Section 125.7

Subsection 125.7(1)

Eligible Employee

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Eligibility of non-resident employee

Since eligible employee status is determined based on where the individual is employed and not where the individual resides. Generally, a non-resident individual employed in Canada during a claim period will qualify as an eligible employee as long as all other conditions to be an eligible employee are met.

Canada Emergency Wage Subsidy (CEWS) Calculator under Determine your eligible employees, 21 April 2020 CRA Webpage

Retroactively hiring and paying employees

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.

Eligible Entity

Administrative Policy

Canada Emergency Wage Subsidy (CEWS) Calculator under Who is an eligible employer, 21 April 2020 CRA Webpage

Types of eligible employers

Eligible employers include:

  • individuals (including trusts)
  • taxable corporations
  • persons that are exempt from corporate tax (Part I of the Income Tax Act), other than public institutions:
    • non-profit organizations
    • agricultural organizations
    • boards of trade
    • chambers of commerce
    • non-profit corporations for scientific research and experimental development
    • labour organizations or societies
    • benevolent or fraternal benefit societies or orders
  • registered charities
  • partnerships consisting of eligible employers

Public institutions are not eligible for the subsidy. This includes municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals.

Paragraph (a)

Administrative Policy

8 May 2020 External T.I. 2020-0847791E5

a Treaty exemption for income does not preclude being an eligible entity for CEWS purposes

Is a non-resident corporation that operates an airline that normally flies to and from Canada qualify as an “eligible entity” notwithstanding that a part or all of its income may not be included in computing its income for a taxation year by the operation of an applicable Income Tax Convention between Canada and s. 81(1)(a)? CRA responded:

[A] careful review of other paragraphs under the definition of “eligible entity” and of the overall context and purpose of the provision shows that the exclusion in paragraph (a) was meant to exclude, generally, corporations described under subsection 149(1) while providing under paragraph (d) of that definition that five types of persons that are exempt under subsection 149(1) can qualify as an “eligible entity”.

In our view, a non-resident corporation that operates an airline, a portion of whose Canadian source income is not included in the computation of its income under Part I of the Act as a result of the operation of paragraph 81(1)(a) and a provision under an income tax convention between Canada and another State is not a corporation“ exempt from tax under Part I” under the definition of “eligible entity” in subsection 125.7(1) and therefore would not be prevented from being an “eligible entity” on that basis.

Paragraph (c)

Administrative Policy

3 June 2020 External T.I. 2020-0846831E5 - CEWS - Public institution

ruling not provided on public institution exclusion/general discussion

In indicating that it could not provide a ruling as to whether a registered charity was a public institution, CRA stated:

[D]ue to the large number of enquiries that our Directorate is receiving in the context of the COVID-19 pandemic, we will not be providing any advance income tax ruling regarding the qualification of a specific entity as a public institution for the purpose of the CEWS.

CRA went on to provide general comments, including:

A registered charity can be an “eligible entity”, as defined in subsection 125.7(1) of the Act for the purpose of the CEWS, as long as the charity is not a “public institution”. ….

[P]ublic institutions would generally include municipalities and local governments, Crown corporations, wholly owned municipal corporations, public universities, public colleges, public schools, health authorities and hospitals.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(c) public bodies performing a function of government are entities that are functionally like municipalities 115

Eligible Remuneration

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Remuneration can be exempt

Eligible remuneration of an eligible employee means amounts for which the eligible employer would generally be required to make payroll deductions to be remitted to the CRA, irrespective of whether the amounts are taxable to the eligible employee. For example, salaries and wages paid to a status Indian whose income is exempt from tax under a specific provision of the Act are considered eligible remuneration and would qualify for the purpose of calculating the wage subsidy.

Canada Emergency Wage Subsidy (CEWS) Calculator under Determine your eligible employees, 21 April 2020 CRA Webpage

What is eligible remuneration

Eligible remuneration includes amounts you paid an employee as salary, wages and other taxable benefits, fees, and commissions. These are amounts employers would be required to make payroll deductions on to be remitted to the CRA.

Severance pay and items such as stock option benefits or the personal use of a corporate vehicle are not part of eligible remuneration.

