Business
CEWS 2.0 – Why I see it as another attack on the small business owner
July 18, 2017 – The Minister of Finance announces draft legislation of the Tax on Split Income (TOSI) rule changes that would have far reaching impact into the small business community and although some changes were made, the rules have negatively impacted small businesses ever since and will continue for years to come.
Three years later, July 17, 2020 – The same Minister of Finance tables legislation of the changes to the Canada Emergency Wage Subsidy (CEWS), what I like to call CEWS 2.0 which will also continue for years to come.
Before you try to correct me and say that the subsidy is only for 2020, please read on.
While many media and politician soundbites like to give the impression of how CEWS 2.0 will help small business, I cannot help but see this as an opposite approach.
Do not get me wrong, money is money, and businesses will take all the help they can get, and if my business qualifies, I will take full advantage of it, but I personally don’t have to pay a tax specialist to figure it out.
There are two new calculations to CEWS 2.0.
- a baseline amount based on the percentage of revenue decline in the month compared to either the same month in 2019, or the January-February 2020 average revenue amount.
- a top-up amount based on the three-previous month revenue decline where it exceeds 50%.
Instead of an all or nothing at a 30% decline, even a 1% decline will get you a pro-rated payout, although the costs of figuring out your eligible amount might outweigh the benefit.
In fact, you could have an increase in revenue compared to this time last year and still get a payout. Make sense?
If the previous three months were greater than a 50% decline you qualify for the top-up amount regardless of the result for the current month.
The complexity of the CEWS design will reward those that have experts in their corner compared to those that do not.
Consider the following scenario:
A large public corporation that has employees making more than $1,129 a week will be able to not only have a simple calculation, they will not have anyone “related” to the corporation that they have to do extra baseline remuneration calculations for. Just like CEWS 1.0, in CEWS 2.0 every employee including the CEO will be subsidized in a public corporation, with no clawback mechanism (as recommended in my earlier article, the Keep it Simple S…ubsidy).
In the large public corporation, the bookkeeping, payroll, and accounting function will be up to date and (I would hope) accurate because of internal controls. They also frequently have large accounting and I.T. departments to easily calculate the eligibility and amounts for such a subsidy.
But let us compare this to a small owner-managed business like a restaurant for example. The profit margins in restaurants are already sliced thinner than the meat on a charcuterie board. Add to this the extra costs of social distancing and safety precautions, as well as the inconsistency of regulations for being closed, re-opened, and closed again as we navigate the pandemic and restaurants seem like a lost cause for a business owner.
Assuming they are able to still successfully navigate the minefield that COVID19 has placed on their livelihoods, many restaurants have dozens of part-time staff, including family members.
So right away we have a glaring difference: relatives.
The rules in CEWS 2.0 has not reduced any of the requirements for calculations to be made with respect to relatives working in the business. Relatives must have been being paid as a wage employee during one of a few optional calculation periods prior to March 15, 2020 to be eligible for any of the CEWS.
Do you remember TOSI?
TOSI basically was designed so you could only income split dividends with related persons under a complex set of strict rules. Even though restaurants are considered “food services”, the Canada Revenue Agency (CRA) and Finance have in Example 4B of their TOSI explanatory notes an example of a restaurant which would not be considered a service. In doing so, they sent the message to continue to pay yourselves in dividends if you run a family owned restaurant.
As a result, family owned restaurants continued to do just that.
Fast forward to 2020 and you now have family members working in a low margin business, with no support for their dividend remuneration under CEWS 1.0 or CEWS 2.0.
Even if the small business owner was one of the lucky fortune tellers that decided to pay themselves wages, they still have to do a baseline calculation (two different ways – weekly or bi-weekly – for each claim period) just to figure out how much they might be able to get.
Keep in mind the bi-weekly periods are the periods that were set by finance, not the period you may already be using for your payroll cutoff.
Now we have the part-time restaurant staff in my example. The family business now must calculate the average weekly earnings of each individual staff member during the claim period to figure out what the maximum amount of benefit is.
