Canada’s Efforts to Blunt the Economic Impact of the COVID-19 Pandemic

The COVID-19 pandemic is having unprecedented effects worldwide. In Canada, the number of confirmed cases has risen sharply over the past few weeks, with no clear indication of when the pandemic will peak. In an effort to “flatten the curve” and contain the spread of the virus, provinces across Canada have declared states of emergency, shutting down all but essential services and requiring residents to practice social distancing and self-isolation. The Canada-U.S. border has been closed to all nonessential traffic, and officials have advised Canadians to avoid all nonessential travel outside of the country.

The economic impact of these extreme measures on Canadians and Canadian businesses could be catastrophic. However, in an effort to assist individuals and businesses and to avoid a deep and prolonged economic downturn, the Canadian government introduced the COVID-19 Economic Response Plan (the plan) on March 18. The plan, which the government passed on March 25, offers a number of tax and other financial measures to mitigate the economic impact of the COVID-19 pandemic. Since its initial passage, the government has modified and clarified the plan. Further modifications and enhancements are likely in the days and weeks to come.

The business community has generally been supportive of the plan, but many business leaders have also indicated that greater assistance is needed for businesses affected by the containment measures that are in place across Canada. For example, the Canadian Federation of Independent Business released a statement broadly commending the plan, but also suggesting that the 10 percent wage subsidy (described in greater detail below) be closer to 75 or 90 percent to really help businesses.¹ In response to comments and the evolving COVID-19 environment, the Canadian government has announced additional and enhanced measures under the plan.

Prime Minister Justin Trudeau recalled Parliament on April 1 to pass legislation enhancing the original measures, and in doing so stated that the plan is “the largest economic program in Canada’s history.” Indeed, the plan, which was initially worth C $82 billion (approximately $58 billion), including C $55 billion in deferred tax revenue and C $27 billion in direct income support to Canadians, will now provide up to C $763 billion in direct and indirect support (which includes credit and liquidity support) for individuals and businesses affected by the COVID-19 pandemic. On March 27 U.S. President Donald Trump also signed an unprecedented $2 trillion stimulus package (the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136)) into law. While that number is staggering, it is worth keeping in mind that the U.S. GDP is historically about nine times greater than Canada’s.

Tax Measures

The tax measures included in the plan are designed to address the economic effects of COVID-19, but they also reflect the fact that the Canada Revenue Agency sent its staff home without the immediate ability to work remotely.

As of April 12 they include the following items.

Extension of Tax Filing Deadlines

The CRA has extended filing deadlines as follows:

• the 2019 individual tax filing deadline is extended to June 1;

• the 2019 filing deadline for trust T3 returns, partnership T5013 returns, and NR4 information returns for payments to nonresidents is extended to May 1, 2020;

• filings for trusts that would have been due in April or May are now due June 1;

• filings for corporations that would have been due after March 18 and before June 1 are now due June 1;

• information returns that would have been due after March 18 and before June 1 are now due June 1; and

• the filing deadline for Forms T3010, “Registered Charity Information Returns,” that became or are due between March 18 and December 31 is now December 31.

The filing deadline of June 15 for individuals who are self-employed and their spouses and common-law partners is unchanged.

The deadlines for filing goods and services tax/harmonized sales tax (GST/HST) returns are unchanged. No penalties will be imposed for late filing of a GST/HST return if it is filed by June 30. However, the CRA has stated that “those who are able to, should continue to file their GST/HST returns on time, reporting their net tax for the reporting period to help facilitate tax compliance and administration.” Electronically filed GST/HST returns that do not require client contact or additional review will be processed, and the CRA will issue a refund if there is no balance owing. However, paper returns will not be processed until normal operations resume.

Deferral of Tax Payments

The due date for balances for 2019 and for the usual June 15 installments for those who earn business or investment income that is not subject to withholding is extended to September 1 for individuals.

Income tax payments for corporations and trusts that were due on or after March 18 and before September may be deferred to September 1. This includes all final amounts for 2019, which would have been due on April 30.