Articles

Alex Ghani, Stan Shadrin, Boris Volfovsky, "How Does the Canada Emergency Wage Subsidy Apply to Non-Resident Employers?", COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 4

Example of Treaty-exempt U.S. corp employee US employees in Canada for several days a quarter (p. 4)

Consider the case of a US-resident corporation, NR Co, that provides services in Canada … [and] does not have a permanent establishment in Canada … [has] a payroll account in Canada, which it maintains in respect of its US-resident employees who work in Canada on an intermittent basis … [and] had the requisite decline in qualifying revenue … .

Assume that A is an employee of NR Co, is a tax resident of the United States, and works in Canada for three days during the period March 15-April 11, 2020 and in the United States for the remainder of the period. A is paid a salary by NR Co for the entire period. Is NR Co entitled to a CEWS benefit in respect of all of the wages paid to A?

Treaty-exempt non-resident can be an eligible entity (p. 4)

NR Co is an eligible entity because it is a corporation and is not exempt from tax. …

Mostly non-resident payroll might be eligible remuneration if some Canadian withholding (p. 4)

… The salary paid to A in respect of the services performed in Canada will qualify [as eligible remuneration] only if NR Co has not applied for a non-resident employer certification pursuant to paragraph 153(7)(a). … [A]mounts paid at any time by an employer to an employee at a time that the employer is a "qualifying non-resident employer" and the employee is a "qualifying non-resident employee" are excluded [from “eligible remuneration”]. … If NR Co chooses not to file an application pursuant to paragraph 153(7)(a) to be classified as a qualifying non-resident employer, or is not eligible to be considered a qualifying non-resident employer for some other reason (for example, failing to comply with the requirements of the certified non-resident employer program), it would be liable to withhold, but it would be eligible for the CEWS.

Public Institution

Paragraph (a)

Administrative Policy

1 May 2020 External T.I. 2020-0846931E5 - CEWS - public institution

factual tests applied in determining ownership of capital of non-share corporation

In response to an enquiry as to the definition of “public institution” in the context of Crown corporations referred to in s. 149(1)(d), CRA first paraphrased the rules in ss. 149(1)(d) to (d.6) as well as referring to the deeming rule in s. 149(1.1), and stated:

In the context of a corporation without share capital, the determination of the ownership necessitates a review of all the relevant documents such as articles of incorporation, by-laws and agreements relating to the operation and control of the corporation and its assets. We consider that the following factors would be relevant in making such determination:

• the identity of members,
• the structure of the corporation,
• who exercises control over the financing, operation and direction of the corporation,
• who has the right to elect or change the board of directors or to reverse its decision,
• who can contribute capital and receive a distribution of capital,
• details regarding asset distribution on winding-up or dissolution and
• whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(d.3) functional approach to determining the ownership of the “capital” of a non-share corporation 163

Qualifying Entity

Paragraph (c)

Subparagraph (c)(ii)

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Example of application of alternative approach

Example 4

An eligible employer is determining if it has experienced the required reduction in revenue to qualify in order to claim the wage subsidy for the first claim period, from March 15 to April 11, 2020. Since the eligible employer began operations only on January 14, 2020, it must use the alternative approach to determine its reduction in revenue. Its total qualifying revenues earned in January and February 2020 was $90,000. Its average qualifying revenue for the two months will be $57,447 [0.5x90,000x(60/47]. Its qualifying revenue for March 2020 is $39,600.

Because its qualifying revenue for March 2020 has declined by 31% when compared to the average of its qualifying revenues earned in both January and February 2020, the eligible employer has experienced the required reduction in revenue of at least 15% for the first claim period and will qualify to claim the wage subsidy for that period.

Because it has qualified for the first claim period, the eligible employer is automatically considered to have experienced the required reduction in revenue for the second claim period (April 12 to May 9, 2020).

Qualifying Revenue

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

6-1 Qualifying revenue includes interest and dividend income arising in course of ordinary activities

The qualifying revenue of an eligible employer is generally determined in accordance with its normal accounting practices. To the extent that investment revenue, such as interest or dividends from investments in securities, arises in the course of an eligible employer’s ordinary activities in Canada in the particular period, is not an extraordinary item or on account of capital, and is included in revenue under its normal accounting practices, it would generally be included in qualifying revenue.

6-2. Whether government assistance directly related to the COVID-19 is excluded as an extraordinary item

Qualifying revenue of an eligible employer is generally determined in accordance with its normal accounting practices. Qualifying revenue means the inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of the eligible employer in Canada in a particular period. For greater certainty, qualifying revenue does not include extraordinary items.

