COVID-19 tax issues: Regs on RPPs and DSLPs, CEWS updates, and more

Our discussions with the Canada Revenue Agency (CRA) continue as the government evolves its COVID-19 tax measures and administrative practices. Find out the latest key announcements and changes made in the past few weeks.

In this update, we highlight:

  • draft regulations providing temporary relief for Registered Pension Plans (RPPs) and Deferred Salary Leave Plans (DSLPs)
  • update on the Canada Emergency Wage Subsidy (CEWS), including new information about the process for CEWS-related administrative disputes
  • tax filing deadline extensions and other important updates

Relief for RPP and DSLP

Finance Canada proposed to amend the Income Tax Regulations to provide relief for RPPs and DSLPs through measures that would help employers manage and maintain their employee benefit obligations during the pandemic.

Relief for RPPs

The proposed regulations would provide temporary relief to help RPP administrators manage and maintain their benefit obligations through the COVID-19 pandemic. These measures propose to:

  • temporarily remove RPP borrowing restrictions
  • extend the deadline for crediting pensionable service retroactively
  • permit catch-up contributions to money purchase RPPs for 2020 
  • maintain pension coverage during periods of reduced pay

These changes are subject to conditions that are summarized in the backgrounder. 

Stop-the-clock rules for DSLPs

In our previous blog post, we discussed concerns that a DSLP could be terminated when COVID-19 causes an employee to cancel or postpone their paid leave of absence or causes their leave to be interrupted. The government is proposing to address these concerns with rules that would “stop the clock”: 

  • If an employee was on a leave of absence and returned to work on or after March 15, 2020, and then resumed their leave of absence on or before April 30, 2021, the two leave periods will be considered as one leave of absence:
    • If the leave of absence resumes in 2020, the deferred salary must be fully paid by the end of 2021.
    • If the leave resumes in 2021 but no later than April 30, the deferred salary must be paid by the end of 2022.
  • If an employee has not yet started a leave of absence and their deferral period would first exceed six years between March 15, 2020 and April 30, 2021, the deferral period will be extended to enable the employee to postpone the start of their leave by up to 14 additional months.

These regulations are in line with administrative positions set out in several recent CRA interpretations and summarized in our blog.

Updates on the CEWS

As you may recall, Finance Canada publicly consulted on how the program could be evolved, and you can read a summary of CPA Canada’s feedback. On July 13, the Prime Minister announced that the government will extend the CEWS through to December 2020. No further details on this extension or other program changes were included in the Prime Minster’s announcement. We will provide more information as soon as it becomes available.

In addition to the extension, the CRA updated its Frequently Asked Questions (FAQs) on the CEWS on July 9. Some important updates included:

Period 4

The FAQ now reflects the extension to include period 4 of the program which was recently implemented through Regulation 8901.2. Period 4 runs from June 7 to July 4 under the same rules as for the first three periods.

Tax-exempt trusts

In question 3-01, the CRA discusses Bill C-17’s proposals around the amended definition of eligible entity and tax-exempt trusts. It is proposed that where the trust is a tax-exempt entity (other than a public institution), it would qualify as an eligible entity only if it is a registered charity or one of the other types of eligible tax-exempt entities. This change, if enacted, will apply for claim periods beginning on or after May 10 and the CRA will apply the change at the time of Royal Assent.

Amalgamations and wind ups

The CRA has revised question 6-4 but there is no substantive change. The CRA discusses Bill C-17’s proposed change to allow corporations formed by amalgamation of two or more predecessor corporations (or where a corporation is wound up into another) to calculate benchmark revenue using combined revenues

Foreign currency issues

Questions 6-7 and 6-8 have been added and provide guidance on exchange rate fluctuations and functional currency reporting. The CRA states that where an eligible employer’s normal accounting practice is to convert the inflow of cash, receivables and other consideration to Canadian currency from a foreign currency, then the eligible employer would be expected to use the Canadian currency equivalent of the amounts in the computation of qualifying revenue.  Similarly, an eligible employer who files their tax return using a functional currency should determine its qualifying revenue based on the currency it uses under its normal accounting practices, which the CRA assumes will be the foreign currency.