To make it better, the bookkeeping records better be pristine and accurate on a month to month basis, rather than on an annual basis like many, if not most, small businesses do.
Enter in that sale on the 1st of this month instead of the 31st of last month, and you could be looked at as “gaming the system”.
If you are a late-night pub restaurant, make sure that you are closing out the tills at 11:59pm on the 31st of the month – or your numbers would be inaccurate and you could be called a “tax cheat.”
I can’t wait for the Halloween pub crawls this year, when the weekly earnings of those late-night pub staff will have to also be cut off at midnight Saturday, October 31st. At least there will be plenty of mask wearing that night.
So, we now have increased the compliance costs for the small restaurants for monthly reporting, weekly payroll calculations, overnight cutoffs on month-ends, and special treatment for relatives of the business.
It doesn’t take a tax specialist, a cost-accounting CPA, or a PhD in mathematics to figure out that this is going to cost more per employee in overhead costs to the small family business in comparison to the large public corporation.
While I am more than happy to receive money from my clients for doing the immense research and calculations that will be required, the fact remains for the small business owner, is all of this extra work and compliance cost worth it in the end?
Sadly, you will not know if it is worth it, until after you have put in the work to calculate it.
If you happen to be one of the lucky ones that qualifies, you will then have to track the amount of CEWS you received for each employee separately.
This is because the CRA in question 29 of their Frequently Asked Questions on CEWS said that there will be a new box at the bottom of the T4 required to be filled in for the amount of CEWS received for that employee.
But what about my earlier statement that CEWS will impact businesses for years to come? With your calculation and compliance is going on until the end of February 2021 with the addition of the T4 box, does it end there?
February 2021 will just be the beginning. This will begin the audits of the CEWS claims (if they have not already started).
Since the CEWS is required to be reported on the 2020 T4 slips filed by the business in February 2021, would it be fair to say that the three-year tax compliance clock only begins at that time?
This means from now until February of 2024 you can expect to have a call from (likely the payroll audit division of) the CRA to take a look at:
- your weekly employee wage calculations;
- the monthly revenue calculations;
- the monthly cut-offs;
- the timing of your invoices;
- the CEWS amounts allocated to individual staff members; and
- the scrutiny of amounts paid to relatives;
All while you have the joy of having an internal debate with yourself on whether to pay your tax specialist to deal with them, or to try and go at it alone and confused.
July 2017 – TOSI
July 2020 – CEWS 2.0
I wonder what July 2023 will bring.
This article was originally published on July 23, 2020.
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Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr is the founder of CGL Strategic Business & Tax Advisors (CGLtax.ca). Cory is an advocate for small business in his role as Alberta Governor for the Canadian Federation of Independent Business (CFIB); converts legislation into layman terms for fun; and provides Canadian tax advisory services to other CPA firms across Canada; opinions are his own.
Biography of Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr can be found here.
From the Fraser Institute
By Grady Munro, Milagros Palacios and Jason Clemens
The sudden resignation of federal finance minister (and deputy prime minister) Chrystia Freeland, hours before the government was scheduled to release its fall economic update has thrown an already badly underperforming government into crisis. In her letter of resignation, Freeland criticized the government, and indirectly the prime minister, for “costly political gimmicks” and irresponsible handling of the country’s finances and economy during a period of great uncertainty.
But while Freeland’s criticism of recent poorly-designed federal policies is valid, her resignation, in some ways, tries to reshape her history into that of a more responsible finance minister. That is, however, ultimately an empirical question. If we contrast the performance of the last four long-serving (more than three years) federal finance ministers—Paul Martin (Liberal), Jim Flaherty (Conservative), Bill Morneau (Liberal) and Freeland (Liberal)—it’s clear that neither Freeland nor her predecessor (Morneau) were successful finance ministers in terms of imposing fiscal discipline or overseeing a strong Canadian economy.
Let’s first consider the most basic measure of economic performance, growth in per-person gross domestic product (GDP), adjusted for inflation. This is a broad measure of living standards that gauges the value of all goods and services produced in the economy adjusted for the population and inflation. The chart below shows the average annual growth in inflation-adjusted per-person GDP over the course of each finance minister’s term. (Adjustments are made to reflect the effects of temporary recessions or unique aspects of each minister’s tenure to make it easier to compare the performances of each finance minister.)
