Prepare for CRA audit after Canada Emergency Wage Subsidy benefit
Friday, June 04, 2021 @ 1:24 PM | By Eva Khabas
The Canada Emergency Wage Subsidy (CEWS) program was created in a rush to discourage companies from firing workers, or encourage them to rehire workers who had been laid off. Employers deemed ineligible for the program but who still received funds must repay what they got. They also have to pay interest in the case of excessive amounts (amounts the recipient was not eligible for), not to mention penalties if the CRA thinks the claims were fraudulent.
At this time the interest due for overpaid CEWS is not known, but the current interest rate for overdue taxes, CPP, EI and other things is five per cent. If the CRA thinks an employer artificially reduced revenue for the purpose of CEWS, the penalty is 25 per cent of the total subsidy claimed, in addition to repaying the excess CEWS funding received, plus interest.
But it doesn’t end there. If in the mind of the CRA an employer knowingly, or under circumstances amounting to “gross negligence,” made a false statement or an omission in their application for a wage subsidy, they could be looking at a gross-negligence penalty of up to 50 per cent. That is 50 per cent of the difference between the amount of CEWS claimed and the actual entitlement received. This can be a lot of money. Penalties may also include fine and even imprisonment!
A Tax Court ruling in 2015 involving Halifax-based Immunovaccine Technologies Inc. and the CRA concluded that companies should not be getting subsidies and also tax credits as a means of subsidizing expenses. It is no secret that any subsidy comes at a cost. Surprisingly however, in the case of CEWS, the combined penalties and interest may wind up with revenues going to the government, not the taxpayer.
Keep in mind that any CEWS payment received is taxable income subject to corporate income tax. Let’s look at a hypothetical case with a Canadian-controlled private corporation applying for CEWS funding for 60 per cent of $300,000 in employee wages over a certain period. That works out to a request for $180,000.
In this case the company declared a drop in revenue of more than 50 per cent, but let’s say its actual drop was only 30 per cent. That means its claim should have been for 24 per cent of those wages, not 60 per cent. To see a table that compares two scenarios, one with excessive claim and one with CRA-revised claim and applicable interest and penalties, click here. The benefit to this company will be zero and they actually wind up paying $7,416 to the government! In a somewhat better scenario the penalty for understating revenue is 25 per cent of the total claim — not the difference — resulting in a penalty of $45,000. Or $9,000 less than the first example.
In either case, if the CRA suspects something fishy and comes after you with an audit afterward, the reassessment negates any benefit received and might even lead to bankruptcy. Such is more likely to happen in a business where employee remuneration is a significant part of total business expenses.
Considering all the possible implications, here are some things to keep in mind in the case of a CRA audit.
Filing for a CEWS claim involves only a single-page document. However, the standard audit request from the CRA announcing an audit is nine pages! What’s more, it requests information in 10 different categories. The 10 categories of required information are:
- Complete documentation from your minute book and not only pertaining to CEWS.
- Revenue details for the current year in different formats.
- Revenue details for the prior year in different formats.
- Working papers in relation to your CEWS calculation.
- Payroll information.
- Information related to other subsidies.
- Signed copy of attestation filed with your application for CEWS.
- Information concerning exceptions/elections related to CEWS.
- Remuneration (i.e., what is excluded from the claim).
- Details on qualifying revenue.
Despite that long list, your expected turnaround time is two weeks. Ten business days. Given the short turnaround time, the extensive list of requests and all the potential consequences, here are some tips to minimize the impact of a potential audit:
- Keep all documents in relation to the original claim you filed, along with any amendments. This means not only your working papers, but also information from the CRA website advising you on how to proceed with the claim.
- Keep any legal documents protected by solicitor-client privilege.
- Have only one contact person in your organization deal with the CRA.
- Review all documents repeatedly before providing them to the CRA.
- Review legal documents, including everything from your minute book, and if you don’t have one a lawyer must prepare it. This is for any potential issues that can arise or that can be flagged by the CRA for other audits.
- File the applicable notice of objection within 90 days of receiving the reassessment or determination.
Finally, when considering the cost of keeping people employed under the CEWS program, remember all the potential exposures you may be subject to. And that’s why consulting a knowledgeable accountant and lawyer is a good idea.
Eva Khabas is an accountant who runs Tax By CPA.
Photo credit / NatalyaBurova ISTOCKPHOTO.COM
Interested in writing for us? To learn more about how you can add your voice to The Lawyer’s Daily, contact Analysis Editor Yvette Trancoso-Barrett at Yvette.Trancosoemail@example.com or call 905-415-5811.