CEWS – Income Inclusions & Audits
January 25, 2021 marked the one-year anniversary of the first confirmed COVID-19 case in Canada and March 15, 2021 will mark the one-year anniversary of the start of the first Canada Emergency Wage Subsidy (“CEWS)” qualifying period. The government of Canada introduced CEWS as part of its COVID-19 Economic Response Plan in an attempt to prevent further job losses stemming from the pandemic. CEWS was implemented through amendments to the Income Tax Act (Canada) (the “ITA”) which essentially deem the CEWS amount for each qualifying period to be an overpayment of the qualified employer’s tax liability under Part I of the ITA resulting in a “refund” to the qualified employer for each qualifying period.
At the core of the CEWS program was the federal government’s desire to encourage employers, who had encountered decreased revenues as a result of COVID-19, to retain or re-hire their employees during the pandemic. Most practitioners are now abundantly familiar with the mechanics of CEWS so, instead of repeating what most advisors already know and what is already available in numerous resources, this article highlights a few of the more recent CEWS topics that advisors are now dealing with.
Income Inclusion
Subsection 125.7(3) of the ITA requires CEWS to be included in income “immediately before the end of the qualifying period to which it relates”. Consequently, it is not when the subsidy is received that matters but the end date of the qualifying period to which the subsidy relates.
Advisors should be alert to situations where employers are delayed in applying for CEWS. Where an employer filed its tax return before applying for CEWS with respect to a qualifying period that fell within the employer’s taxation year, the CRA has advised that the employer will need to amend the employer’s income tax return to include the amount of CEWS received for a qualifying period that falls within their filed tax return.
Another potential hiccup to watch for when reporting CEWS is the difference between accounting and taxable income stemming from the misalignment of the qualifying periods and calendar months.
Audits
Given the amount of money that the federal government has paid out under the CEWS program, it is no surprise that the CRA is now extending considerable resources to ensure that those who have received CEWS were entitled to it. The CRA has been honing their audit review process over the past few months and has commenced post-payment audits of taxpayers who have received CEWS.
An extensive template audit letter started making the rounds in the media and amongst practitioners in the Fall of 2020. It only took a quick scan of the letter to raise immediate concerns about a large amount of information and supporting documentation being requested by the CRA on an expedited basis. However, some relief was provided in the CRA’s comments in the October 26, 2020 CPA Canada – CRA Webinar on CEWS and more wherein the CRA representative stated that the letter making circulation was only a template with a list of documents that could be required but not that would be required in every information request. It was also noted that the issue has been addressed with auditors and that the level of the information request will be dependent on the type of claimant and the complexity of the CEWS claim. If you, or one of your clients, receive the nine-page exhaustive template, consider calling the assigned auditor or team leader to gain further clarity as to what information and supporting documents are being requested.
So, what can we expect to see from the CRA’s dedicated CEWS audit program? Phase one will examine qualifying periods one through six, cover all regions of Canada and will review all categories of taxpayers including corporations, individuals, partnerships and charities. There will be a random element to the selection process as well as the use of algorithms to identify claimants that may be at a high risk of non-compliance. Areas of interest for the CRA will include employer eligibility, eligible remuneration, confirming the qualifying revenue drop and ensuring that eligible employees are employees and not contractors. It is expected that this dedicated audit program will cease in 2022 or 2023 and that CEWS audits will then be part of the normal tax audit program.
Recommendation: advisors should encourage clients to prepare for an audit by having the appropriate corporate records and documents assembled and ready to go. In preparation for these audits, advisors may also find themselves in the position of needing to have difficult conversations with clients around ineligibility and the anti-avoidance rule. Potential consequences of an audit that finds errors or ineligibility include, but are not limited to, repayment of all or a portion of the subsidy with interest and penalties (both monetary and criminal for false statements) and director liability.