Affiliation Election for CEWS: Private Corporation Applications

Businesses that do not initially meet the revenue decline test for the Canada Emergency Wage Subsidy (CEWS) may be surprised that the affiliation election may be applicable in a variety of scenarios, including a simple corporate structure where there is only one operating company. This affiliation election may assist businesses in applying for the CEWS when they initially appear to be ineligible.

The term "affiliated group of eligible entities" is not defined in the Act; however, an "affiliated group of persons" is defined in subsection 251.1(3) to mean a group of persons each of which is affiliated with every other member. Presumably, an affiliated group of eligible entities would mean a group of eligible entities each of which is affiliated with every other eligible entity. An eligible entity is broadly defined in subsection 125.7(1) to include corporations, individuals, and partnerships. Affiliation is clarified in subsection 251.1(1) and includes numerous different possibilities for determining whether one person is affiliated with another.

A common approach to the affiliation election has been to apply it in circumstances where there are multiple corporations in a corporate structure. However, for small business owners, there is generally one operating company and the affiliation election may not appear to be initially useful; however, an in-depth understanding of "affiliated" and "eligible entity" may prove otherwise.

Consider a simple corporate structure with one operating company ("Opco") wholly owned by Mr. X. Opco currently has employees, but the revenue of Opco as of May 2020 is identical to May 2019 and would initially not meet the revenue decline test to be eligible for the CEWS. However, Mr. X has his own separate self-employed business whose revenue has declined from May 2019 to May 2020. Note that even if Mr. X earned only passive income, such income should count as revenue, since the definition of qualifying revenue includes cash and receivables derived from "the use by others of resources of the eligible entity" (that is, interest as payment for the use of capital).

Applicants should be aware that eligible entities do not have to be corporations to be able to file the affiliation election. An Opco and an individual shareholder may form an affiliated group of eligible entities for the purposes of the CEWS. See the examples below.

Example 1

Since Mr. X wholly controls Opco, Mr. X is affiliated with Opco pursuant to subparagraph 251.1(1)(b)(i). Therefore, Mr. X and Opco are an affiliated group of eligible entities and they can jointly elect under paragraph 125.7(4)(b) to permit Opco to use the consolidated revenues of the group to determine its own revenue decline test. Under this approach, Opco will now be eligible for the CEWS (see table 1).

Table 1
  Opco revenue Mr. X business revenue Consolidated revenue
May 2019 $100 $100 $200
May 2020 $100 $40 $140
% decline year over year 0% 60% 30%

Mr. X does not need a payroll number since an election is permitted among affiliated eligible entities rather than affiliated qualifying entities. Mr. X would need a payroll number only if he were personally applying for the CEWS.

Example 2

As demonstrated above, the affiliation election is a blessing in some cases. However, if the affiliation election is not properly analyzed, disastrous consequences may arise, because the affiliation election must take into consideration all affiliated eligible entities; an applicant cannot pick and choose which affiliated parties to consolidate with. Consider the same fact pattern as example 1, but Mr. X fails to identify that Mrs. X, his spouse, is also an affiliated eligible entity. Suppose she has interest income, perhaps from a bank, which leads to the result shown in table 2.

Table 2
  Opco revenue Mr. X business revenue Mrs. X interest revenue Consolidated revenue
May 2019 $100 $100 $200 $400
May 2020 $100 $40 $200 $340
% decline year over year 0% 60% 0% 15%

If Mr. X is not careful with his analysis, Opco may erroneously apply for the CEWS and be subject to repayment and penalties.

Martin Lee and Thanusan Raveendran
LRK Tax LLP, Markham, ON

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