Dividends Only – Are owner-managers out of luck for COVID-19 support?
Article by Joseph Devaney CPA, CAFollow VP Education and Development at Video Tax
Owner-managers who have traditionally chosen to be remunerated via dividends are expressing concerns that the incentives related to COVID-19 may not be fully available to them. In particular, their access to the following may be limited: the 75% Canadian Emergency Wage Subsidy; the 10% Wage Subsidy; the Canadian Emergency Response Benefit; and the $40,000 Canada Emergency Business Account loan. This article explores support applicability and possibilities.
75% Canadian Emergency Work Subsidy (CEWS)
1) The pre-crisis income restriction
This 75% payout is subject to additional limitations in respect of salaries paid to non-arm’s length (NAL) employees. This would generally include owners that directly or indirectly control the corporation, those directly related to them, and those that do not factually act at arm’s length from the business.
According to the Finance Release, the subsidy amount for such employees will be limited to the eligible remuneration paid, "up to a maximum benefit of $847 per week or 75 per cent of the employee’s pre-crisis weekly remuneration". While not explicitly stated, the maximum benefit appears to be a "lesser of " test, meaning that the maximum is the lesser of $847/week, and 75% of the employee's pre-crisis weekly remuneration. If it was a "greater of" test, the owner could potentially pay him/herself a salary of $1,000,000 and have $750,000 of it subsidized, which does not make sense given that any other employee is restricted to $847/week.
Therefore, if there was no remuneration prior to March 15, no portion of the later salary will be eligible for the CEWS. It is likely that this element has been introduced to avoid artificial increases in salary to take advantage of the subsidy. Hopefully this test will be clarified in near future.
2) Will a dividend count towards pre-crisis income?
We do not have a definition yet, but the Department of Finance has noted the details will be coming shortly. However, in the meantime, we know that the Finance backgrounder uses the word “remuneration” when describing such income. Remuneration is defined in Income Tax Regulation 100(1), but does not include dividends. Once the legislation is tabled and passed, we will be able to assess whether it would be included, however, according to the government releases up to this point, it is unlikely.
3) Can I accrue a salary?
Assume that the NAL employee has provided services prior to March 15 for which they have not yet been remunerated. Is it possible to accrue salary in respect of it? It depends on the legal relationship that the individual has with their organization. For example, are they actually an employee? Is there an employment contract in place? What is their history of remuneration? What understandings were in place?
It may be possible to accrue such wages, however, there are several other issues to consider. For example: Will “pre-crisis remuneration” be a weekly proration of a year’s salary and, therefore, the impact of a week’s payments be negligible? Was there, in fact, a pre-existing right to the remuneration accrued? Will this be considered abusive?
In summary, the condition that that there must be pre-crisis remuneration could prevent the 75% subsidy in respect of much of the crisis period salary paid to NAL employees who were not already receiving regular payments of employment income.
10% Work Subsidy (WS)
1) Are there NAL employee restrictions?
In the legislation (Bill C-13) which was passed on March 25, 2020, there were no restrictions released in respect of salaries earned by NAL employees. Simply, 10% of remuneration paid during the eligible period would be available for the WS if the other conditions are met (ex. if it is a CCPC, it must have small business limit available). Therefore, it may be possible to start paying salaries. There are no parallel NAL restrictions to the 75%. However, this does not mean that the government will not introduce them when Parliament sits again to pass the legislation in respect of the 75% subsidy, or at some later date. As well, if they consider the situation abusive, CRA may seek to invoke the General Anti-Avoidance Rule (GAAR). Government officials have announced multiple times that there will be strict and severe repercussions for those that game the system.
2) Would commencing salary payments now constitute a gaming of the system?
Again, this is a question to be determined as legislation and further details are to be released. However, I do note that the 75% subsidy appears to specifically prevent such planning, which may indicate the government’s view on abuse. On the other hand, it has generally been accepted that actively involved owners could generally choose how they are remunerated from active business earnings, be it by salary or wages. At question is whether such wage-like dividends now converted to wages would be considered abusive. Again, clarity is required. Unfortunately, it seems quite possible such clarity will not be available until after the subsidy periods have ended – perhaps many years after, if we must wait for CRA audits of the years in question, or even Court decisions.
However, there is nothing that would stop an owner from commencing to pay salaries now, and then holding off in applying for the WS if clarity is achieved in the near term. Such actions will at least leave the option open in case it is determined to be clearly acceptable. Keep in mind that amounts can be claimed in a later period.
Canadian Emergency Response Benefit (CERB)
1) The $5,000 restriction
Amongst other conditions, this benefit is available where the individual received certain types of income totalling at least $5,000 in the 2019 year, or the 12-months prior to application. The types of income include self-employment income and wages, but do not include dividends. Therefore, some entrepreneurs are considering the commencement of earnings from the corporation in the form of self-employed income or wages prior to application. Would this be abusive? Again, it is uncertain. Where the owner-manager has been providing services which would support ongoing salary payments, it does not seem that paying sufficient salary to be eligible for the CERB would be offensive. If the business were not incorporated, the CERB would be available. However, whether the government, Finance and CRA agree with the writer on this point is, obviously, uncertain.
Finally, like above, one may consider changing to such remuneration now in order to preserve the option to receive such benefit once the rules become clearer. Like the wage subsidy, the benefit can be applied for at a later point.
$40,000 Canada Emergency Business Account loan
To qualify for this partially forgivable loan, organizations will need to demonstrate that they paid between $50,000 and $1 million in total payroll in 2019. If a corporation consisted only of an owner-manager taking dividends, there may not have been a large enough payroll to meet the $50,000 test. Unfortunately, the government has not yet made comments which would provide alternative eligibility factors for such scenarios. Similar issues may apply to those organizations that were incorporated in 2020 which would have no 2019 payroll, or cash strapped businesses operating in 2019 in which the owner had forgone salary for liquidity purposes. Consider contacting your MP if any of these situations apply to yourself or a client, and you would like to voice your concern.
Final Thoughts
It is, of course, important to remember the purpose of these assistance programs. The wage subsidies are intended to provide an incentive to business owners who, faced with a significant reduction in revenues, retain their employees. It seems like a business owner who retains all of the pre-COVID-19 employees, at pre-COVID-19 remuneration levels, would present a much more sympathetic case than one who lays off all unrelated staff, but continues remuneration for the owners and related parties to claim wage subsidies. Similarly, it seems like a business owner who was truly placed in financial distress due to COVID-19, and therefore claimed the CERB, would present a more positive picture than one who simply chose to cease conducting business when they had options to continue, in some form, during the crisis.