Covid-19 has damaged most Canadian small businesses. Even physicians have not been immune. The Federal government has responded with massive fiscal stimulus to try and keep Canadians afloat. It has been hard to keep on top of these programs. Almost daily, our PM pops out of his house like the bird of cuckoo clock to announce a new day and new funding. Even though I like to have some photoshop fun, I honestly have to respect the difficulty this poses for politicians who are in a position of choosing between risky options on short timelines with an evolving crisis. It is like acute medicine. Anyway, here is my understanding of what is out there, so far.
There has been support for Canadian small business, like the CEBA that I explained last week. Two different wage subsidy programs were also rolled out rapidly to encourage businesses to keep employees on their payroll.
This post explains how the Temporary Wage Subsidy for Employers (small business wage subsidy in the chart above) and the Canadian Emergency Wage Subsidy (CEWS) work.
Temporary Wage Subsidy for Employers (TWS)
This subsidy was announced in a bit of a panic and is effective March 18th, 2020. The good news is that you don’t need to do anything right now to qualify for it. It will be applied when you do your business taxes. However, it is important to figure out if you qualify and for how much now for two reasons.
First, if you are making quarterly tax installments for your business, you can reduce the amount by the TWS. Important Note: quarterly tax installments are not the monthly remittance that you make for payroll (CPP, EI collected at source). Payroll remittance is not reduced for CPP/EI. However, if you are making monthly remittance of income tax collected from your employees, you can reduce that remittance by the amount of TWS instead of waiting for your quarterly installment. The goal of this subsidy is to improve cash flow in the near-term.
Second, the amount of TWS you get is needed to apply for CEWS. You can collect both TWS and CEWS. However, the amount of TWS you get is subtracted from the CEWS and you need to enter that as part of your CEWS application.
Who qualifies for TWS?
Just about any business can apply, as long as they pay salaries. This includes sole proprietors that are paying salary. If it is a Canadian Controlled Private Corporation (CCPC), such as a medical professional corporation (CCPC), then it needs to qualify for the Federal small business deduction. The main exclusion from the Federal small business deduction is having more than $15 million in capital. For those with passive income, you’ll be relieved to know that the SBD for this purpose does not include elimination due to the active-passive income threshold.
You also do NOT need to have reduced revenue to apply for the TWS.
This differentiates it from CEWS which does require a reduction in revenue to qualify.
How much TWS do you get?
It is 10% of the total payroll for the three month period of March 18, 2020 to June 19, 2020.
There are caps on the subsidy.
It is capped at $1375/employee and $25K/employer. These caps are for the entire three month period and not per month. If you have associated CCPCs (eg. a married couple who each have their own corporations), then they do not share the $25K cap. The $1375/employee cap will limit the subsidy for most physicians unless they have a large staff.
Example of TWS Calculations.
A physician has a CCPC that pays them $10K/month salary, their spouse $2K/month salary, and a secretary $4K/month salary.
Total payroll = $16K/month. That is $48K over the 3 month period.
Total employees = 3
Subsidy = 10% of $48K =$4800. This is above the max of $1375/employee (3 X $1375= $4125).
So, the subsidy would be $4125 for the 3 month period.
TWS is considered taxable income.
TWS can improve cash flow temporarily by reducing quarterly tax installments. However, it is not actually applied to reduce your tax bill until filing business taxes. At that point, some of the TWS will be clawed back as business income (12-15% for a small business or ~27% for a general corporation).
Canadian Emergency Wage Subsidy (CEWS)
Methods to access the application.
This subsidy became open for application on April 27th. Unfortunately, many have still not been able to apply because they are waiting for “My Business Account” portal accounts with CRA. To get a My Business Account login, you need to call CRA. There are also options to login on their website using your bank, but it still requires a CRA security code. The problem arises that the CRA security code for either option is sent to you via snail mail. We have been waiting for ours for a month now.
There are other ways to access the application. You can have your accountant do it via their Represent a Client account. There is also an option to use a web form with your web access code. There is an option on the link above to get a web access code using your T4sum. My wife and I tried various permutations, but were unable to get that work. Frustrating. We gave up and contacted our accountant. So, I don’t have line by line screen shots of the application. However, we did go through the calculation process which I will explain below.
You need to apply for each period separately.
There are currently three periods to apply for CEWS. You can apply retroactively. To qualify, you need to have a reduction in revenue of >15% for the period of March 15th to April 11th (period 1), >30% for April 12th to May 9th (period 2). The third period is May 10th to June 6th and requires a >30% revenue reduction. There is talk of further extensions. It isn’t just “moist talk” – an extension to Aug 29, 2020, was announced today.
If you qualify for a period, you automatically qualify for the period that follows. However, you still need to apply for each period separately regardless of whether you qualify or not.
Example: You have a 20% reduction in period 1 (requires 15% reduction) and period 2 (requires 30% reduction). You qualify for both periods 1 and 2. You still have to apply for period 2 even though you automatically qualify.
Calculating the revenue reduction for CEWS.
What counts as revenue?
Revenue is the money coming in from selling goods, selling services, or being paid for access to your companies resources. Excluded are one-time exceptional revenue or capital gains from selling an asset.
Cash vs Accrual Method of calculating revenue.
