worker Lockdown Benefit will be temporarily expanded from December 19, 2021 to February 12, 2022, to support businesses and their employees while public health restrictions are imposed to respond to the Omicron variant.

In detail

CEWS audits

Background

In August 2020, the CRA commenced its audits of a small sample of CEWS claims, focusing on claims for periods 1 through 4 of the CEWS. The audit letter used by the CRA at the time was approximately nine pages in length and included extensive requests for information and documents. This initial stage was intended to identify the types and levels of non-compliance with the CEWS rules. In the latter half of 2020, the CRA began actively auditing CEWS claims, with up to 3,000 auditors dedicated to these audits.³ The CRA indicated that its dedicated CEWS post-payment audit program will likely continue until 2022. 

CRA email to stakeholders

In an email to tax practitioners and other stakeholders dated December 7, 2021, the CRA stated that it is continuing its post-payment audit program, with additional audit activity as of fall 2021. Recognizing the hardship that audits can impose on businesses, especially during the COVID-19 pandemic, the email states that the CRA will “proceed carefully” with its audit program and is open to granting taxpayers extended time to respond to audit queries in certain circumstances. Nonetheless, the CRA has signalled its intention to identify any errors by taxpayers in determining their eligibility for and claiming the CEWS.

PwC observes

The CEWS audits have only recently recommenced, and therefore experience is limited. Nevertheless, the information requested is expansive, although it is not as extensive as the earlier CEWS audits, but will certainly include documentation supporting the calculation of the revenue drop and subsidy claim for each qualifying period. In this case, the general ledger, supporting documentation and related working papers will almost certainly be requested. Technology can facilitate the timely submission of a substantial amount of that information at minimal cost. Taxpayers are usually required to provide the documentation within 30 days, although modest extensions of time are often granted. PwC has experience working with taxpayers to assemble the required information efficiently and to present it to the CRA in the most effective way.

CEWS clawbacks

Newly enacted legislation, which implements federal COVID-19 financial support measures relating to wage and rent subsidies, contains amendments to the CEWS clawback provisions that require employers that are publicly-traded companies (or their subsidiaries) to repay some or all of their wage subsidy claims when common share dividends are paid to individual shareholders. 

Background

The federal government’s 2021 budget introduced a clawback provision that requires employers that are public corporations to repay a part of their wage subsidy claims for a qualifying period that begins after June 5, 2021, to the extent the compensation paid to its five highest-paid executives in 2021 exceeds that paid in 2019. The clawback applies to a corporation with publicly listed shares or to an entity controlled by such a corporation.

The 2021 federal budget legislation⁴ also required the Minister of Finance to table a report in Parliament on the CEWS in the context of publicly traded companies, and their subsidiaries, paying out dividends or repurchasing their own shares.

Parliamentary report on CEWS

On December 10, 2021, the Minister of Finance met her statutory requirement and tabled the report The Canada Emergency Wage Subsidy: Dividend Payments and Share Repurchases by Public Companies - Report to Parliament. The report does not provide a detailed analysis on the topic and instead describes the general impact of the CEWS and states that only about 9.6% of CEWS paid out (as of September 27, 2021) has gone to public corporations and corporations controlled by public corporations.

The report does not recommend implementing a specific rule to address dividend payments and share repurchases, but does explain why such a rule was not included because “[i]mposing additional conditions and restrictions to the wage subsidy would have impeded the timeliness and predictability of the program, potentially resulting in lower take-up and more lay-offs … [and] having program eligibility conditional on the future performance and financial position of employers would have created significant uncertainty for employers negatively affected by the pandemic.”

The majority of the members of the House of Commons’ Standing Committee on Finance did not agree with the report’s assessment and, during the Committee’s consideration of Bill C-2, made two amendments to that bill relating to a clawback for dividends.

Amendments to Bill C-2 relating to clawback of dividends

In general, the first amendment provides that, where a qualifying entity is a publicly traded company, or its subsidiary, has paid taxable dividends to individuals who hold common shares of the company or subsidiary during a qualifying period, no overpayment (i.e. the wage subsidy) is deemed to have arisen for that company or subsidiary. The amendment came into effect on royal assent (i.e. December 17, 2021). During the Committee’s debate, most of its members clearly thought that this amendment would apply only prospectively. If this is the case, it will apply only in respect of the THRP, HBRP and Local Lockdown Program.