“Extraordinary items” is not a term defined in the Act. Generally, the CRA would expect extraordinary items to meet all three of the following characteristics:

Not be expected to occur regularly or frequently within several years
Grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.
Not typical of the normal activities or risks inherent in the normal operations of the entity
Consideration should be given to the nature of the services or products offered by an entity and the normal environment in which it operates.
Primarily out of the control of owners or management
Consideration should be given to the extent that inflows are influenced by the decision of owners or management.

... [D]ue to the highly unusual economic impact and response resulting from the COVID-19 crisis, the CRA would generally consider emergency government assistance, including assistance from provinces and municipalities, directly related to COVID-19 to be an extraordinary item. However, the CRA would not consider COVID-19 related government assistance to be extraordinary to the extent that it replaces or is meant to replace normal or recurring government assistance.

9-1. Consolidated revenue can arise in Canada even if ultimate sale does not occur in Canada

In accordance with accounting principles for consolidation, consolidated revenue excludes transactions between members of the group but includes global revenue of the group. The qualifying revenue of an eligible employer does not include the portion of consolidated revenue that does not arise in the course of ordinary activities in Canada. The eligible employer can however include the portion of the consolidated revenue that arises in the course of ordinary activities in Canada whether or not the ultimate sale to third parties occurs in Canada.

Canada Emergency Wage Subsidy (CEWS) Calculator under Who is an eligible employer, 21 April 2020 CRA Webpage

What is an eligible revenue reduction

… Use your normal accounting method when calculating revenue. You can use the cash method or the accrual method, but you must use the same approach throughout.

Paragraph (c)

Administrative Policy

6 May 2020 Internal T.I. 2020-0846711I7 - CEWS - Meaning of extraordinary item

emergency COVID-19 governmental relief generally would meet the 3 conditions for being "extraordinary"

Would provincial support payments to childcare centres to assist them during the COVID-19 crisis be qualifying revenue” under s. 125.7(1)? Before concluding that it would “generally consider emergency government assistance, including assistance from provinces and municipalities, directly related to COVID-19 to be an extraordinary item,” but that this would include “COVID-19-related government assistance … to the extent that it replaces or is meant to replace normal or recurring government assistance,” the Directorate stated:

Generally, we would expect extraordinary items to meet all three of the following characteristics:

a) Not be expected to occur regularly or frequently within several years

Grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.

b) Not typical of the normal activities or risks inherent in the normal operations of the entity

Consideration should be given to the nature of the services or products offered by an entity and the normal environment in which it operates.

c) Primarily out of the control of owners or management

Consideration should be given to the extent that inflows are influenced by the decision of owners or management.

Subsection 125.7(2)

Element B

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Wage subsidy reduced by 10% temporary wage subsidy as calculated, even where the latter has not yet been fully claimed through available reductions in source deduction remittances

Example 13

Assume an eligible employer is eligible for both the subsidies. It calculates its 10% temporary wage subsidy as $2,050 on remuneration paid from April 12 to May 9, 2020 (which coincides with the second claim period), using the 10% rate. However, it only deducted $1,050 of federal, provincial, or territorial income tax from its employees for that period.

While the eligible employer can still reduce a future payroll remittance by $1,000 in respect of the balance (even if that remittance is in respect of remuneration paid after May 9, 2020), its CEWS claim for the same period (April 12 to May 9, 2020), is reduced by the entire amount of $2,050.

Reduction to wage subsidy can be avoided by electing to claim temporary wage subsidy at less than 10%

Example 13-1

In Example 13, assume the eligible employer elects to apply a percentage less than 10% to determine the 10% temporary wage subsidy such that the subsidy is now only $1,050. It is now able to offset the entire $1,050 of the subsidy against the $1,050 from the federal, provincial, or territorial income tax withheld from its employees for that period. In this situation, its CEWS claim for the same period (April 12, to May 9, 2020), is reduced by only $1,050.

Subsection 125.7(4)

Paragraph 125.7(4)(a)

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Normally, qualifying revenues of each eligible employer determined by the consolidated statements

The qualifying revenue of an eligible employer is generally determined in accordance with its normal accounting practices. Consequently, when a group of eligible employers generally prepares consolidated financial statements, each member of the group will determine its qualifying revenue in accordance with those statements.