Sources: Statistics Canada Table 17-10-0005-01, Table 36-10-0222-01; 2024 Fall Economic Statement
By far Paul Martin oversaw the strongest growth in per-person GDP, with an average annual increase of 2.4 per cent. Over his entire tenure spanning a decade, living standards rose more than 25 per cent.
The average annual increase in per-person GDP under Flaherty was 0.6 per cent, although that includes the financial recession of 2008-09. If we adjust the data for the recession, average annual growth in per-person GDP was 1.4 per cent, still below Martin but more than double the rate if the effects of the recession are included.
During Bill Morneau’s term, average annual growth in per-person GDP was -0.5 per cent, although this includes the effects of the COVID recession. If we adjust to exclude 2020, Morneau averaged a 0.7 per cent annual increase—half the adjusted average annual growth rate under Flaherty.
Finally, Chrystia Freeland averaged annual growth in per-person GDP of -0.3 per cent during her tenure. And while the first 18 or so months of her time as finance minister, from the summer of 2020 through 2021, were affected by the COVID recession and the subsequent rebound, the average annual rate of per-person GDP growth was -0.2 per cent during her final three years. Consequently, at the time of her resignation from cabinet in 2024, Canadian living standards are projected to be 1.8 per cent lower than they were in 2019.
Let’s now consider some basic fiscal measures.
Martin is by far the strongest performing finance minister across almost every metric. Faced with a looming fiscal crisis brought about by decades of deficits and debt accumulation, he reduced spending both in nominal terms and as a share of the economy. For example, after adjusting for inflation, per-person spending on federal programs dropped by 5.9 per cent during his tenure as finance minister (see chart below). As a result, the federal government balanced the budget and lowered the national debt, ultimately freeing up resources via lower interest costs for personal and business tax relief that made the country more competitive and improved incentives for entrepreneurs, businessowners, investors and workers.
*Note: Freeland’s term began in 2020, but given the influence of COVID, 2019 is utilized as the baseline for the overall change in spending. Sources: Statistics Canada Table 17-10-0005-01, Table 36-10-0130-01; Fiscal Reference Tables 2024; 2024 Fall Economic Statement
Flaherty’s record as finance minister is mixed, in part due to the recession of 2008-09. Per-person program spending (inflation adjusted) increased by 11.6 per cent, and there was a slight (0.6 percentage point) increase in spending as a share of the economy. Debt also increased as a share of the economy, although again, much of the borrowing during Flaherty’s tenure was linked with the 2008-09 recession. Flaherty did implement tax relief, including extending the business income tax cuts started under Martin, which made Canada more competitive in attracting investment and fostering entrepreneurship.
Both Morneau and Freeland recorded much worse financial performances than Flaherty and Martin. Morneau increased per-person spending on programs (inflation adjusted) by 37.1 per cent after removing 2020 COVID-related expenditures. Even if a more generous assessment is used, specifically comparing spending in 2019 (prior to the effects of the pandemic and recession) per-person spending still increased by 18.1 per cent compared to the beginning of his tenure.
In his five years, Morneau oversaw an increase in total federal debt of more than $575 billion, some of which was linked with COVID spending in 2020. However, as multiple analyses have concluded, the Trudeau government spent more and accumulated more debt during COVID than most comparable industrialized countries, with little or nothing to show for it in terms of economic growth or better health performance. Simply put, had Morneau exercised more restraint, Canada would have accumulated less debt and likely performed better economically.
Freeland’s tenure as finance minister is the shortest of the four ministers examined. It’s nonetheless equally as unimpressive as that of her Trudeau government predecessor (Morneau). If we use baseline spending from 2019 to adjust for the spike in spending in 2020 when she was appointed finance minister, per-person spending on programs by the federal government (inflation adjusted) during Freeland’s term increased by 4.1 per cent. Total federal debt is expected to increase from $1.68 trillion when Freeland took over to an estimated $2.2 trillion this year, despite the absence of a recession or any other event that would impair federal finances since the end of COVID in 2021. For some perspective, the $470.8 billion in debt accumulated under Freeland is more than double the $220.3 billion accumulated under Morneau prior to COVID. And there’s an immediate cost to that debt in the form of $53.7 billion in expected federal debt interest costs this year. These are taxpayer resources unavailable for actual services such as health care.