The second amendment affects the executive compensation clawback. The amended clawback, which will apply for qualifying periods that begin after December 18, 2021 (the 24th and subsequent qualifying period), will be the greater of:

• the increase in executive compensation (generally 2022 compared to 2019 calendar years), and 

• where the qualifying entity is a publicly traded company, or its subsidiary, that has paid taxable dividends to individuals who hold common shares of the company or subsidiary, the amount of those taxable dividends  

PwC observes

These amendments raise many questions for taxpayers and the CRA. For example, it is unclear what constitutes a publicly traded company or subsidiary for these purposes and which taxable dividends from which period are included in the clawback calculations.

It is also questionable whether these amendments produce the right policy result. Will they cause corporations to reconsider paying normal course dividends that ordinary investors rely upon? As well, these new rules will apply in respect of the THRP, HBRP and Local Lockdown Program, which are targeted to hard hit CEWS recipients. We encourage the CRA to provide guidance quickly to prevent any unintended negative impact on wage subsidy recipients and their employees. 

Lockdown support

The Deputy Prime Minister and Minister of Finance, Chrystia Freeland, has announced⁵ that the federal government will introduce new regulations that will temporarily expand:

• the Local Lockdown Program, to include employers subject to capacity-limiting public health restrictions of 50% or more and reduce the current-month revenue decline threshold requirement to 25% (from 40%); eligible employers will be entitled to receive wage and rent subsidies from 25% up to a maximum of 75%

• the Canada Worker Lockdown Benefit, to include employees of organizations subject to capacity-limiting public health restrictions of 50% or more imposed by provincial or territorial governments

These changes will apply from December 19, 2021 to February 12, 2022 (i.e. for the Local Lockdown Program, the 24th and 25th qualifying periods). It is expected that public health authorities will implement “circuit-breaker” restrictions during this period to limit the spread of the Omicron variant of COVID-19.

The takeaway

Organizations should be preparing for CEWS audits. When contacted by the CRA, a CEWS recipient will likely only have 30 days to assemble the required supporting materials. By taking action now, you will be in a stronger position to successfully support your CEWS claims. PwC can help your organization get ready to provide information that will allow you to most efficiently and effectively deal with the CRA.

With respect to the new legislation on clawing back wage subsidy support, organizations will need to assess how likely it could impact their ability to make wage subsidy claims. PwC can help you understand the new legislation to the extent possible at this time, so that you can make informed decisions.

With the Omicron variant taking hold in Canada, organizations will need to monitor changing public health announcements and remain flexible as we are now in another uncertain pandemic period. To keep apprised of federal, provincial and territorial government measures in response to the COVID-19 pandemic, see our Government economic response to COVID-19 updates.

<sup>1. For more information, refer to CRA web page “COVID-19 wage and hiring support for businesses.”

2. An Act to provide further support in response to COVID-19, (S.C. 2021, c. 26) formerly Bill C-2 (royal assent: December 17, 2021). The Act implements the measures announced on October 21, 2021 that:
- extend the Canada Recovery Hiring Program (CRHP) to May 2022
- introduce more targeted wage and rent subsidy programs (effective October 24, 2021 to May 7, 2022) that support: (i) specific types of organizations (Tourism and Hospitality Recovery Program [THRP] and Hardest-Hit Business Recovery Program [HBRP]); and (ii) other (non-THRP or HBRP) qualifying businesses that face new local lockdowns due to public health restrictions (Local Lockdown Program) 
For more information, see our Tax Insights “Targeted COVID-19 business supports introduced and Canada Recovery Hiring Program extended to May 2022.”</sup>

^{3. See our Tax Insights “Canada Emergency Wage Subsidy audits underway — Are you prepared?.”} 

^{4. Budget Implementation Act, No. 1, 2021, (S.C. 2021, c. 23), formerly Bill C-30 (royal assent: June 29, 2021)}

^{5. For more information, see the Department of Finance December 22, 2021 Backgrounder “Temporarily Expanding Eligibility for the Local Lockdown Program and the Canada Worker Lockdown Benefit.”}