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.
Once upon a time, Canadians were known for our prudence and good sense to such an extent that even our Liberal Party wore the mantle of fiscal responsibility.
Whatever else you might want to say about the party in the era of Jean Chrétien and Paul Martin, it recognized the country’s dire financial situation — back when The Wall Street Journal was referring to Canada as “an honorary member of the Third World” — as a national crisis.
And we (remember, I proudly served as Member of Parliament in that party for 18 years) made many hard decisions with an eye towards cutting spending, paying down the debt, and getting the country back on its feet.
Thankfully we succeeded.
Unfortunately, since then the party has been hijacked by a group of reckless leftwing fanatics — Justin Trudeau and his lackeys — who have spent the past several years feeding what we built into the woodchipper.
Mark Carney’s finally released budget is the perfect illustration of that.
The budget is a 400 page monument to deficit delusion that raises spending to $644.4 billion over five years — including $141.4 billion in new spending — while revenues limp to $583.3 billion, yielding a record (non-pandemic) $78.3 billion shortfall, an increase of 116% from last year.
This isn’t policy; it’s plunder. Interest payments alone devour $55.6 billion this year, projected to hit $76.1 billion by 2029-30 — more than the entire defence budget and rising faster than healthcare transfers.
We can’t discount the possibility that this will lead to a downgrade of our credit rating, which will significantly increase the cost of borrowing and of doing business more generally.
Numbers this big start to feel very abstract. But think of it this way: that is your money they’re spending. Ottawa’s wealth is made up entirely of our tax dollars. We’ve entrusted that money to them with the understanding that they will use it responsibly. In the decade these Liberals have been in power, they have betrayed that trust.
They’ve pursued policies which have made life in Canada increasingly unaffordable. For example, at the time of writing it takes 141 Canadian pennies (up from 139 a few days ago) to buy one U.S. dollar, in which all of our commodities are priced. Well, that’s .25 cents per litre of gasoline. Imagine what that’s going to do to the price of heating, of groceries, of the various other commodities which we consume.
And this budget demonstrates that the Carney era will be more of the same.
Of course, the Elbows Up crowd are saying the opposite — that this shows how fiscally responsible Mark Carney is, unlike his predecessor. (Never mind that they also publicly supported everything that Trudeau did when he was in government.) They claim that Carney shows that he’s more open to oil and gas than Trudeau was.
Don’t believe it.
The oil and gas sector does get a half-hearted nod in the budget with, for instance, a conditional pathway to repeal the emissions cap. But those conditions are important. Repeal is tied to the effectiveness of Carney’s beloved industrial carbon tax. If that newly super-charged carbon tax, which continues to make our lives more expensive, leads to government-set emissions reductions benchmarks being met, then Ottawa might — might — scrap the emissions.
Meanwhile, the budget doubles down on the Trudeau government’s methane emissions regulations. It merely loosens the provisions of the outrageous Bill C-59, an act which should have been scrapped in its entirety. And it leaves in place the Trudeaupian “green” super structure, which has resource sector investment, and any business that can manage it, fleeing to the U.S.
In these perilous times, with Canada teetering on the brink of recession, a responsible government would be cutting spending and getting out of the way of our most productive sectors, especially oil and gas — the backbone of our economy.
It would be repealing the BC tanker ban and Bill C-69, the “no more pipelines act,” so that our natural resources could better generate revenue on the international market and bring down energy rates at home.
It would quit wasting millions on Electric Vehicle charging stations; mandating that all Canadians buy EVs, even with their elevated cost; and pressuring automakers to manufacture Electric Vehicles, regardless of demand, and even as they keep closing up shop and heading south.
But in this budget the Liberals are going the opposite direction. Spend more. Tax more. Leave the basic Net-Zero framework in place. Rearrange the deck chairs on the Titanic.
They’re gambling tomorrow’s prosperity on yesterday’s green dogma, And every grocery run, every gas fill-up, every mortgage payment will serve as a daily reminder that we are the ones footing the bill.
Once upon a time, the Liberals knew better. We made the hard decisions and got the country back on its feet. Nowadays, not so much.
If you only listened to the mainstream media, you would think Justin Trudeau’s carbon tax is long gone. But the Liberal government’s latest budget actually doubled down on the industrial carbon tax.
While the consumer carbon tax may be paused, the industrial carbon tax punishes industry for “emitting” pollution. It’s only a matter of time before companies either pass the cost of the carbon tax to consumers or move to a country without a carbon tax.
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