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Introduction – The Canada Emergency Wage Subsidy
Many Canadian businesses have been impacted by the ongoing
COVID-19 pandemic. While many businesses are experiencing financial
hardship, some of them are unable to pay their employee’s
wages. In response, the Government of Canada introduced the Canada
Emergency Wage Subsidy (CEWS) in April 2020. The CEWS subsidies a
portion of an employee’s wages for eligible employers. The
purpose of the CEWS is to (1) allow employers to maintain their
employees on the payroll during the pandemic; (2) prevent job loss
and layoffs; and (3) create new employment opportunities.
Effective April 11, 2020, Canada’s Income Tax Act was
amended to introduce the CEWS. The CEWS rules apply by
“deeming qualified entities to have overpaid tax and then
giving the Minister discretion to refund them (all or part of) the
deemed amount.” To be a qualifying entity under subsection
125.7(1) of the Income Tax Act, a Canadian employer must have
experienced a reduction in revenues from the average of its
revenues in January and February 2020 or from revenues for the same
month in the prior calendar year. The deemed overpayment amount is
determined using the formula set out in subsection 125.7(2) of the
Income Tax Act. Subsection 152.7(3.4) of the Income Tax Act grants
the Minister power to, at any time, determine the amount deemed by
subsection 125.7(2) of the Act to constitute an overpayment and
issue a notice of determination to the employer. Further,
subsection 164(1.6) of the Income Tax Act grants the Minister the
discretion to refund all or part of the deemed overpayment.
In Iris Technologies Inc. v. R the Federal Court
dismissed the Canadian tax litigation lawyer for the Minister of
National Revenue’s (the “CRA”) motion to set aside a
decision of Prothonotary Kevin Aalto (the
“Prothonotary”), who dismissed the Minster’s motion
to strike the taxpayer’s, Iris Technologies Inc.,
application for judicial review of the June 19, 2020 decision,
wherein CRA denied Iris’ claims for the CEWS for Periods 1 and
2, and a July 10, 2020 decision, wherein CRA denied Iris’ claim
for the CEWS for Period 3. This decision sheds light on the CEWS
measures incorporated into the Income Tax Act and the CRA’s
discretionary power and limits under these measures. This article
provides tax guidance related to the CEWS rules under the Income
Tax Act and the Canada Revenue Agency’s (CRA) tax audit of CEWS
claims.
The CEWS Eligibility Criteria
Employers that have experienced a decline in revenue due to the
COVID-19 pandemic may be eligible for the CEWS to cover a portion
of their employee wages, retroactive to March 15, 2020. To be
eligible to receive the CEWS, applicants must meet the following
criteria:
- Have a CRA payroll account on March 15, 2020:
- Applicants who did not have a CRA payroll account on March 15,
2020 may still qualify for the CEWS if: - Another person or partnership made remittances on their behalf;
or, - They purchased all (or almost all) of another person’s or
partnership’s business assets.
- Another person or partnership made remittances on their behalf;
- Applicants who did not have a CRA payroll account on March 15,
- Be one of the following types of employers:
- Individuals
- Corporations or Persons (that are not exempt from Part I of the
Income Tax Act) - Registered charities
- Partnerships consisting of eligible employers
- Specific private organizations
- Have experienced a drop in revenue.
The CEWS Application Process
There are three ways to apply for the CEWS online:
- My Business Account
- Represent a Client
- The CEWS Web Forms application
Applicants must submit a separate application for each CEWS
claim for which they are eligible to apply, and for each payroll
account they have with the CRA. Generally, CEWS applicants who are
registered for direct deposit through their payroll account with
the CRA receive the payment within 3 to 8 business days. However,
in certain circumstances, CEWS payments may be delayed if
additional review (of a CEWS claim) is required or if the CEWS is
paid by cheque. It should be noted that only business
representatives authorized at level 2 or 3 will be able to apply
online under the Represent a Client option.