GST/HST remittances and customs duty payments are deferred to June 30.

The timing for the remittance of source deductions and nonresident withholding tax is unchanged.

Electronic Signatures

The CRA will recognize electronic signatures, including for forms T183 and T183CORP, which authorize tax preparers to file tax returns on taxpayers’ behalf. The CRA has been unwilling to communicate via email, preferring fax or its secure online system, “My Account.” Communicating with the CRA during this period is likely to be challenging — the CRA closed the drop boxes at most tax service offices, and its unmonitored fax machines are likely to run out of paper and memory.

Moratorium on Audit and Collection Activities

The CRA will not commence any post-assessment GST/HST or income tax audits for small or medium-size enterprises for a period of four weeks beginning March 18. Interaction with taxpayers will be limited to high-risk, exceptional cases and high-risk GST/HST refund claims. The CRA has also temporarily suspended other audit activity. Specifically, it will not send out requests for information in existing audits, finalize any audits, or issue any reassessments.

The CRA is also holding objections — the first-level internal administrative review of Canadian tax decisions — to tax matters (other than those involving entitlements to benefits) in abeyance, and it will not take any collection action on those accounts during this time. The deadline to file objections that were initially due after March 18 has been extended to June 30.

Taxpayers who received correspondence from the CRA requesting dates for response or the provision of documents do not need to respond at this time. The CRA will contact these taxpayers once the COVID-19 measures are lifted.

Requests for contemporaneous documentation of transfer pricing made before April 1 that have a deadline of March 18 or later are deemed cancelled. The CRA will reissue them at a later date and will give taxpayers three months — the maximum amount of time that the rules allow — to submit the documentation.

Also, at this time, banks and employers are not required to comply with CRA requirements to pay (garnishments).

The CRA published its national COVID-19 business continuity plan on March 27, outlining its prioritization of services. As may be expected, priority will be given to processing benefits, refunds, and credits. However, while the CRA will not initiate audits for SMEs for a four-week period, it is not clear that large corporations will receive a similar reprieve. We expect that all audit activity will end up stalled for a significant period in light of the operational challenges facing the CRA. That said, we know that CRA management is working diligently to find solutions, so we expect that over time many of the CRA’s services will begin to be delivered again, subject to its need to concentrate on the delivery of some of the economic subsidies described below.

Taxpayer Relief

Taxpayers may request the cancellation of penalties and interest related to the failure to file a return or pay taxes by their respective deadlines as a result of COVID-19.

Projections

The Department of Finance projects that the plan will defer C $105 billion in income tax, GST/HST remittances, and customs duty payments.

Direct Financial Assistance

Canada will also provide direct financial assistance to both individuals and businesses.

Enhanced Employment Insurance Benefits

The one-week waiting period and medical certificate requirement for employment insurance (EI) benefits is waived for individuals who cannot work as a result of COVID-19. Also, the EI work sharing program — a program that provides EI benefits to workers who agree to reduce their normal working hours as a result of events that are outside their employers’ control — is extended from 38 weeks to 76 weeks.

Income Support for Individuals

The plan offers several measures aimed at helping individuals. These include:

• The Canada Emergency Response Benefit (CERB) of C $2,000 for a four-week period starting March 15. The CERB is a taxable benefit and must be reported in a recipient’s 2020 tax return. Applications can be made starting on April 6 and must be made every four weeks, if needed, for up to 16 weeks. It will generally be available to workers who:

  • reside in Canada and are at least 15 years old;

  • have stopped working because of COVID-19 or are eligible for EI benefits;

  • had income of at least C $5,000 in 2019 or in the 12 months preceding the date of application; and

  • expect to be without employment or self-employment income for at least 14 consecutive days during the initial four-week period.

• A one-time special GST credit payment of, on average, C $400 for individuals and up to C $600 for couples.

• An increase in the maximum Canada Child Benefit payment for the 2019-2020 benefit year of C $300 per child starting in May.

