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Your business expects you to know about Tax & Incentives - Cashflow

There are several programs still available to assist your business through COVID-19, we will explain 5 cash flow enhancing opportunities to assist your business. A complete list of financing and incentives is beyond the scope of this article, however, a list of available federal programs can be found here.

Part 2: CASHFLOW: we need it, where we can find it?

4 Things Your Business Expects You to Know About Tax & Incentives

 

i)

Expanded Canada Emergency Wage Subsidy (CEWS)

The CEWS has been expanded to allow more businesses to receive support for wages, as a result for a decrease in revenue associated with COVID-19. For Claim periods 5 (commencing July 5th) through period 9 (ending November 21), there is no minimum revenue drop required to qualify for the subsidy (formerly 30%). The rate that your revenue has declined is only used to calculate how much the subsidy will be for those periods.

 

For claim periods 1 to 4, the subsidy calculation was based on a fixed rate of 75%. However, for claim periods 5 and later, the CEWS rate is variable and depends on the amount your revenue dropped, and is made up of two parts:

  1. Base Rate: uses your base revenue drop
  2. Top-up Rate: is available to employers that have experienced a 3-month average revenue drop of more than 50%

For periods 5 and 6 only, if your base revenue drop is at least 30%, and overall subsidy rate calculated under the new 2-step approach is less than 75%, you may benefit from using the rules and calculations from period 4 to calculate your subsidy amount (ultimately arriving at the 75% floor). This is known as the safe harbour rule, and regardless of the result from the 2-step approach, the minimum subsidy should be 75%.

How do you calculate the subsidy under the new 2-step approach?

 

A) Calculate the Base Revenue Drop Calculation

  1. Finally, compute the Top-Up rate to be added to the base subsidy rate. The top-up rate applies to eligible employers whose revenue has dropped by more than 50% in a particular period of three months. If this does not apply to your business, the wage subsidy is the rate calculated in B) above.
  1. If you have been comparing the current 2020 month to the same month in 2019 to arrive at a revenue drop, you will continue to do so.
  2. If you have been comparing the current 2020 month to the Jan/Feb average sales amount, likewise you will continue to do so
  3. If the prior month calculation results in a larger revenue drop, use the prior month’s revenue drop %, otherwise use the current period (if higher).
  4. If it is your first time calculating a revenue base drop due to previously not having a decline of 30%, you may choose the highest revenue drop by comparing the current or prior revenue to the same period in 2019, or the average of January & February 2020 revenue to arrive at the highest revenue drop %. However, once you select an approach for period 5, you must use the same comparison for periods 6 through 9.

    Example: Period 5 results in July 2020 being the current period
    i) Jan/Feb 2020 Average Revenue = $50,000
    ii) July 2020 Revenue = $39,000
    iii) July 2019 Revenue = $40,000
    iv) June 2020 Revenue = $36,000
    v) June 2019 Revenue = 46,000

    July 2020 vs Jan/Feb Avg = 22%
    July 2020 vs July 2019 = 2.5%
    June 2020 vs Jan/Feb Avg = 28%
    June 2020 vs June 2019 = 21.74%

    Therefore, the period 5 highest available base revenue drop is 28%. However, with this selection, all remaining periods will use Jan/Feb Avg sales as the comparison base.

B) Once the base revenue drop percentage is known, apply the appropriate multiplier or fixed base % for each relevant period based on the following CRA Table:

Strata-G - Cashflow - CRA Table

Continuing with our example, using the base revenue drop of 28% for Period 5, we will arrive at a base subsidy rate of 33.6% (1.2 * 28%). If the same revenue drop existed in Period 9, the base wage subsidy would be 11.2% (0.4 * 28%).

 

C) Finally, compute the Top-Up rate to be added to the base subsidy rate. The top-up rate applies to eligible employers whose revenue has dropped by more than 50% in a particular period of three months. If this does not apply to your business, the wage subsidy is the rate calculated in B) above.

 

To calculate the 3-month average revenue drop, compare the prior 3-month’s average revenue to the same 3 months in 2019, or to the January/February 2020 average revenue amount. However, you must use the same comparison period as you chose for the base revenue drop. Once you have picked a comparison period, you must maintain this comparison for all future reporting periods.

 

Example:

  1. Jan/Feb 2020 Average Revenue = $50,000
  2. April, May, June 2020 Average Revenue = $32,000
  3. April, May, June 2019 Average Revenue = $65,000

 

Comparing the prior 3 month’s average revenue to Jan/Feb Average results in a revenue decrease of 36%. While compared to the same period in 2019, the drop in revenue is 50.77%. However, since we used the January/February Average for our base revenue drop calculation, we must use 36% to continue with our example, and no top-up rate will be available, even though compared to last year we would be eligible for a top-up rate.

 

If the revenue drop is greater than 50%, you select the following top-up rate

 

  • 25% for revenue drops of 70% or higher
  • 25 * (top-up revenue drop – 50%)

 

Therefore, if we were able to use 50.77% as the 3-month revenue drop, the top-up rate would be 0.96% [1.25 * (50.77-50)]. Using the base rate from above, the total wage subsidy would have been 34.56%.