The CEWS Claim Period
The time frame for each CEWS claim is 4 weeks, beginning on a
Sunday. Applicants must confirm their eligibility according to the
specific period for which they are applying. The CEWS was
introduced in April 2020 with the following claim period:
- Period 1: March 14 to April 11, 2020
- Period 2: April 12 to May 9, 2020
- Period 3: May 10 to June 6, 2020
- Period 4: June 7 to July 4, 2020
- Period 5: July 5 to August 1, 2020
- Period 6: August 2 to August 29, 2020
- Period 7: August 30 to September 26, 2020
Subsequently, the Government of Canada announced its plan to
extend the CEWS, as part of its measures to create new jobs and
restore employment levels to pre-pandemic. Consequently, the
following claim periods were introduced:
- Period 8: September 27 to October 24, 2020
- Period 9: October 25 to November 21, 2020
- Period 10: November 22 to December 19, 2020
- Period 11: December 20, 2020 to January 16, 2021
- Period 12: January 17 to February 13, 2021
- Period 13: February 14 to March 13, 2021
- Period 14: March 14 to April 10, 2021
- Period 15: April 11 to May 8, 2021
- Period 16: May 9 to June 5, 2021
- Period 17: June 6 to July 3, 2021
- Period 18: July 4 to July 31, 2021
- Period 19: August 1 to August 28, 2021
- Period 20: August 29 to September 25, 2021
Iris Technologies Inc. v the Minister
Facts
Iris Technologies Inc. (Iris) is a Canadian corporation that
provides telecommunications services to Canadians and abroad. Iris
filed applications for the CEWS for periods 1 through 3. Iris
reported that its revenues declined in all three periods by 95.92%,
88.57% and 97.08%, respectively, compared to its average revenue
earned in January and February of 2020 and “more than the
requisite threshold reduction for the same months in
2019”.
Backgrounds
On August 28, 2020, the Canadian tax litigation lawyer for Iris
filed a Notice of Application (Application) for judicial review,
pursuant to sections 18 and 18.1 of the Federal Courts
Act. Specifically, Iris’s Application for judicial review
was of the June 19, 2020 decision, wherein CRA denied Iris’
claims for the CEWS for Periods 1 and 2, and a July 10, 2020
decision, wherein CRA denied Iris’ claim for the CEWS for
Period 3. On October 2, 2020, the Canadian tax litigation lawyer
for the CRA brought a motion seeking to strike Iris’
Application, without leave to amend. CRA’s motion relied on the
affidavit of Marie Lusson (the “Lusson Affidavit”)
wherein the CRA determined that Iris’ entitlement to the CEWS
for Periods 1 through 3 was $0. However, on March 5, 2021, the
Prothonotary dismissed CRA’s motion to strike out Iris’s
judicial review Application. Subsequently, the Canadian tax
litigation lawyer for the CRA filed a motion, on behalf of the CRA,
for an order, pursuant to Rule 51 of the Federal Courts
Rules, seeking to appeal and set aside the Prothonotary’s
March 5, 2021 decision.
Issues
The issues before the Federal Court are as follows: (a) whether
the Prothonotary erred in refusing to admit the Lusson Affidavit;
and (2) whether the Prothonotary erred in refusing to strike out
Iris’ Application for judicial review.
Analysis
The Federal Court held that the “Prothonotary’s
conclusions of law are reviewable on a standard of correctness, and
his findings of fact or mixed fact and law are reviewable on the
standard of palpable and overriding error.”
With respect to the admissibility of the Lusson Affidavit, the
Federal Court confirmed that subsection 244(9) of the Income Tax
Act “requires that the affiant “has charge” of the
appropriate records” and that the Lusson Affidavit
“contained no express statement to that effect.” The
Federal Court explained that Prothonotary’s decision not to
admit the Lusson Affidavit into evidence was because it failed to
establish that Ms. Lusson had insufficient “knowledge of the
document to support its introduction into evidence.” In
addition, the Federal Court held that once the requirements of
subsection 244(9) are met, the document in question “is
admissible into evidence to establish its nature and
contents”. Further, subsection 244(13) of the Income Tax Act
may subsequently provide “additional useful purposes
surrounding the evidentiary value of the documents.” The
Federal Court therefore found “no palpable and overriding
error” in the Prothonotary’s decision to decline to admit
the Lusson Affidavit into evidence.
With respect to striking Iris’ application for judicial
review, the Federal Court structured its reasons into the following
four parts: (1) essential nature of the application; (2) CRA’s
discretionary power; (3) adequate alternative remedy; and (4)
mootness.
The Federal Court agreed with CRA’s position that the
Prothonotary’s analysis in context of the essential nature of
the application is “reviewable on a standard of
correctness.” Upon reading Iris’ Application holistically,
the Federal Court explained that the Application “is pleading
a sequence of events in support of an assertion that CRA has failed
to pay such benefits for improper reasons.” In addition, the
Federal Court accepted Iris’ “assertions surrounding the
decline in its revenues and its resulting entitlement to CEWS
benefits”. The Federal Court also upheld the
Prothonotary’s position that Iris’ Application pertains to
the Minster’s conduct “in exercising the discretion
granted under the COVID-19 measures incorporated into the ITA,
which conduct Iris asserts to be procedurally unfair and an abuse
of process”. Further, the Federal Court upheld the
Prothonotary’s conclusion that Iris’ Application is indeed
within the Federal Court’s administrative law
jurisdiction”.