• Additional support for groups that are particularly vulnerable to the impact of COVID-19, including indigenous communities, the homeless, seniors, children, and youth. This will also include support for women’s shelters and sexual assault resource centers.

The direct income support for individuals is expected to cost more than C $32 billion.

Support for Businesses

The temporary wage subsidy (TWS) covers 10 percent of the remuneration paid by an eligible employer between March 18 and June 19, up to C $1,375 per employee and C $25,000 per employer. Eligible employers do not need to apply for the TWS; they simply need to have an existing payroll program account with the CRA on March 18 and pay salary, wages, bonuses, or other remuneration to individuals employed in Canada. The CRA will not pay an eligible employer the TWS. Instead, the TWS will be deducted from the payroll remittance of any federal, provincial, or territorial income tax to the CRA for remuneration paid between March 18 and June 19. Critics said the TWS, which was part of the government’s original plan, was too small to make a difference and too focused on small businesses.

On March 27 the government introduced the Canada Emergency Wage Subsidy (CEWS) to offer support to both small and large employers. The CEWS provides eligible employers with a grant equal to 75 percent of the first C $58,700 they would normally pay employees (up to C $847 per week for each employee) for up to 12 weeks, retroactive to March 15. The eligibility requirements for the CEWS are more complicated than for the TWS: Employers whose revenues dropped at least 15 percent in March (originally 30 percent) and 30 percent in April or May are eligible for the CEWS (after the fact) for the month of the drop. The relevant revenue is revenue from a business carried on in Canada and earned from arm’s-length sources; it does not include revenue from extraordinary items or from the sale of capital assets. Since the focus is on employers carrying on business in Canada, the CEWS should be available to Canadian subsidiaries of U.S. companies. Eligible employers will be expected to make best efforts to maintain salaries at 100 percent of the covered wages. Antiabuse rules will be proposed, and penalties will apply to fraudulent applications. The Canadian government is considering creating new offenses that specifically involve providing false or misleading information to obtain the CEWS. Penalties may include fines or even imprisonment. Employers that do not qualify for the CEWS may still qualify for the TWS.

The CEWS is the primary mechanism for delivering income support to Canadian businesses, and therefore to Canadian individuals. It is designed to prevent employers from needing to lay off employees to survive COVID-19’s economic impact. It does not offer support for businesses that use independent contractors.

However, the absence of details and the threat of significant but unknown penalties for employers that abuse the CEWS has led some to be reluctant to use it, and layoffs have been occurring anyway — although, perhaps, some employees will be recalled to work in reliance upon the CEWS. The requirement for a 30 percent drop in revenue is also problematic for successful low-margin businesses because some will become insolvent before suffering a 30 percent revenue drop. The press has reported on discussions between bureaucrats concerned about abuse and others focused on preserving the economy.

On April 11 the government introduced Bill C-14, the COVID-19 Emergency Response Act, No. 2, which received royal assent the same day. The bill enacts the measures that the government introduced on April 8, which addressed some of the reported concerns and provided clarification and guidance on the eligibility requirements for the CEWS. Specifically, the new legislation provides as follows:

• The eligible periods are:

  • March 15-April 11;

  • April 12-May 9; and

  • May 10-June 6.

• The requirement for a drop in revenue for an eligible employer of 30 percent was reduced for March to 15 percent. The 30 percent drop in revenue remains for April and May.

• Eligible employers are now allowed to compare their revenue using an average of their revenue earned in January and February of this year to allow more flexibility in calculating their change in revenue for purposes of the CEWS. This will be helpful for high-growth firms, sectors that faced difficulties in 2019, nonprofits and charities, and employers established after February 2019. Employers may choose to use the general year-over-year approach or this alternative approach when applying for CEWS. Whichever approach that is first taken by an employer must be used for the duration of the CEWS program.

• In order to provide certainty for employers, once an employer is found to qualify for one period, the employer would also qualify for the next period.

• Employers may choose to use the cash or accrual method in calculating their revenues. Again, the same method must be used for the duration of the program.

• Eligible employees for the purposes of the CEWS are now limited to those who have not been without remuneration for more than 14 consecutive days in an eligibility period.

• The amount of the CEWS will be the greater of:

  • 75 percent of the amount of the remuneration paid (up to C $847 per week); and

  • the lesser of the amount of remuneration paid, up to a maximum benefit of C $847 per week or 75 percent of the employee’s pre-crisis earnings.

• Employers may also receive the CEWS on wages paid to new employees.

• Wages for non-arm’s-length employees qualifies for the CEWS. However, it will be limited to non-arm’s-length employees employed prior to March 15. The maximum subsidy is the lesser of $847 per week and 75 percent of the non-arm’s-length employee’s pre-crisis remuneration.

• The government proposes to expand the CEWS to introduce a new 100 percent refund for certain employer paid contributions to EI, the Canada Pension Plan, the Quebec Pension Plan, and the Quebec Parental Insurance Plan for eligible employees for each week throughout which such employees are on leave with pay and for which the employer is eligible to claim the CEWS. Employers must continue to collect and remit employer and employee contributions to each program, and apply for a refund at the same time that they apply for CEWS.

• Employers that engage in artificial transactions to reduce revenue in order to claim the CEWS would be subject to a penalty equal to 25 percent of the subsidy claimed and will be required to repay the full amount of the subsidy that was claimed. 

The government encouraged employers to rehire employees as quickly as possible and to apply for the CEWS if they are eligible.

Also, a special business support program will provide waivers of ground lease rents from March to December for airports.

The total cost for direct income support for businesses under the plan is over C $72 billion. However, any amount employers receive under the CEWS or TWS is to be included in their income for income tax purposes and will reduce the amount of remuneration expenses eligible for other federal tax credits calculated on the same amount.

Financing for Businesses

Business Credit Availability Program

The plan also established the Business Credit Availability Program (BCAP) through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC).

The BCAP includes:

• The Canada Emergency Business Account, which will provide interest-free loans of up to C $40,000 to qualifying small business and not-for-profit organizations. Eligible financial institutions will implement the program. Organizations paid between C $50,000 and C $1 million in total payroll in 2019 will qualify. Borrowers who repay the balance of their loan on or before December 22, 2022, will have 25 percent (up to C $10,000) of their loans forgiven.

• Loan guarantees from EDC for new operating credit and cash flow term loans of up to C $6.25 million for SMEs.

• A co-lending program with BDC and financial institutions for SMEs that will provide incremental credit amounts up to C $6.25 million. The BDC will fund up to C $5 million per loan.

The total amount of credit available under the BCAP is C $65 billion.

All creditworthy businesses involved in activities that fall within the mandate of the BDC or EDC are eligible for the BCAP. The BDC’s mandate is to support Canadian entrepreneurs by providing financial, consulting, and venture capital services. EDC’s mandate “to support and develop Canada’s export trade and Canadian capacity to engage in that trade and to respond to international business opportunities” is limited to Canadian companies. Therefore, U.S. and other nonresident businesses operating in Canada may not be eligible for the BCAP.

Agricultural Lending

The plan includes C $5 billion of increased lending capacity available to the agricultural sector through Farm Credit Canada.

Other Credit and Liquidity Support

The Bank of Canada, the Office of the Superintendent of Financial Institutions, the Canada Mortgage and Housing Corporation, and commercial lenders are coordinating to offer additional credit and liquidity support in excess of C $500 billion.

Conclusion

As Trudeau observed, the plan is “the largest economic program in Canada’s history.” While the Conference Board of Canada forecasts a sharp decline in economic activity in the second quarter of 2020, many hope that the plan will help avert a recession. Regardless, Pedro Antunes, the chief economist at the Conference Board of Canada, ultimately believes that Canada’s “economic recovery hinges on successfully containing the spread of COVID-19.”²