You need to choose one method or the other. Whichever you choose, you need to stick with for all calculations.
The cash method is simply using the time of deposit into your business account as the date assigned the income. The accrual method uses the date the service was provided/billed as the date of the income.
The cash method is simpler but can present problems.
The delay in getting paid could result in not showing the drop in income from Covid. For example, if you worked like a beast in February, but get paid for that in March/April, then you income in March/April would be high even if you had stopped working in mid-March.
It also can make a difference when you get lump sums for multiple months of service. For example, if I get paid $9K quarterly for one of my roles. With the cash method, $9K shows up in period 1. With the accrual method, only $3K shows up in period 1. The other $6K are part of January and February.
I would suggest doing both so you can compare. There will be an online tool embedded later in this post.
Calculating the baseline revenue.
There are two ways to establish the baseline to compare with in determining if you have a qualifying drop in revenue. Again, you need to choose one or the other and be consistent.
Method 1: Year over year. You compare the same period in the previous calendar year. For example, March 15 to April 11th, 2019 is the comparator for period 1.
Method 2: Jan/Feb 2020. You use the average of the revenue from January and February, 2020. This is used as the baseline for all the periods.
Again, I would do the calculation using each method to see which one is more favorable across multiple periods before committing. Someone who has a busy period in January and February, but slows down for March break or the spring each year may be better off using method 2.
CEWS Revenue Drop Calculator
For your convenience, I made a calculator to compare accounting methods and baseline methods below. It also has a print feature. You can change the cream coloured cells to suit yourself. The input/result tabs become available when you agree to the disclaimer. Try the cash method columns first since this is simple and it may show that you should qualify. The accrual method requires a closer look at your books, but may be needed for those who have delayed and lumped payments (like many docs do).
Calculating the CEWS benefit.
So, you qualify for CEWS. How much do you get? The basic formula is below. Here is a link to a downloadable Excel Calculator from the CRA website. Note: it calculates the CEWS subsidy, but you still need to subtract the TWS and Workshare deduction to find the final benefit amount. You enter that information into the calculator on this CRA page to calculate the net CEWS benefit for the period. Next, you need to access the application using My Business Portal, via your accountant, or using the webform (as described earlier in this post) to enter the data and actually apply.
The CEWS subsidy for the period is the lesser of:
- 75% of remuneration in the period. For non-arms-length employees, it is 75% of the average remuneration paid between Jan 1, 2020 and March 15, 2020.
- Maximum subsidy of $847/employee/week. That corresponds to 75% a gross pay of $1129.32/week.
The TWS subsidy is subtracted.
The TWS was described earlier in the post. This would be deducted as payroll is paid out until the maximum is hit.
Using the example of 3 employees and a payroll of $16K/month for a max TWS benefit of $4125. That is $4K/week of payroll. For period 1 of CEWS (4 weeks), the physician’s corp paid $16K of payroll. It is done on a weekly basis because some practices pay by the hour and may fluctuate, but I am using a constant payroll for simplicity here. That would mean 10% of $16K for a TWS of $1600 for period 1. Same for period 2 of CEWS. For period 3 of CEWS, the TWS would only be $925 because the cap of $4125 was hit.
Workshare is deducted.
Workshare is a program to share work/wages when there is a reduction in revenue as a way to avoid lay-offs. This is a more complicated system that is more likely to be used by larger businesses. There is an application process, including submitting plans for recovery etc. Not likely used by most medical practices.
If you have an employee on leave with pay, then you can get a 100% refund of the employer CPP/EI for that employee added into the overall CEWS benefit. For Quebec, that would be QPP/EI/QPIP.
Enforcement: Stay out of trouble.
The TWS will be reconciled at tax filing. CEWS may result in queries, especially if something smells fishy. If you artificially manipulate revenues to qualify, then that will result in a 25% penalty plus the improper CEWS. Plus, there could be charges if grossly fraudulent. Part of CEWS is agreeing that the government can publish that you received it (even appropriately) at its discretion. I smell a Toronto Star article for next Doctor’s Day.
As with all of these rapidly shifting programs, consult with your accountant if you have any doubts. Not only will that help keep you on side, it also makes it easier for them to handle any issues that may come up dealing with CRA down the road.
Summary of CEWS and TWS Wage Subsidies
- There are two major wage subsidies to help Canadian small businesses.
- The TWS is 10% (max$1370/employee) for the three month period starting March 18th. You don’t need to apply, it will happen when you do your taxes. You may be able to reduce quarterly installments now though.
- The CEWS is 75% (max $847/week/employee). The accounting method used can be important. So, can the baseline period. Use the tool embedded above to see if one is better for you – you need to choose one and stick with it for all periods.
- CEWS also has an associated 100% refund of employer CCP/EI contributions for employees that are on paid leave.
- You need to apply separately for CEWS for each one month period. You may automatically qualify if you qualified in the preceding period (even if you do not in the current one) – but you still need to re-apply.
- To apply, you need to calculate your CEWS subsidy and your TWS subsidy. You then need to enter that into one of the application methods.
- The methods to apply are via My Business Account (requires a delay due to snail mail to set up), via your accountant, or by accessing the online application using your web code.
- Both the TWS and CEWS will be taxed as business income. Enjoy the money now. We will all likely be paying for all of this for a very long time.