For entities, experiencing a revenue drop of 70% or more, the new CEWS calculation will result in a subsidy of 85% for Periods 5 and 6, with corresponding decreases for the base decreases referenced above, per Period. However, even for entities that have experienced any decrease in revenue, there is an opportunity to be supported through a wage subsidy proportionate to the decline in revenue.

 

ii)

Expanded Canada Emergency Business Account (CEBA) Interest-Free Loans

Originally launched on April 9, 2020, CEBA is intended to support businesses by providing financing for their expenses that cannot be avoided or deferred as they take steps to safely navigate a period of shutdown, thereby helping to position businesses for successful relaunch when the economy reopens.

 

This $55 billion program provides interest-free loans of up to $40,000 to small businesses and not-for-profits.

 

Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000).

 

As of June 26, 2020, businesses eligible for CEBA now include owner-operated small businesses that do not have a payroll, sole proprietors receiving business income directly, as well as family-owned corporations remunerating in the form of dividends rather than payroll. This means that more small businesses can access it.

 

Applicants with $20,000 or less in payroll in 2019 will have to demonstrate having Eligible Non-Deferrable Expenses between Cdn.$40,000 and Cdn.$1,500,000 in 2020. Expenses are considered “Eligible Non-Deferrable Expenses” if they were already incurred in January and/or February 2020, or are due to a legal or contractual obligation as at March 1 and cannot be avoided or deferred beyond 2020 even during a period of shut down and depressed revenues as a result of COVID-19. CEBA is not intended to provide income support, or support for variable operating expenses to businesses.

 

The Eligible Non-Deferrable Expense categories include the following:

 

  • Wages and other employment expenses to independent (arm’s length) third parties;
  • Rent or lease payments for real estate used for business purposes;
  • Rent or lease payments for capital equipment used for business purposes;
  • Payments incurred for insurance related costs;
  • Payments incurred for property taxes;
  • Payments incurred for business purposes for telephone and utilities in the form of gas, oil, electricity, water and internet;
  • Payments for regularly scheduled debt service;
  • Payments incurred under agreements with independent contractors and fees required to maintain licenses, authorizations, or permissions necessary to conduct business by the Borrower;
  • Payments incurred for materials consumed to produce a product ordinarily offered for sale by the Borrower.

 

iii)

Canada Emergency Commercial Rent Assistance (CECRA)

CECRA provides relief for small businesses experiencing financial hardship due to COVID-19. Over the course of the program, property owners will reduce rent by at least 75 % for the months of April, May, June, July, and August for their small business tenants. CECRA will cover 50 % of the rent, with the tenant paying up to 25% and the property owner forgiving at least 25 %.

 

The loans provided through this program would be forgiven if the landlord complies with all program terms and conditions. This includes not trying to recover rent payments for the agreed upon period from the small business tenant after the program is over.

 

Support will be retroactive to April 1, 2020. The deadline for new applications is August 31, 2020. If you already submitted an application, the deadline to apply for the August extension is September 14, 2020.

 

If rent has already been collected, landlords must either:

  • refund the amount paid by the small business tenant that is in excess of 25% of rent,
  • apply rent paid that is in excess of 25% of rent to future rent owing, if the small business tenant agrees

iv)

Corporate Income Tax Instalment Deferral

Corporate Income Tax Instalments can be calculated based on three options, for which a corporation can choose the least amount of tax to remit. In summary, the three options are (assumes monthly instalment, for quarterly divide by 4):

 

  1. 1/12 of the estimated tax payable for the current tax year (2020)
  2. 1/12 of the tax payable from the previous tax year (2019)
  3. 1/12 of the tax payable from the year before the previous tax year (2018) for first 2 months, and then 1/10 of the difference between the 2019 and 2018 tax payable for the remaining 10 months. (This option works out to the same base as B, it just may reduce the first 2 months for cash flow purposes).

Strata-G recommends estimating your 2020 tax provision to determine if 2020 tax will be less than 2019. Strata-G has an online calculator to assist with this estimate. Often, a corporation defaults to a tax instalment base from the prior year but given that COVID-19 may have reduced your entity’s 2020 profitability, it may be worth taking the time to determine what the 2020 instalment base should be. There may be an opportunity to cease paying additional tax instalments in 2020 and retain the cash for business related expenditures.

v)

Employer Health Tax (EHT) Exemption/Deferral

Employer Health Tax (EHT) is a payroll tax on remuneration paid to employees and former employees. This article focuses on tax measures in Ontario and BC.

 

The Ontario government has temporarily increased the EHT exemption for 2020 from $490,000 to $1 million due to the special circumstances caused by the coronavirus (COVID‑19) in Ontario. The exemption will return to the previous amount of $490,000 on January 1, 2021.

 

In British Columbia, the employer health tax return and final payment due date for the 2019 calendar year has been extended to September 30, 2020 (from March 31).

Part 1:
T2200
What is it and why do we need to know about it?

 

Part 2:
Cash Flow: we need it where can we find it?

 

Part 3:
Key Tax Implications
 arising from COVID-19 relief

 

Part 4:
Treaty Benefits
 arising from COVID-19 relief

Nicholas Coburn

Nicolas Coburn, CPA, CA, has 15+ years of experience spread across Government Audit, Industry Financial & Tax Reporting, and Big 4 Canadian Accounting Firms.

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