Principal Issues: What is the impact of some government assistance not related to the COVID-19 pandemic on the CEWS?
Position: None.
Reasons: Question of fact.
XXXXXXXXXX
2020-086675
Jean-François Benoit,
CPA, CMA, M. Adm. January 7, 2022
Dear Mr. XXXXXXXXXX,
Re: Government Financial Assistance and Canada Emergency Wage Subsidy
This letter is in response to your email of October 14, 2020 and a telephone conversation (XXXXXXXXXX/Thibault) in which you inquired about the impact of certain non-COVID-19 related government assistance on the Canada emergency wage subsidy ("CEWS") pursuant to section 125.7 of the Income Tax Act (the "Act").
More specifically, you referred to the Industrial Research Assistance Program, and the Tax Credit for the Development of E-Business ("Financial Assistance"). These Financial Assistance measures are, in whole or in part, linked to a labour expenditure and are claimed once a year.
You indicated that for accounting purposes, some eligible entities record Financial Assistance by adding directly to revenue the appropriate portion of the estimated total Financial Assistance they expect to receive. However, this estimated total may differ from the amount of Financial Assistance ultimately received.
In particular, you asked whether, for the purposes of the CEWS, Financial Assistance is included in "qualifying revenue" as defined in subsection 125.7(1), and if so, when. You further asked whether subsections 125.7(6) and 163(2.901) may apply.
All legislative references in this letter are to the provisions of the Act.
Our Comments
This technical interpretation provides general comments on provisions contained in the Act and other related legislation, where applicable. It is not intended to confirm the tax treatment of any particular situation involving a particular taxpayer, but rather to assist you in determining that treatment.
To be eligible for the CEWS, an eligible entity must have experienced a decline in income determined primarily by comparing its qualifying revenue in a current reference period with its qualifying revenue in the prior reference period.
Qualifying revenue, as defined in subsection 125.7(1), in respect of an eligible entity for a prior reference period or a current reference period, means the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity — generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity — in Canada in the particular period, subject to certain exceptions.
Whether Financial Assistance is a receipt of cash or other consideration received or receivable in the ordinary activities of an eligible entity's business in Canada for a period of time for purposes of the definition of "qualifying revenue" is a question of fact. The Income Tax Rulings Directorate does not rule on questions of fact in a technical interpretation.
Subsection 125.7(4) provides that, for the purposes of the definition “qualifying revenue” in subsection 125.7(1), the qualifying revenue of an eligible entity is to be determined in accordance with its normal accounting practices, subject to certain rules in paragraphs 125.7(4)(a) to (e). An eligible entity's normal accounting practices must generally be the same for a current reporting period and the corresponding prior reporting period.
As indicated in Information Circular IC70-6R11, Advance Income Tax Rulings and Technical Interpretations, the Income Tax Rulings Directorate does not issue technical interpretations of, among other things, accounting practices or principles.
Consequently, to the extent that Financial Assistance of an eligible entity qualifies as qualifying revenue within the meaning of subsection 125.7(1) for a particular period and that qualifying revenue is determined in accordance with the eligible entity's normal accounting practices, Financial Assistance will generally be included in its qualifying revenue for that particular period. However, Financial Assistance is not included in the qualifying revenue (as defined in subsection 125.7(1)) of an eligible entity if the normal accounting practice of the eligible entity is to record Financial Assistance as a reduction in expenses.
An eligible entity will generally not have to amend a CEWS claim it has filed for a particular period where it has included in its qualifying revenue the Financial Assistance that qualifies as qualifying revenue within the meaning of subsection 125.7(1) for that particular period and that is determined in accordance with its normal accounting practices. If the application needs to be amended, we refer you to questions 26 and 26-01 of the Frequently Asked Questions: Canada Emergency Wage Subsidy ("FAQ") which explains the circumstances under which the Canada Revenue Agency will accept an amended late-filed CEWS application. The FAQs can be found at https://www.canada.ca/en/revenue-agency/services/wage-rent-subsidies/cews-frequently-asked-questions.html.
In general, subsection 125.7(6) provides an anti-avoidance rule that, where it applies, requires an eligible entity to repay any amount received as or on account of the CEWS. For this rule to apply to an eligible entity for purposes of the CEWS, the transaction, event or other action listed in paragraph 125.7(6)(a) must have the effect of reducing qualifying revenue for the particular current qualifying period and it must be reasonable to conclude that one of the main purposes of that transaction, event or other action is to make the eligible entity eligible for the CEWS for a particular qualifying period or to increase the amount of the CEWS.
Where the rule in subsection 125.7(6) applies, the eligible entity is also liable, pursuant to subsection 163(2.901), to a penalty of 25% of the amount of the CEWS claimed.
Furthermore, an eligible entity that knowingly or under circumstances amounting to gross negligence makes a false statement or omission in a return, form, certificate, statement or answer may also be liable pursuant to paragraph 163(2)(i) to a penalty of up to 50% of the difference between the amount of the CEWS claimed and the amount to which it is actually entitled, but not less than $100.
The application of subsection 125.7(6) and the penalties under subsection 163(2.901) and paragraph 163(2)(i) is a question of fact that can only be determined after a full analysis of the facts surrounding each particular situation.
We hope that our comments are of assistance.
Best regards,
Isabelle Landry
Interim Section Manager
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch