The Canada Emergency Wage Subsidy: Affiliated Group Issues

The Canada Emergency Wage Subsidy (CEWS) became law on April 11, 2020. It applies to "eligible entities" other than a corporation exempt from tax under part I of the Act or a public corporation.

The CRA stated in document no. 2020-084779 (May 8, 2020) that "exempt from tax under Part I" is meant to refer to corporations exempt from tax under subsection 149(1), other than those entities specifically referred to in paragraph (d) of the definition of "eligible entity." The entities specifically referred to in paragraph (d) are as follows:

  • agricultural organizations;
  • chambers of commerce;
  • boards of trade;
  • non-profit corporations for the purpose of carrying on SR & ED;
  • labour organizations or societies;
  • benevolent or fraternal benefit societies; and
  • clubs, societies, or organizations operated exclusively for any purpose other than profit.

The CRA stated that whether a corporation is "exempt from tax" is determined by the type of corporation and does not depend on whether certain amounts earned by a corporation are included in the computation of income for the calculation of part I tax.

To qualify for the CEWS, an eligible entity must have a decrease in qualifying revenue over certain comparative periods. "Qualifying revenue" is defined in subsection 125.7(1) to mean the inflow of cash or any other consideration arising in the course of ordinary activities, generally from the sale of goods or rendering of services. (Certain specific exceptions to the qualifying revenue definition will not be discussed here.)

Subsection 125.7(4) expands the definition of qualifying revenue in a number of ways. One of these applies if the eligible entity is part of an affiliated group of persons. We refer to this as the "affiliated entity rule."

Paragraph 125.7(4)(b) may be summarized as follows:

  • An eligible entity along with each member of an affiliated group of eligible entities may calculate their revenue on a consolidated basis in accordance with relevant accounting principles.
  • Each member of the affiliated group of eligible entities can then use the consolidated revenue as a proxy for stand-alone qualifying revenue when calculating its eligibility for the CEWS.
  • Each member of the affiliated group must jointly elect to use this method.

This rule can be useful in organizational structures where the payroll function is handled by an entity separate from the operating business, since it would allow that entity to access the subsidy based on an entity-wide determination of revenue if it would not meet the qualifying revenue test on a stand-alone basis.

There are a number of interpretive issues, including the following.

What Is an Affiliated Group?

Paragraph 125.7(4)(b) refers to an affiliated group of eligible entities. However, the phrase "affiliated group" is not defined in the Act. There is a definition of "affiliated group of persons" in subsection 251.1(3), but this definition applies only for the purposes of section 251.1. Notwithstanding this, the CRA has indicated that it will apply that definition for the purposes of the affiliated entity rule. See question 10-1 in Frequently Asked Questions—Canada Emergency Wage Subsidy (CEWS).

What Is the Meaning of a Consolidated Basis of Revenue?

The affiliated group of eligible entities must calculate its revenue on a consolidated basis. "Consolidated basis" is not a defined term. Consolidation is an accounting concept whereby the financial information of a parent and one or more wholly owned subsidiaries is merged into one notional entity. Does this imply that in order to use this approach, eligible entities must be in a parent-subsidiary relationship? Or is the intent that any entities that normally prepare their financial information on a combined basis are allowed to use this method? On the basis of a CRA comment, it appears that the phrase will not be limited to a strict application of the accounting concept of consolidation, and that a "combination" of qualifying revenue of each entity will be acceptable. See example 7 in question 9.

What Is the Meaning of Relevant Accounting Principles?

Revenue must be calculated in accordance with "relevant accounting principles." The phrase is not defined. Presumably, as long as an eligible entity is using accepted accounting practices to calculate its revenue, and is not changing them for the purposes of the CEWS calculation, its particular method would be accepted. The CRA has not provided any specific guidance on this point. However, the legislation includes a broadly worded anti-avoidance provision that would likely catch a deliberate manipulation of revenue (subsection 125.7(6)).

Which Eligible Entities Constitute Members of the Affiliated Group?

Each member of the affiliated group of eligible entities must jointly elect to use this method. In this context the CRA says "affiliated group" is intended to be interpreted in the broadest sense possible. See question 10.

