CEWS Users: Planning for Additional CRA Compliance Obligations
During the summer of 2020, the Canada Revenue Agency (“CRA”) announced it would be allocating significant resources to audit employers in receipt of Canada Emergency Wage Subsidy program (“CEWS”).
The CRA is now following up on that promise, making it crystal clear that they are taking enforcement seriously, despite businesses’ requests to postpone audits until after the pandemic.
Beyond the prospect of audits, employers will be facing enhanced employee income reporting obligations for 2020 and higher payroll and CPP rates and caps in 2021.
1. CEWS obligations
CEWS is a wage subsidy developed in response to the economic hardship caused by the COVID-19 pandemic. While it was not a perfect solution and aided some businesses more than others, the tax plan kept some businesses afloat, prevented layoffs, and encouraged re-hiring of employees who had previously been laid off. In her October blog, Patrizia Piccolo discusses the most recent updates to the program.
How is compliance being ensured?
In order to determine whether or not there has been a subsidy overpayment, the CRA is using a combination of automated queries, follow-up phone calls, and more comprehensive post-payment audits.
Hold onto your paperwork
Consistent with your general tax obligations, creating and maintaining adequate records is crucial to the preparation for a CEWS audit. Inaccurate or incomplete applications may lead to repayments, interest, and penalties. Employers should ensure that they have clear documentation that supports their eligibility for the CEWS during the applicable claim periods.
At a minimum, the following information should be created contemporaneously and kept readily available to ensure a smooth audit process:
Employee time sheets showing hours worked;
Payroll information by employee for each claim period;
Records indicating what types of pay employees received;
Payroll information demonstrating previous pay received by employees;
Bank statements;
2019 and 2020 revenue details, including calculation spreadsheets and description/breakdown of qualifying revenues;
Any documentation reflecting information relating to other subsidies received that may impact a CEWS claim (i.e. the 10% Temporary Wage Subsidy); and
A signed copy of the Attestation that was filed with the CEWS.
Penalties and non-compliance
If an audit leads to a finding that a CEWS claim was not valid, the CRA may impose penalties. Due to a specific anti-avoidance rule, employers who have participated in a scheme aimed at effectively reducing their qualifying revenue for a claim period will not be eligible to claim that wage subsidy. Where this anti-avoidance rule applies, employers will not only have to repay any subsidies it received, they will also be liable to pay a penalty equal to 25% of the amount of wage subsidy that was claimed in the application.
In the event that an employer knowingly made false statements or deliberately omitted relevant information in its wage subsidy application amounting to gross negligence, they will be liable to a penalty of up to 50% of the difference between the amount of wage subsidy that it claimed in its application and the amount of wage subsidy to which it is actually entitled.
2. T4s and new information codes
In addition to the audits, employers will also have to include additional information on employees’ T4s, as part of the CRA’s strategy to verify the legitimacy of the CEWS, CERB, and CESB claims. The CRA has also introduced new information codes to be used by employers when reporting employment income, as well as retroactive payments to employees. These codes align with the applicable claim periods:
Code 57: Employment income – March 15 to May 9
Code 58: Employment income – May 10 to July 4
Code 59: Employment income – July 5 to August 29
Code 60: Employment income- August 30 to September 26
3. Increased payroll taxes and CPP rates
Despite COVID-19, the planned annual increases to payroll taxes and CPP contribution rates and income cap will proceed.
According to the Globe & Mail:
[t]he legislated annual increases, announced by the Canada Revenue Agency on [November 2], mean that the maximum amount that an employer or employee could pay will soar by 9.3 per cent in 2021. That represents the largest percentage increase since 2003, the tail end of the period when CPP contributions were being rapidly increased to close a severe funding deficit that threatened the long-term viability of the plan.
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Piccolo Heath LLP continues to monitor developments surrounding the wage subsidy program and will provide updates as information becomes available. The program’s rules have changed a number of times over the past months and interpretation is not readily available. Whether currently under audit or not, we urge employers to seek legal and accounting advice if there is any uncertainty surrounding CEWS claims.
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By Sabrina Morcos & Jennifer Heath