Elections under paragraph 125.7(4)(d) involving non-residents

New question 8-01 deals with situations where an employer elects under paragraph 125.7(4)(d) and the “particular person or partnership” is a non-resident. The CRA states that the eligible employer may use the foreign currency amounts used by the non-resident person or partnership in its normal accounting practices to determine the particular non-arm’s length person’s or partnership’s qualifying revenue for the prior reference period and the current reference period.

Documentation for elections

Question 12-2 clarifies that form RC661  is where an employer will indicate which elections were made as well as attest that the application is accurate and complete.

Treatment of vacation, holiday and sick pay

Question 17-3 provides guidance on how sick pay, vacation pay, and statutory holiday pay is included in eligible remuneration. In general, these amounts are paid in two ways: as regular salary when the person is actually absent from work; or, as a lump sum in lieu of not taking time off. The CRA confirms that to be eligible for a particular period, the sick, vacation or holiday pay entitlement must be paid to the eligible employee in respect of a particular week in the claim period. In particular, the CRA provides:

  • Where the employee takes time off, this entitlement will be included in the week(s) in which the employee is absent from work (in other words, no adjustment to remuneration paid is necessary).
  • Where the entitlement is paid regularly (i.e. in each paycheque), the entitlement is eligible at the same time as the regular pay.
  • Where the entitlement is paid in lieu of not taking time off as a lump sum, the amount will not be eligible for the week in which it was paid. Also, it would seem that the CRA is saying that it cannot be considered for the prior periods in which it accrued either (see example 9-4, where CRA states that the lump sum “will not qualify for the wage subsidy”).

Recourse for denied claims

Question 36 provides guidance about the recourse process when CRA denies a CEWS claim, which we describe in greater detail below

The CRA also previously updated its CEWS FAQs on June 19, and we highlighted the key changes on June 24 on our COVID-19 tax updates page. The changes include commentary from the CRA on proposed changes included in Bill C-17 and further guidance on determining qualifying revenue for the CEWS in various situations. .

The CRA’s FAQs confirm that they would only administer and apply Bill C-17’s proposed changes once the legislation has received Royal Assent. At the time of writing, Bill C-17 has not progressed beyond first reading on June 10.

Finally, in a recent web post addressing potential changes to the CEWS, the CRA states: “Any potential changes would commence as of periods 5 (July 5 to August 1) and/or 6 (August 2 to August 29). Further details on this will be forthcoming.” The CRA confirms in footnote 4 of the latest FAQ update that claims for period 4 would follow the same rules as the original three periods. 

Dispute process for denied CEWS claims

Some of our members are concerned that the process for disputing an unsuccessful CEWS claim is unclear. When we raised this with the CRA, they offered guidance as follows:

  • If an employer disagrees with a claim decision, the employer may ask the CRA to review the application again (i.e. a second-level review). The request must include all supporting documents and be sent within 30 days of the date of the decision letter. This review would be independent and would not be completed by the original decision maker.
  • Employers can make these requests online by logging into My Business Account and selecting “Register a formal dispute (Appeals)” in the payroll section. The CRA notes that the Appeals Branch will not conduct these second-level reviews. Using the Appeals portal will make it easier for the CRA to receive and process review requests.
  • If the dispute remains unresolved following the second-level review, formal recourse rights through the Appeals process will still be available once a Notice of Assessment (or Notice of Determination) has been issued for the employer’s taxation year for income tax purposes. We have asked the CRA to clarify how this will work for employers who will not receive such an assessment.

Extensions and other important updates

Since our last blog post, Finance Canada and the CRA have provided updates on deadline extensions and other administrative matters. Here’s our round-up of some of their most important announcements.

