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Updates to CERS, CEWS & CEBA: Canadian Tax Lawyer Analysis

Introduction – The Canada Emergency Rent Subsidy, the Canada Emergency Wage Subsidy, and the Canada Emergency Business Account & Rules

Many Canadian businesses have been impacted by the ongoing COVID-19 pandemic. While some businesses are able to operate but not at full capacity, others are forced to temporarily shut down due to public health orders.

On October 9, 2020, the Government of Canada announced its plan to introduce legislation targeted at providing support to Canadian businesses and to help them (1) survive the second wave of the COVID-19 pandemic; (2) cover their overhead costs so they can continue serving their communities; and, (3) align them for a strong recovery post-pandemic. The Government of Canada’s plan includes:

Key Features of the Canada Emergency Rent Subsidy (CERS)

The CERS program will provide rent and mortgage support to businesses, charities and not-for-profit organizations that have been impacted by the COVID-19 pandemic, until June 2021. The CERS will replace the Canada Emergency Commercial Rent Assistance Program which ended in September 2020 and depended on landlords applying for rent relief.

In contrast, the CERS is created to provide support to tenants and business owners. The CERS will allow businesses to apply directly to the Canada Revenue Agency (CRA) for rent and mortgage relief while also providing financial support to property owners. In addition, the CERS will provide a subsidy for eligible fixed property expenses including rent and interest on commercial mortgages. Although applications to the CERS program will open in November 2020, applicants will be able to make their claims retroactive to September 27, 2020.

Under the CERS, businesses, charities and not-for-profit organizations that have experienced a decline of 70% or more in revenue, due to the COVID-19 pandemic, may be eligible to receive up to 65% of their eligible expenses until December 19, 2020. In addition, businesses, charities, and not-for-profit organizations that have experienced a decline in revenue of less than 70% may be eligible for subsidy, on a sliding scale, based on their revenue decrease. Further, the CERS will provide a top-up of 25% emergency rent subsidy, in addition to the 65% subsidy, to businesses and organizations that are temporarily shut down due to public health orders.

Key Features of the Extended Canada Emergency Wage Subsidy (CEWS)

Key Features of the Extended Canada Emergency Wage Subsidy (CEWS)

The CEWS subsidies a portion of an employee’s wages for eligible employers. The purpose of the CEWS is to (1) allow employers to maintain their employees on the payroll during the pandemic; (2) prevent job loss and layoffs; and, (3) create new employment opportunities.

The Government of Canada announced its plan to extend the CEWS, until June 2021, as part of its measures to create new jobs and restore employment levels to pre-pandemic. Canadian businesses, charities and not-for-profit organizations that have experienced a decline in revenue due to the COVID-19 pandemic may be eligible for the CEWS to cover a portion of their employee wages, retroactive to March 15, 2020.

The Government of Canada’s plan proposes that the current maximum base subsidy rate at 40% and the maximum top-up rate at 25% would continue to apply until December 19, 2020. Employers that have experienced a decline of 70% or more in revenue, due to the COVID-19 pandemic, may be eligible to receive up to 65% of wage subsidy. However, for employers that have experienced a decline in revenue of less than 70%, there will be wage subsidy available, on a sliding scale, which is determined using the “revenue decline test”. The revenue decline test helps determine an employer’s wage subsidy and top up eligibility by examining the changes in the employers’ monthly revenue in relation to the average of its January 2020 and February 2020 revenues.

See also
CRA Guidance on COVID-19 & Tax Residence | Rotfleisch & Samulovitch PC

Key Features of the Expanded Canada Emergency Business Account (CEBA) 

The CEBA provides financial support to small business and not-for-profit organizations that have experienced a decline in revenue due to the COVID-19 pandemic. In particular, the CEBA provides eligible small businesses and not-for-profit organizations access to an interest-free loan, for up to $40,000, to help cover their operating costs and expenses. However, the Government of Canada also announced its plan to expand the CEBA. The Government of Canada plans to expand the CEBA loan amount from $40,000 to $60,000, of which $20,000 (of the loan balance) will be forgivable if the loan is repaid by December 31, 2022. The deadline to apply for the CEBA is December 31, 2020.

The Benefits & Concerns Associated with the CERS, the CEWS and the CEBA

The CERS, the CEWS and the CEBA reflect the Government of Canada’s effort to provide financial support and relief to Canadian businesses, charities and not-for-profit organizations that have been impacted by the COVID-19 pandemic. However, it is not clear how efficient the Government of Canada’s plan will be, whether it will meet the needs of businesses and organizations or whether it will ensure that they are properly supported.