Example of election to determine revenues on an unconsolidated basis

However, each member of such a group may determine its qualifying revenue separately and not based on the consolidated statements, so long as every member of the group determines its qualifying revenue on that separate basis.

Example 7

Corporation A owns all the shares of Corporation B. Both corporations are eligible employers. Corporation A prepares consolidated financial statement for accounting purposes. Assume that that there is no intercompany revenue. [There is a consolidated reduction in qualifying revenue of 10% for the first period, but an unconsolidated reduction of 20% for Corporation B.] In accordance with normal accounting practice Corporations A and B will not be eligible for the wage subsidy as their qualifying revenue, determined on a consolidated basis, has not experienced the required reduction in revenue of at least 15%.

Therefore, Corporation A and Corporation B have decided to determine their qualifying revenue separately. In that case, while Corporation A will not qualify for the wage subsidy, as it has not experienced the required reduction in revenue of at least 15%, Corporation B will qualify for the wage subsidy because its qualifying revenue has dropped by more than 15%.

Non-consolidation election under s. 127.5(4)(a) is not binding on subsequent periods

12-1. Can an eligible employer change their approach used for calculating the qualifying revenue from claim period to claim period?

[F]or the special rules described in Q8-Q11 [e.g., respecting Q.9 where “each member of … a group may determine its qualifying revenue separately and not based on the consolidated statements, so long as every member of the group determines its qualifying revenue on that separate basis”] an eligible employer may choose to apply a different approach in a subsequent claim period, provided that all the requirements for the application of that different rule are met for that subsequent claim period.

Paragraph 125.7(4)(b)

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Example 8 of two affiliated but not commonly controlled corporations making the election
  • CRA provides Example 8 of two silos making the s. 127.5(4)(b) election, e.g., two corporations each owned 100% by a spouse, with one having no percentage reduction in qualifying revenue in its first period, and the other experiencing a 50% reduction.
  • Accordingly, on a consolidated basis there is a 25% drop in qualifying revenue.

Consolidation election must be made by the broadest affiliated group of eligible entities possible and not a subset

10-2. Can affiliated corporations that are not in the same ownership chain, determine their qualifying revenue on a consolidated basis, even if they cannot prepare consolidated financial statements?

On the assumption that affiliated corporations that are not in the same ownership chain, are otherwise eligible employers, they can jointly elect to determine their revenue on a consolidated basis, as though the relevant accounting principles for consolidation applied to them. This means, for example, that intercompany transactions should be eliminated.

Where there are multiple entities in an affiliated group, if an election is going to be made, all eligible employers in the affiliated group must consolidate for the purpose of calculating qualifying revenue. It is not possible to have only some of those eligible employers in the affiliated group elect to consolidate.

Articles

Martin Lee, Thanusan Raveendran, "Affiliation Election for CEWS: Private Corporation Applications", COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 3

Example of using interest income decline of controlling individual shareholder to meet revenue test (p. 3)

Opco [wholly-owned by Mr. X] currently has employees, but the revenue of Opco as of May 2020 is identical to May 2019 .. . However, Mr. X has his own separate self-employed business whose revenue has declined from May 2019 to May 2020. Note that even if Mr. X earned only passive income, such income should count as revenue, since the definition of qualifying revenue includes cash and receivables derived from "the use by others of resources of the eligible entity" (that is, interest as payment for the use of capital). …

… Mr. X and Opco are an affiliated group of eligible entities and they can jointly elect under paragraph 125.7(4)(b) to permit Opco to use the consolidated revenues of the group to determine its own revenue decline test. …

Mr. X does not need a payroll number since an election is permitted among affiliated eligible entities rather than affiliated qualifying entities.

Must consider qualifying revenue of all affiliated eligible entities (p. 4)

[T]he affiliation election must take into consideration all affiliated eligible entities; an applicant cannot pick and choose which affiliated parties to consolidate with. … . [For example] Mr. X fails to identify that Mrs. X, his spouse, is also an affiliated eligible entity.

