Canada Emergency Wage Subsidy and Shareholder Employees?

Effective July 05, 2020, there are new rules applicable to non-arm’s length employees and Canada Emergency Wage Subsidy, please read here.

In response to COVID-19, the government of Canada has announced a series of relief measures. Canada Emergency Wage Subsidy (CEWS) is one of such measures to provide relief to businesses. One of the most frequent questions we are having from a lot of small businesses is the eligibility of shareholder-employees.

This post focuses only on the eligibility of shareholder-employees of a corporation, or owner-managers. Read: Our post on wage subsidy programs in Canada due to COVID-19 here. 

Owner-managers or shareholder-employees deal at “Non-Arms Lengths (NAL) “

A shareholder who works for a corporation does not deal at arm’s length with the corporation. They deal at non-arms length (NAL). Term non-arm’s length is the dealing between related persons. The fact that shareholders control the corporations and have the power to modify their own remuneration makes them deal with their corporations at non-arms length.

What is the special rule for Non-Arms length employees of business?

Canda Emergency Wage Subsidy does not prohibit the application of CEWS to the shareholder-employees but it does apply some restrictions to avoid the abuse of the relief program. There is a special rule for employees who do not deal at arm’s length with the corporations. It is important to note that this is applicable to anyone who does not deal with the corporation at arm’s length. It might be the spouse of the shareholder who works for a corporation, or a dependent.

Here are some of the questions asked by lot of small business owners in the past couple of days:

I did not pay myself salary but I pay myself whenever I need money, am I eligible for CEWS? The answer is no! The employee is the one for which you have had deducted source deductions and remitted to the Canada Revenue Agency. If you simply pay yourself a lump sum amount every month and do not make payroll deductions, you are not an employee.

I do not have any other source of income, can I put myself on the payroll and get 75% from the government? The answer is again “no”!  You must be an employee working for the corporation before March 15, 2020.

I used to pay myself dividends and salary but there is no more business, can I increase my salary to get a 75% wage subsidy? No, there is a limit on the wage subsidy per employee. You can get subsidy whichever is lower of below:

1. $875/week
2. 75% of pre-crisis remuneration paid to non-arms length employees.

Can I hire more employees to get the benefit of 75% wage subsidy? Yes, you can as long as they are not dealing at non-arm’s length. In fact, you are encouraged to hire new employees or re-hire laid-off employees.

Retro-active hiring of Shareholder Employees

You can hire shareholder-employees or non-arms length employees retroactively. In that case, use the average of remuneration paid between January 01, 2020, and March 15, 2020.

Read: How can you take advantage of COVID-19 situation by hiring new employees.

This post is written for general discussion purposes and cannot be considered as tax advice at any point in time. We shall keep on updating this post with future developments. If you need advice, please note that Maroof HS CPA Professional Corporation does not provide any kind of phone consultation or direct messaging services to non-clients. If you are not a client, please contact your tax accountant in Canada or Canada Revenue Agency. However, we do take an active part in the Facebook discussion to help to share our knowledge. You are encouraged to follow the below post and leave your questions in the comments section (no direct messages please, we have a communication overload).