Section 216 returns for individuals

Among the CRA’s extended filing deadlines, the due date for non-resident individual T1 returns electing under section 216(4) or section 217 has been extended to September 1 (from June 30). The CRA also confirmed to us that they will administratively extend the undertaking referred to on the NR6 form. As a result, the CRA will not issue a default assessment against the agent of a non-resident taxpayer who fails to file their subsection 216(4) return unless the agent misses the extended September 1 due date. We have asked the CRA whether they would allow similar relief for corporate returns.

Section 216 returns for corporations

Given the CRA’s announcement on section 216 returns for individuals, we asked the CRA whether similar relief would be provided for corporations. In their response to us, they stated that these corporate tax returns are eligible for the filing and tax payment extensions that apply for corporations generally. The CRA also said they would not issue NR6 default assessments against the agent of a non-resident corporate taxpayer for corporations that file their subsection 216(4) T2 return:

  • on or before June 1, 2020 (for non-resident corporate taxpayers otherwise having a filing deadline after March 18 and before May 31, 2020)
  • September 1, 2020 (for those otherwise having a filing deadline on May 31, or in June, July, or August 2020)

Guidance on international tax issues

On May 20, the CRA provided guidance on international income tax issues arising from COVID-19. The guidance initially had effect from March 15 to June 29, but in a June 26 update, the CRA extended it to August 31. (This update did not include any other significant changes.)

Scientific research and experimental development (SR&ED)

As we noted on our COVID-19 tax update page on June 26, the filing deadline for SR&ED claims has not changed. They remain due 18 months after a corporation’s year-end. If enacted, Bill C-17 would allow the CRA to provide relief for late-filed claims.

Contemporaneous documentation for transfer pricing

For corporations, contemporaneous transfer pricing documentation is due at the same time as their corporate income tax return, according to the definition of “documentation-due date” in subsection 247(1) of the transfer pricing rules of the Income Tax Act. In view of other COVID-19 extensions, we followed up with the CRA on when this documentation is now due. The CRA confirmed that where a corporation qualifies for the extension to September 1, 2020 to file its corporation tax return, this extension will also apply to the documentation-due date definition in subsection 247(1).

GST/HST tax and duty remittances and electronic signatures

Finance Canada announced on June 29 that it will not allow an additional deferral on sales tax and duty remittances. All remittances were due on June 30. Finance Canada stated that businesses that still have difficulty remitting GST/HST and customs duty amounts can contact the CRA and Canada Border Services Agency (CBSA) to request cancellation of penalties and interest and/or to make a flexible payment arrangement with the CRA. We will continue to discuss with the CRA whether there are common situations where broad-based relief should be granted.

In their new FAQs on electronic signatures for GST/HST documents, the CRA says it is temporarily accepting electronic signatures for GST/HST documents submitted online. The CRA indicates that, as of July 6, 2020, businesses can use a new service to submit a GST/HST document with an electronic signature. This service will be linked to the main web page of the GST/HST program account menu in My Business Account. This temporary measure does not apply to paper-filed GST/HST returns and forms. We will continue to discuss with CRA whether any further accommodations can be made for paper filers.

Canada Emergency Commercial Rent Assistance (CECRA)

The government announced that it is extending the CECRA program for one month. This program offers relief for small businesses experiencing financial hardship due to COVID-19. Relief is delivered by providing unsecured, forgivable loans to eligible commercial property owners so they can reduce the rent owed by their affected small business tenants and meet the operating expenses on their commercial properties.

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NOTE: The commentary function of this page has been temporarily closed. Unfortunately, because of the volume of feedback regarding recently announced COVID-19 tax measures, we do not have the capacity to respond to individual inquiries. We strongly encourage you to visit our Federal Government COVID-19 Tax Updates page for information.

About the Author

Bruce Ball, FCPA, FCA, CFP

Vice-president, Taxation, CPA Canada