COVID-19 updates: Amending CEWS claims, CEWS and corporate groups, DSLPs and time limits

In our discussions with the Canada Revenue Agency (CRA), we continue to learn more details about the Canada Emergency Wage Subsidy (CEWS) and other COVID-19 related issues. Find out about the latest updates.

Today’s blog features news about:

  • the CRA’s new process for amending CEWS claims
  • guidance on CEWS claims on tax consolidation for corporate groups
  • draft proposals for extending tax deadlines
  • the CRA’s priorities as audit work resumes
  • the status of deferred salary leave plans (DSLPs) for employees on leave for over six years
  • administrative leeway for health care spending accounts
  • draft proposals for extending certain tax limitation periods
  • our update on outstanding COVID-19 tax measures (beyond those related to the CEWS)

CEWS update

CRA opens amendment process

On June 1, 2020, the CRA opened its process for amending CEWS claims through Represent a Client (RAC) or My Business Account (MyBA). Representatives must have level 2 or 3 authorization to change a claim on an employer’s behalf. Claimants need to update their Attestation for owner/managers and/or senior employees to support an amended application.

Based on the CRA’s instructions for making these changes, we understand that when a claimant or advisor selects the option “adjustment to a prior claim” within MyBA and RAC, the CEWS interface will show the data originally filed and ask them enter the revised data, and not the adjustment amounts.

When the change increases the CEWS amount, the claimant will receive the cash the same way as when they originally filed. When there is an overpayment, the CRA recommends repaying the overpaid amount immediately. My Business Account  has been updated to allow claimants to “view and repay CEWS balance.” Coming soon, the CRA’s website will provide more information about other options for CEWS repayments.

The CRA also updated their website with further information on how they plan to review claims, which may involve calls or letters from the CRA. The CRA also offers advice on how claimants can verify that such CRA calls are legitimate.

Finally, the CRA indicates that any suspected misuse or abuse of the CEWS program can now be reported through the CRA’s Leads program.

Some outstanding questions we have raised with the CRA include:

  • How will the CRA apply interest and penalties for CEWS overpayments?
  • How will the CRA apply the CEWS anti-avoidance provision?

We will continue to follow up with the CRA on these questions and update you as we learn more.

FAQs deliver more guidance on consolidated revenues

On May 29, we reported on our COVID-19 Tax Updates page that the CRA had added four more questions to their Frequently Asked Questions (FAQs) about the CEWS. The answers to questions 9-1 and 10-2 are of special note as they clarify how to compute revenue for the CEWS under subsection 125.7(4) of the Income Tax Act (ITA).

Eligible entities can use consolidated revenue for the revenue test provided that conditions are met. We asked the CRA for more guidance on how these rules apply for non-resident entities, particularly the requirement to exclude from consolidated revenue any revenue that did not arise from ordinary activities in Canada. For example, the rule raises concerns where a Canadian manufacturer selling goods to a non-resident group member, which then sells the goods to the final customer in that non-resident’s jurisdiction.

In question 9-1, the CRA states: “An amount representing a portion of the revenue from a sale to a third party by a non-resident member of the group may be included in computing the qualifying revenue of the eligible employer if it can be demonstrated that it arose in the course of the ordinary activities of the group in Canada.”

The CRA adds: “In determining whether a portion of the amount of a sale to a third party arose in Canada, each transaction or series of transactions will need to be considered in light of the facts and circumstances of that particular situation.” By referring to a portion of revenue, it seems that a transfer pricing approach should be used.

While these comments are helpful, we believe that a practical example would also be useful.

In question 10-2, the CRA discusses consolidation issues where affiliated corporations are not part of the same ownership chain. The CRA’s answer indicates that affiliated entities that do not normally consolidate revenue can elect to apply paragraph 125.7(4)(b). The CRA says: “They can jointly elect to determine their revenue on a consolidated basis, as though the relevant accounting principles for consolidation applied to them.”

By referring to “as though”, the CRA appears to say that consolidation principles can be used for paragraph 125.7(4)(b) where consolidated statements would not be prepared under relevant accounting principles. This addresses a concern we raised earlier about the wording of paragraph 125.7(4)(b), where it states that if an eligible entity and each member of an affiliated group jointly elect “the qualifying revenue of the group determined on a consolidated basis in accordance with relevant accounting principles”. Consolidation may not be possible under relevant account principles where affiliated corporations are not part of the same ownership chain.