With respect to the Minister’s discretionary power under the
Income Tax Act, the Federal Court rejected CRA’s position that
the Prothonotary has “overstated the scope of the CRA’s
discretion” under the Act and has “erroneously found that
the application engages a discretionary power on the part of the
Minister.” The Federal Court found “no palpable and
overriding error” in the Prothonotary’s analysis relating
to the Minister’s discretionary power.
In context of adequate remedy, the Federal Court rejected
CRA’s submissions relating to the effect of the jurisdictional
provision in subsection 18.4 of the Federal Court Act and that the
Prothonotary “erred in failing to strike the
application.” The Federal Court, however, agreed with
Iris’ position that is “consistent with the statutory
purpose of the CEWS program, which is to enable Canadian employers
to retain employees while coping with the commercial impacts of the
COVID-19 pandemic.” In context of adequate remedy, the Federal
Court found “no palpable and overriding error on the part of
the Prothonotary.”
With respect to mootness, the Federal Court held that since
there was no error in the Prothonotary’s decision to refuse to
admit the Lusson Affidavit, there is “no evidentiary
foundation for the mootness argument.” Therefore, the Federal
Court found “no palpable and overriding error” in context
of mootness.
Federal Court Decision
CRA’s position for an order pursuant to Rule 51 of the
Federal Courts Rules is dismissed.
The Benefits & Concerns Associated with the CEWS
There are ongoing concerns regarding CRA’s audit of CEWS
claims and potential repayment. CEWS recipients may have to repay
the CEWS if they (i) amend or cancel an application (ii) made a
calculation error in their application (iii) receive a notice from
the CRA indicating that following a review of their CEWS, their
claim has been reduced or denied. Excess CEWS amount received that
is not returned to the CRA may be subject to interest. Potential
penalties and imprisonment may also apply in circumstances of
fraudulent CEWS claims. Further, CEWS recipients who reduce their
revenue for the purpose of claiming the CEWS will be required to
repay the wage subsidy amount in full, plus a penalty equal to 25%
of the total value. Moreover, Iris Technologies Inc. v. R
exemplifies how CEWS recipients could potential incur unnecessary
legal fees as a result of CRA tax audit into their CEWS claims.
Given the ongoing concerns associated with the CEWS, businesses
and organizations should bear in mind that any CRA tax audit, including an audit into a CEWS
application, can result in the CRA requesting access to details,
including corporate and financial records, that may not be relevant
to the CEWS claim as part of a broader tax audit. As such, CEWS
applicants should review the relevant eligibility criteria, posted
on CRA’s website, prior to submitting their claim. Applicants
who notice an error in their CEWS application or in any payment
received should contact the CRA immediately to address the error
and to confirm their eligibility or consult with an expert Canadian
tax lawyer.
Pro Tax Tips – Tax Guidance and CEWS Tax Audit
CEWS recipients who are subsequently found to be ineligible for
the wage subsidy can face tax audit and will have to repay the
amounts with interest and penalties. If you have questions
concerning CRA’s CEWS tax audit, or if you received a letter
from the CRA pertaining to a CEWS audit or the repayment of the
CEWS and you would like to dispute the CRA’s decision please contact
our tax law office for tax guidance from one of our top Canadian
tax lawyers.
FAQ
Which employers can apply for the CEWS?
Employers that have experienced a decline in revenue due to the
COVID-19 pandemic may be eligible for the CEWS to cover a portion
of their employee wages, retroactive to March 15, 2020. To be
eligible to receive the CEWS, applicants must meet the following
criteria: (1) have a CRA payroll account on March 15, 2020; (2)
Have experienced a drop in revenue; and (3) be one of the following
types of employers: (i) individuals; (ii) corporations or persons
(that are not exempt from Part I of the Income Tax Act); (iii)
registered charities; (iv) partnerships consisting of eligible
employers; or (v) specific private organizations.
What potential tax consequences may arise if the CRA
audits a CEWS application?
Any CRA tax audit, including an audit into a CEWS application,
can result in the CRA requesting access to details, including
corporate and financial records, that may not be relevant to the
CEWS claim as part of a broader tax audit. In addition, CEWS
recipients who are subsequently found to be ineligible for the wage
subsidy can face tax audit and will have to repay the amounts with
interest and penalties. If you received a notice from the CRA
relating to any CRA tax audit, including an audit into a CEWS
application, please contact our tax law office for tax guidance
from one of our top Canadian tax lawyers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.