2020-0865791I7 CEWS - eligible remuneration
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether certain amounts are eligible remuneration as defined in 125.7(1).
Position: It depends.
Reasons: Eligible remuneration excludes amounts that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever, to the employer.
Section: 125.7(1) "eligible remuneration"
March 29, 2021
Technical Section HEADQUARTERS
Business Audit Division Income Tax Rulings
Attention: Joanne Verkerk Sylvie Danis
CEWS – Shareholder loan and paragraph (c) of the definition eligible remuneration
We are writing in response to your September 26, 2020 request for our views on whether certain amounts meet the definition of “eligible remuneration” as defined in 125.7(1) of the Income Tax Act (Act) for purposes of the Canada Emergency Wage Subsidy (CEWS). In this regard, the underlying issue is whether certain amounts paid or credited retroactively by an eligible entity to an eligible employee who is also a shareholder are considered eligible remuneration paid to the employee for purposes of the CEWS.
In the scenario described, the controlling shareholder of a corporation that is an eligible entity is also an employee of the corporation and was paid a regular salary for the first quarter of 2020. The corporation did not pay a salary to the shareholder/employee for the months of April, May or June 2020 because of financial hardship due to the COVID-19 pandemic. The corporation resumed paying the shareholder/employee’s salary for July 2020 and subsequent months. Throughout all periods, the shareholder/employee continued performing employment duties. The shareholder/employee did not apply for, or receive, the CERB at any time. The corporation is currently indebted to the shareholder/employee as reflected in the due to shareholder loan account. It is our understanding that there were no shareholder draws during the months of April, May and June.
With respect to this scenario, you have asked us the following questions.
1. Can the corporation pay the shareholder/employee’s salary retroactively for periods 1 through 4 and claim the CEWS for the amounts paid for those periods?
2. Where a corporation expenses salary to a shareholder/employee by way of journal entry with a credit (increase) to the due to shareholder loan account, is the salary considered eligible remuneration paid to the shareholder/employee?
3. Where a shareholder/employee is paid salary by way of a transfer of funds which are immediately returned as a capital contribution to the eligible employer, is the salary considered eligible remuneration (or is it excluded due to the application of paragraph (c) in the definition of eligible remuneration)?
In general terms, the CEWS is calculated pursuant to subsection 125.7(2) of the Act for an eligible entity that is a qualifying entity by reference to the eligible remuneration paid to an eligible employee by the eligible entity in respect of a week in the qualifying period.
Subsection 125.7(1) of the Act defines eligible remuneration of an eligible employee of an eligible entity to mean amounts described in paragraphs 153(1)(a) or (g) of the Act, other than the exclusions described in the definition. In particular, paragraph (c) of the definition of eligible remuneration excludes any amount received that can reasonably be expected to be paid or returned, directly or indirectly, in any manner whatever, to
(i) the eligible entity,
(ii) a person or partnership not dealing at arm's length with the eligible entity, or
(iii) another person or partnership at the direction of the eligible entity.
In our view, the reference to “directly or indirectly, in any manner whatever” has broad meaning.
Paragraph 153(1)(a) generally refers to salary, wages or other remuneration and paragraph 153(1)(g) generally refers to fees, commission or other amounts for services. Such amounts are those which employers would generally be required to withhold or deduct amounts to remit to the Receiver General on account of the employee’s income tax obligation.
In our view, salary and wages paid to an employee retroactively in respect of a week in qualifying periods 1 to 4 can generally be considered eligible remuneration paid in respect of those weeks for purposes of the CEWS to the extent that the eligible remuneration reflects the actual amount paid in respect of the particular claim period. Questions 17-5 and 26-1 of the FAQ on the CEWS, available on CRA's Website, address similar matters. However, in the situation described above, where salary and wages are only reflected by journal entry as an expense by the employer with a corresponding credit to a due to shareholder loan account, such salary and wages are not considered eligible remuneration paid to an eligible employee for purposes of subsection 125.7(2).
In addition, where salary and wages are paid to an eligible employee and returned to the eligible employer with a corresponding increase or credit to a due to shareholder loan account or other shareholder loan account, we consider such salary or wages would not be eligible remuneration for purposes of the CEWS pursuant to paragraph (c) of the definition of that term in subsection 125.7(1). Similarly, salary and wages paid but returned to the corporation by the shareholder/employee as a capital contribution or as an amount re-loaned to the corporation would not be considered eligible remuneration for purposes of the CEWS.
We hope these comments will be of assistance. Please do not hesitate to contact us if you have any further questions.
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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