Eligible entities that are affiliated cannot opt out of the election once it is made, nor can a subset of entities form a smaller affiliated group. This may present practical difficulties in some cases.

Example: Affiliated Group with International Structure

Consider a company with subsidiary corporations in multiple international jurisdictions, none of which have a connection to Canada. Consider also a Canadian subsidiary of a foreign entity. The Canadian entity has sister companies in multiple international jurisdictions. All of the corporations in this structure would meet the definition of an affiliated group of persons. Does this mean that each company in the entire international structure is part of the affiliated group for the purposes of this rule, even if some of them have no connection with the Canadian entities, and the Canadian entity is insignificant compared with the entire international structure?

As discussed earlier, an eligible entity is defined to include, among other things, a corporation, other than a corporation that is exempt from part I tax by virtue of subsection 149(1). Also, as discussed earlier, the CRA says that this comment is meant to refer to only to the type of corporation and not to the computation of taxable income.

A non-resident corporation that has no Canadian-source income is generally outside the purview of Canada's income tax regime. However, if a non-resident corporation earns certain types of Canadian-source income, it will be taxable in Canada under subsection 2(3) and section 115. Therefore, all non-resident corporations other than those referred to earlier as being exempt under subsection 149(1) are caught, on the basis of a literal interpretation of the affiliated entity rule. Therefore, all companies everywhere in the world would have to participate in the joint election. The CEWS claimant would need to take account of the qualifying revenue of all of the corporations worldwide in order to determine whether the decrease-in-revenue threshold is met. As well, it would need signatures on the joint election from authorized representatives of all of the corporations. This could prove to be problematic if information is not generally shared between the different international entities. As of the date of writing, the CRA has not provided any guidance on this type of international organization.

Example: Affiliated Group That Is Different from Prior Year

Consider another example where four entities meet the definition of an affiliated group in March 2020, but one of the entities was newly incorporated in 2020 and only three of the entities existed during the comparative period. Can the affiliated entity rule still be used in this case? If so, would the affiliated group be composed of the four entities, which would then calculate revenue on a consolidated basis and compare it to the consolidated revenue of the three entities that existed during the comparative period? Or would the newly incorporated entity be excluded from this calculation? The CRA has not provided guidance in this area, other than to say that the determination of revenue should be done on a consistent basis, with an "apples-to-apples" comparison, and without any manipulation.

How Is the Election Made?

Each member of the affiliated group of eligible entities must jointly elect in order to use this method (paragraph 125.7(4)(b)). The CRA offers no guidance on what actually constitutes an election, other than to say that it must be made and retained on file, and that it must be produced if the CRA requests it. Presumably, an election would take the form of a letter to the CRA, listing the members of the affiliated group and stating their intention to elect jointly under paragraph 125.7(4)(b) for the relevant period, and would be signed by an authorized representative of each entity.

It should be noted that an election is valid only for one claim period. For example, the election can be made for the initial claim period that begins on March 15, 2020 and ends on April 11, 2020. If an affiliated group of eligible entities wishes to use the affiliated entity rule for a subsequent claim period, it may do so, but it must make another election. On each claim, the individual who has principal responsibility for the entity's financial activities must attest that the election has been made, by checking the appropriate box on the RC661 attestation form. A completed attestation is required for an entity to qualify for the CEWS: see the definition of a qualifying entity in subsection 125.7(1). However, completing the attestation does not of itself constitute making the election.

Who Files the Claim?

Each qualifying entity makes its own individual claim for the CEWS, regardless of whether the affiliated entity rule is being used to determine revenue. The affiliated entity rule exists only for the purposes of determining qualifying revenue and has no bearing on the CEWS claim itself.

Conclusion

There is some uncertainty regarding the application of the affiliated entity rule. The CRA has indicated that there will be strict penalties for non-compliance with the CEWS rules, but hopefully common sense will prevail and the CRA will take a reasonable approach when dealing with uncertainties such as the ones discussed above.

David Carolin
Kakkar CPA Professional Corporation, Toronto
davidc@kakkar.com

Manu Kakkar
Kakkar CPA Professional Corporation, Montreal
manu@kakkar.com


COVID-19 and Canadian Tax
A special joint issue of Canadian Tax Focus and Tax for the Owner-Manager
July 2020
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