Impacts of government COVID-19 emergency subsidies on your future SR&ED and E-Business tax credit claims
The Government of Canada’s emergency support plan for businesses facing hardship as a result of the COVID-19 crisis is quite generous and will benefit a large number of businesses.
We would like to share our first impressions about these government subsidies with our clients, especially as concerns any likely impact the subsidies may have on your future Scientific Development and Experimental Development (SR&ED) and E-Business (CDAE in French for crédit d’impôt aux Affaires Électroniques) tax credit claims. Normally, such subsidies are excluded from tax credit calculations, given that the same salary expenditure cannot be funded by the public sector twice (no “double dipping”, to use this expression popularized by the TV show, Seinfeld).
We therefore believe that this guideline should always be followed when calculating your future tax credits. However, given that exceptional situations call for exceptional emergency measures, a question therefore arises: will the government not also make an exception to this rule in the near future? This is one of several questions we are closely monitoring from the government’s regular announcements.
Before delving too deep into the various subsidies available, we recommend that you keep any emergency aid documents you will receive safe and handy. They will be needed when calculating future SR&ED and CDAE tax credits and could be requested by tax authorities in the event of an audit.
Canada Emergency Wage Subsidy
Under the Canada Emergency Wage Subsidy (CEWS), eligible employers can request a wage subsidy of 75%, with a maximum weekly limit of $847. Granted for a maximum period of 12 weeks and retroactive from March 15, 2020, this subsidy is aimed at preventing job losses. Eligible employers can apply for the CEWS through the Canada Revenue Agency’s My Business Account portal from April 27 to October 2020.
Eligibility for this program is subject to demonstrable income loss. Depending on the application and reference times, a drop in revenue due to COVID-19 must be shown of at least 15% in March 2020 and at least 30% subsequently. As indicated by the Finance Minister last April 11, processing timelines could range between 3 and 10 days once the application is submitted.
In addition to the 75% wage subsidy, employers are also entitled to claim the total refund of some employment insurance payments and contributions to the Canada Pension Plan, the Quebec Pension Plan and the Quebec Parental Insurance Plan for eligible employees on paid leave. This reimbursement can be requested concurrently with the CEWS claim for any period during which workers are eligible for paid leave.
If you wish to apply for the CEWS as soon as it opens, but have not yet created a My Business Account, you are advised to create one as soon as possible. This tool has become essential.
10% Temporary Wage Subsidy for Employers
The 10% temporary wage subsidy is a three-month measure (from March 18 to June 19, 2020) enabling eligible employers to reduce payroll deductions payable to the CRA. This grant amounts to 10% of the wage paid for the period cited above, with a maximum of $1,375 per eligible employee and $25,000 per employer. Once the 10% calculation is made, the employer can directly deduct this sum from federal tax deduction remittances at the usual moment for their payment.
However, to be eligible for this subsidy, a very important criterion must be met. A for-profit corporation must be a Canadian-controlled private corporation (CCPC) with a business limit greater than zero over the most recent tax year ending March 18, 2020.
Conclusion: The two subsidies above are government aid and should be subject to the usual tax credit processing. Therefore, the wage subsidy paid to each employee eligible to the SR&ED tax credit should be deducted from the eligible wage when calculating the tax credit at a rate proportional to the time spent on SR&ED activities. The calculation of general costs (commonly known as proxy) remains unchanged since the aid received is deducted only after this calculation.
The overall impact on the tax credit amount could be less than expected. In effect, the CEWS aid carries a limit of $847 per week. This means that for all employees with an annual wage of more than $58,000, only this weekly $847 will be paid. For example, for a resource with up to a 40% SR&ED involvement and an annual wage of over $58,000, the weekly SR&ED deduction shall be $339.
For the E-Business, the entire subsidy received for each employee that will need to be deducted from their wages. For the credit calculation, the eligible wage limit then applies and remains unchanged.
Note further that your company may be eligible for the two subsidies as well as the Work-Sharing Program (to be discussed in our next article). If that is the case, the CEWS will be reduced by the amounts paid or refunded under the 10% temporary wage subsidy and the work-sharing program for the same period. We therefore believe that if a business is eligible for the CEWS, the 10% temporary subsidy would no longer be of interest.
Since current conditions are very exceptional and fluid, the subsidies discussed and information provided in this article could change at any time. Eligibility criteria and subsidy rates are equally liable to change.
Rest assured that Emergex SR&ED Subsidies is closely monitoring the situation and is always on top of any new information put out by the governments that could have a significant impact on your claims. We remain available to support you and secure the highest possible returns in your future tax credit claims, considering any potential emergency aid obtained and the unique situation your business will face.