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.
PBO slices through Carney’s creative accounting
The Canadian Taxpayers Federation is calling on Prime Minister Mark Carney to cut spending following today’s bombshell Parliamentary Budget Officer report that criticizes the government’s definition of capital spending and promise to balance the operating budget.
“The reality is that Carney is continuing on a course of unaffordable borrowing and the PBO report shows government messaging about ‘balancing the operating budget’ is not credible,” said Franco Terrazzano, CTF Federal Director. “Carney is using creative accounting to hide the spiralling debt.”
Carney’s Budget 2025 splits the budget into operating and capital spending and promises to balance the operating budget by 2028-29.
However, today’s PBO budget report states that Carney’s definition of capital spending is “overly expansive.” Without using that “overly expansive” definition of capital spending, the government would run an $18 billion operating deficit in 2028-29, according to the PBO.
“Based on our definition, capital investments would total $217.3 billion over 2024-25 to 2029-30, which is approximately 30 per cent ($94 billion) lower compared to Budget 2025,” according to the PBO. “Moreover, based on our definition, the operating balance in Budget 2025 would remain in a deficit position over 2024-25 to 2029-30.”
The PBO states that the Carney government is using “a definition of capital investment that expands beyond the current treatment in the Public Accounts and international practice.” The report specifically points out that “by including corporate income tax expenditures, investment tax credits and operating (production) subsidies, the framework blends policy measures with capital formation.”
The federal government plans to borrow about $80 billion this year, according to Budget 2025. Carney has no plan stop borrowing money and balance the budget. Debt interest charges will cost taxpayers $55.6 billion this year, which is more than the federal government will send to the provinces in health transfers ($54.7 billion) or collect through the GST ($54.4 billion).
“Carney isn’t balancing anything when he borrows tens of billions of dollars every year,” Terrazzano said. “Instead of applying creative accounting to the budget numbers, Carney needs to cut spending and debt.”
From the Fraser Institute
By Tegan Hill and Grady Munro
Following the recent release of the Carney government’s first budget, Fitch Ratings (one of the big three global credit rating agencies) issued a warning that the “persistent fiscal expansion” outlined in the budget—characterized by high levels of spending, borrowing and debt accumulation—will erode the health of Canada’s finances and could lead to a downgrade in Canada’s credit rating.
Here’s why this matters. Canada’s credit rating impacts the federal government’s cost of borrowing money. If the government’s rating gets downgraded—meaning Canadian federal debt is viewed as an increasingly risky investment due to fiscal mismanagement—it will likely become more expensive for the government to borrow money, which ultimately costs taxpayers.
The cost of borrowing (i.e. the interest paid on government debt) is a significant part of the overall budget. This year, the federal government will spend a projected $55.6 billion on debt interest, which is more than one in every 10 dollars of federal revenue, and more than the government will spend on health-care transfers to the provinces. By 2029/30, interest costs will rise to a projected $76.1 billion or more than one in every eight dollars of revenue. That’s taxpayer money unavailable for programs and services.
Again, if Canada’s credit rating gets downgraded, these costs will grow even larger.
To maintain a good credit rating, the government must prevent the deterioration of its finances. To do this, governments establish and follow “fiscal anchors,” which are fiscal guardrails meant to guide decisions regarding spending, taxes and borrowing.
Effective fiscal anchors ensure governments manage their finances so the debt burden remains sustainable for future generations. Anchors should be easily understood and broadly applied so that government cannot get creative with its accounting to only technically abide by the rule, but still give the government the flexibility to respond to changing circumstances. For example, a commonly-used rule by many countries (including Canada in the past) is a ceiling/target for debt as a share of the economy.
The Carney government’s budget establishes two new fiscal anchors: balancing the federal operating budget (which includes spending on day-to-day operations such as government employee compensation) by 2028/29, and maintaining a declining deficit-to-GDP ratio over the years to come, which means gradually reducing the size of the deficit relative to the economy. Unfortunately, these anchors will fail to keep federal finances from deteriorating.
For instance, the government’s plan to balance the “operating budget” is an example of creative accounting that won’t stop the government from borrowing money each year. Simply put, the government plans to split spending into two categories: “operating spending” and “capital investment” —which includes any spending or tax expenditures (e.g. credits and deductions) that relates to the production of an asset (e.g. machinery and equipment)—and will only balance operating spending against revenues. As a result, when the government balances its operating budget in 2028/29, it will still incur a projected deficit of $57.9 billion when spending on capital is included.
Similarly, the government’s plan to reduce the size of the annual deficit relative to the economy each year does little to prevent debt accumulation. This year’s deficit is expected to equal 2.5 per cent of the overall economy—which, since 2000, is the largest deficit (as a share of the economy) outside of those run during the 2008/09 financial crisis and the pandemic. By measuring its progress off of this inflated baseline, the government will technically abide by its anchor even as it runs relatively large deficits each and every year.
Moreover, according to the budget, total federal debt will grow faster than the economy, rising from a projected 73.9 per cent of GDP in 2025/26 to 79.0 per cent by 2029/30, reaching a staggering $2.9 trillion that year. Simply put, even the government’s own fiscal plan shows that its fiscal anchors are unable to prevent an unsustainable rise in government debt. And that’s assuming the government can even stick to these anchors—which, according to a new report by the Parliamentary Budget Officer, is highly unlikely.
Unfortunately, a federal government that can’t stick to its own fiscal anchors is nothing new. The Trudeau government made a habit of abandoning its fiscal anchors whenever the going got tough. Indeed, Fitch Ratings highlighted this poor track record as yet another reason to expect federal finances to continue deteriorating, and why a credit downgrade may be on the horizon. Again, should that happen, Canadian taxpayers will pay the price.
Much is riding on the Carney government’s ability to restore Canada’s credibility as a responsible fiscal manager. To do this, it must implement stronger fiscal rules than those presented in the budget, and remain accountable to those rules even when it’s challenging.
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