The CRA also reiterates that when paragraph 125.7(4)(b) is used, all members of the affiliated group must use it.


CRA resumes audit work

The CRA announced that they are resuming a full range of audit work, putting priority on actions where the taxpayer benefits or where taxpayers have urgent reasons for advancing their audit. The CRA will also focus on higher dollar audits first, as well as audits near completion or having strategic importance to the government.

From our discussions with the CRA, we understand they are considering new ways to interact with taxpayers, and they will develop new processes and protocols in support. We have encouraged the CRA to seek feedback from CPA Canada and our members as they develop these new approaches.

No need to end deferred salary leave plans

The CRA has released several technical interpretations that have eased some concerns over the impact of COVID-19 on deferred salary leave plans.

As background, the DSLP rules permit employees to defer salary to fund a leave of absence from their employment, subject to conditions. One condition is that the deferral period cannot exceed six years, with the leave period beginning immediately afterwards. Another condition is that the leave period generally must be one continuous period of at least six consecutive months. Under existing rules, where these conditions are not met, the plan has to be terminated, with all deferred salary paid to the employee and included in their income.   

In the recent TIs, the CRA confirms it will not require employers to terminate DSLPs for employees whose leave of absence goes beyond the maximum six-year deferral period (see TI 2020-0848641E5 and 2020-0848511E5), and that it is also permissible for the leave period to be interrupted for COVID reasons (see TI 2020-0849681E5).

The CRA points out that they have no discretion to change the current conditions for DSLPs, as this would require amending Income Tax Regulation 6801. The CRA raised these issues with the Department of Finance Canada (“Finance”) and they agreed to consider it as part of their overall review on issues with the DSLP rules due to COVID-19.

Pending Finance’s review, the CRA says they “will not require an employer to terminate an employee's DSLP for failing to meet either of the above conditions. This administrative position will apply regardless of the reason for deferring the leave or for returning to work. In addition to providing flexibility to health care workers and others providing essential services, it will also accommodate, for example, employees who had planned to travel during their leave but who are now unable to, or who had to return early, because of travel restrictions.”

Administrative leeway for health care spending accounts

In another development of interest to employers, the CRA stated that they will allow administrative relief for health care spending accounts (HCSAs) due to the pandemic. A number of considerations and conditions must be reviewed to determine whether HCSAs and other plans qualify as private health services plan (PHSPs). One key condition is that the plan must involve a reasonable element of risk to qualify. For an HCSA, this generally requires a limit on the ability to carry forward unused credits.

The restrictions placed on access to some health-related services could cause the credits to expire, so the CRA stated in TI 2020-0846751E5 that relief will be provided. Where unused credits under a HCSA would otherwise expire between March 15, 2020 and December 31, 2020, the CRA stated that HCSA’s can temporarily permit a reasonable additional carry forward period. They went on to say that a period of up to six months would generally be considered reasonable and would not, in and of itself, disqualify the HCSA from being a PHSP.

Joint Committee offers input on time limit proposals

On May 19, 2020, the Minister of Justice released draft legislation on time limits and other periods in COVID-19 circumstances. The proposals would suspend limitation periods in civil proceedings before the courts. It would also suspend or extend some limitation periods in a number of statutes and regulations (including the ITA and Excise Tax Act (ETA)) where COVID-19 may make compliance difficult or impossible, or where the periods’ expiry could produce unfair or undesirable effects.

On tax time limits, the proposals would allow the CRA to suspend or extend:

  • filing deadlines for some scientific research and experimental development forms, including Form T661 and Form T2 Schedule 31
  • the normal reassessment period under ITA subsection 152(3.1)
  • the periods within which the CRA may assess, reassess or make an additional assessment beyond the normal reassessment period under ITA subsection 152(4)
  • the limitation periods for GST/HST assessments and reassessments under ETA subsections 298(1) and (2)

The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada  (“Joint Committee) raised a number of important issues and concerns about these proposals under both the ITA and ETA in a recent submission.

COVID-19 tax issues list updated

We continue to work with the government to resolve items on our summary of outstanding COVID–19 tax issues (beyond those related to CEWS). We invite you to review the latest updates to this list. As our work proceeds, we’ll keep you posted on important updates through our tax blog and our COVID-19 Tax Resources page.

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