David Carolin, Manu Kakkar, "The Canada Emergency Wage Subsidy: Affiliated Group Issues", COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 1

Example of application of s. 125.7(4)(b) election to an affiliated multinational group (p. 2)

Example: Affiliated Group with International Structure

The Canadian entity has sister companies in multiple international jurisdictions. All of the corporations in this structure would meet the definition of an affiliated group of persons. Does this mean that each company in the entire international structure is part of the affiliated group for the purposes of this rule, even if some of them have no connection with the Canadian entities, and the Canadian entity is insignificant compared with the entire international structure?

…[O]n the basis of a literal interpretation of the affiliated entity rule … all companies everywhere in the world would have to participate in the joint election. The CEWS claimant would need to take account of the qualifying revenue of all of the corporations worldwide in order to determine whether the decrease-in-revenue threshold is met. As well, it would need signatures on the joint election from authorized representatives of all of the corporations. …

Example of application of s. 125.7(4)(b) election to an affiliated group with a recent addition (p. 2)

Example: Affiliated Group That Is Different from Prior Year

[F]our entities meet the definition of an affiliated group in March 2020, but one of the entities was newly incorporated in 2020 … .[W]ould the affiliated group be composed of the four entities, which would then calculate revenue on a consolidated basis and compare it to the consolidated revenue of the three entities that existed during the comparative period? Or would the newly incorporated entity be excluded from this calculation?

Paragraph 125.7(4)(d)

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

Examples of application of the special rule to use the qualifying revenues of NAL persons to determine reduction in qualifying revenues

Example 5

Corporation A, an eligible employer, provides management services, including payroll services, to Corporation B. All of Corporation A's revenues are from Corporation B with which it does not deal at arm's length. Corporation B's revenues are from arm's-length customers.

Under the special rule, in order to determine whether Corporation A can qualify for the wage subsidy, Corporation A's qualifying revenue for the current reference period is determined by reference to the required reduction in qualifying revenue for Corporation B for that reference period.

Example 6

All or substantially all of the revenues of Corporation X, (an eligible employer), are from two corporations (Corporation Y and Corporation Z) with which it does not deal at arm's length.

Corporation X's total revenue for March 2020 was $1,450 of which $400 was attributable to Corporation Y and $1,000 was attributable to Corporation Z. $50 was from an arm's-length taxpayer.

Corporation Y's qualifying revenue for March 2020 was $1,000 and for March 2019 was $1,500.

Corporation Z's qualifying revenue for March 2020 was $1,300 and for March 2019 was $2,000.

Calculation of Corporation X's qualifying revenue for the current reference period:

Qualifying revenue (QR) calculation in relation to Corporation Y:

$100 x $400 (QR attributable to Corporation Y)/$1,400 (Corporation X's total QR from non-arm's-length persons or partnerships) x $1,000(Corporation Y QR for current reference period)/$1,500 (Corporation Y QR for prior reference period) = 19

QR calculation in relation to Corporation Z:

$100 x $1,000 (QR attributable to Corporation Z)/$1,400 (Corporation X's total QR from non-arm's-length persons or partnerships) x $1,300(Corporation Z's QR for current reference period)/$2,000 (Corporation Z's QR for prior reference period) = 46

The weighted average qualifying revenue for Corporation X for the current reference period is $65 ($19+$46). Since the prior reference period's qualifying revenue is deemed to be $100, Corporation X has experienced the required reduction in revenue of at least 15% for the claim period. Corporation Y and Corporation Z must jointly elect with Corporation X in order to use this special rule.

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Subsection 125.7(6)

Administrative Policy

Canada Emergency Wage Subsidy (CEWS) Calculator under How to apply, 21 April 2020 CRA Webpage

Incorrect or fraudulent claims

… If you artificially reduce your revenue for the purpose of claiming the wage subsidy you will be required to repay any subsidy amounts you received plus a penalty equal to 25% of the total value.

Subsection 125.7(9)

Administrative Policy

Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 28 May 2020

s. 125.7(9) rule can be applied successively

5. How is the reduction in revenue determined?

… Once an eligible employer has determined that it has experienced the required reduction in revenue for a particular claim period, it is automatically considered to have experienced the required reduction in revenue for the immediately following claim period (deeming rule). As a result, the employer does not have to make this determination again for that next claim period … .

… In a situation where the eligible employer, subsequently determines that it actually experienced the required reduction in revenue, without applying the deeming rule, for the second claim period - April 12 to May 9, 2020, the eligible employer will be considered to have experienced the required reduction in revenue for that third claim period because of the deeming rule that can now be applied to the third period … .