Freeland’s resignation from cabinet sent shock waves throughout the country, perhaps relieving her of responsibility for the Trudeau government’s latest poorly-designed fiscal policies. However, cabinet ministers bear responsibility for the performance of their ministries—meaning Freeland must be held accountable for her previous budgets and the fiscal and economic performance of the government during her tenure. Compared to previous long-serving finances ministers, it’s clear that Chrystia Freeland, and her Trudeau predecessor Bill Morneau, failed to shepherd a strong economy or maintain responsible and prudent finances.
Legislators had 24 hours to read through 1,547 pages. Ramaswamy read them. Musk presented an alternative. The process collapsed.
Elon Musk and Vivek Ramaswamy are flexing their muscles even before President Elect Donald Trump’s inauguration, spiking a bipartisan spending bill. The bill was introduced on Tuesday with voting scheduled for Wednesday. Legislators were under massive pressure to approve of the spending bill or risk a government shut down. Problem is, the bill was over 1,500 pages long!
Chances are, the bill would have passed and in the ensuing weeks as details became known the public would have been outraged by all the extra plans to spend / waste taxpayer dollars. Legislators would have apologized by saying they simply had no time to read everything and they were desperate to avoid a shut down.
That’s where the new DOGE comes in. First Ramaswamy somehow read the bill and posted a video to TikTok and X to inform voters what they were going to be paying for in this new bill.
@vivekramaswamy Congress wants to waste your money without telling you, make sure that doesn’t happen
From MXMNews
The newly formed Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, successfully campaigned to halt the bipartisan continuing resolution (CR) in Congress. Musk and Ramaswamy took to X, rallying conservatives against the 1,547-page stopgap funding measure they argue is riddled with wasteful spending and unnecessary policy provisions.
Musk, a billionaire entrepreneur and vocal advocate for government reform, characterized the bill as a “pork-barrel” monstrosity. “Unless @DOGE ends the careers of deceitful, pork-barrel politicians, the waste and corruption will never stop,” Musk posted on X, adding that lawmakers who support the bill should be “voted out in two years.”
Meanwhile, Ramaswamy, a former Republican presidential candidate and DOGE co-chair, proposed an alternative to the bulky spending bill. Sharing a draft of his one-page resolution, he described it as a minimalist approach that avoids exacerbating historical spending excesses. “This is what a clean CR looks like,” he wrote, emphasizing the need for fiscal restraint.
Musk and Ramaswamy posted this to X.
Shorter = better. This bill is only 116 pages, instead of 1,500+ pages. Took a LOT less time to read. Glad to see the following garbage from yesterday’s bill removed in the current version: – Congressional pay raise/health benefits – 17 miscellaneous commerce bills – Random new pandemic policies, like funding for “biocontainment research laboratories” – Renewal of the “Global Engagement Center,” a key player in the federal censorship state
In record time, the public was informed, politicians were influenced by outraged taxpayers, and politicians blamed each other for a faulty bill and were forced to go back to the drawing board.
It’s all explained very well in this video presentation from Kaizen Asiedu, a Harvard graduate in philosophy who makes videos informing Americans about complicated political matters.
Friday’s deadline to avoid a government shutdown looms. Musk posted on X that a shutdown would be “infinitely better than passing a horrible bill.” His DOGE partner Vivek Ramaswamy urged Americans to contact their representatives to “stop the steal of your tax dollars.”
And President-elect Donald Trump posted this: “If Democrats threaten to shut down the government unless we give them everything they want, then CALL THEIR BLUFF,”.
Should the spending bill fail, it will mark a significant victory for DOGE and a potential turning point in efforts to reform Washington’s spending habits.
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