As previously mentioned, the CERS is created to provide support to tenants and business owners. However, the Government of Canada did not comment on how the CERS will provide support to landlords, if any. In addition, while the CERS will provide subsidy for eligible fixed property expenses including rent and interest on commercial mortgages, the Government of Canada has yet to comment on the support available for other types of eligible expenses (other than rent and interest on commercial mortgages) such as business operating expenses. Further, the application for the CERS program is not open until November 2020 and while eligible businesses and organizations will be able to receive relief for the month of October under the CERS, they will not receive the funds until November. The gap between the date when the CERS applications open and when applicants will actually receive funds is problematic because it means that businesses will have to find other means to pay their October and November 1st rent. This demonstrate how the Government of Canada failed to take into consideration that many small businesses have been financially struggling for months due to the COVID-19 pandemic, some of which are in arrears with their landlords. Moreover, this demonstrates the need for relief programs that take into consideration that some businesses and organizations do not have the means or access to other financial resources that would help them pay their October and November 1st rent and other business-related expenses.

Business, charities, and not-for-profit organizations that are forced to temporarily close their doors due to public health orders could receive up to 90% relief under the CERS program. On the one hand, the CERS program will provide some relief and support to businesses and help them get through the challenges associated with the COVID-19 pandemic. On the other hand, the 90% support is not available to all businesses nor is it enough for businesses that are forced to close due to public health orders. Businesses and organizations that are forced to temporarily close their doors due to public health orders are likely to have zero revenue (while closed) and while the maximum relief under the CERS program is 90%, there is still 10% of rent and business-related expenses that these business will need help with. This demonstrates the need for emergency and relief programs that ensure that businesses, charities, and not-for-profit organizations are properly supported. And of course, many businesses have already permanently gone out of business including, especially, restaurants.

See also
Tax Treatment of Work Space in Home Expenses and COVID-19

The CEWS reflects the Government of Canada’s commitment to creating new employment opportunities and restoring Canada’s economy and employment rates to pre-pandemic. However, its uncertain whether the extended CEWS will help prevent unemployment rates from rising or whether it will help align Canadian businesses and the economy for a strong recovery post the pandemic.

The extended CEBA’s $20,000 loan amount will provide financial support to many businesses and not-for-profit organizations during the ongoing COVID-19 pandemic. In addition, the extended loan amount and the $20,000 forgivable loan amount may incentivize many businesses to take advantage of the CEBA program and repay back the loan by December 31, 2022. However, the ongoing COVID-19 pandemic has created much uncertainty and therefore many businesses can not determine whether they will be able to repay the CEBA loan amount back, by December 31, 2022, in order to benefit from the $20,000 forgivable amount.

As previously mentioned, the CERS, the CEWS and the CEBA reflect the Government of Canada’s effort to provide financial support and relief to Canadian businesses, charities and not-for-profit organizations that have been impacted by the COVID-19 pandemic. Needless to say, the above-mentioned concerns associated with the CERS, the CEWS and the CEBA shed light to the fact that the Government of Canada is not equipped to provide businesses and Canadian workers with the proper support that they need.

While the Government of Canada has focused its resources on creating and implementing relief programs to support Canadian businesses impacted by the COVID-19 pandemic, it is inevitable that the government will soon shift its focus to ensuring that applicants were eligible for the relief that they claimed and received. Presently, the CRA is working on creating a post-payment tax audit program that will focus on CEWS applications made between March 15th, 2020 and July 4th, 2020. The purpose of the post-payment tax audit program is for the CRA to identify the various measures of non-compliance with the CEWS legislation. Given the ongoing concerns associated with the CEWS program, Canadian businesses and organizations should bear in mind that any CRA tax audit, including an audit into a CEWS application, can result in the CRA requesting access to details, including corporate and financial records, that may not be relevant to the CEWS claim as part of a broader tax audit. As such, businesses applying for any of the above-mentioned relief programs should review the relevant eligibility criteria, posted on CRA’s website, prior to submitting their claim. Further, businesses and organizations that notice an error in their relief application or in any payment received (as a result of a claim made to any of the above-mentioned benefits) should contact the CRA immediately to address the error and to confirm their benefit eligibility.

Pro Tax Tips – The CERS, the CEWS and the CEBA

Canadians businesses, charities and not-for-profit organizations who receive the CERS, the CEWS or the CEBA when they are not eligible face tax audit and will have to repay the amounts with interest and potentially with penalties. Eligibility for the CERS, the CEWS or the CEBA can become the determining factor of whether (or not) your business or organization will survive or recover from the ongoing challenges created by the COVID-19 pandemic. If you have questions concerning the Government of Canada’s CERS, the CEWS and the CEBA or if your application for any of the above-mentioned benefits is rejected and you would like to dispute the CRA’s decision please contact our law office to speak with one of our experienced Certified Specialist in Taxation Canadian tax lawyers.

Disclaimer:

"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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