The Canadian federal government has announced its response to the Covid-19 Pandemic and is implementing a number of measures to help the economy.[1] In terms of cost, the largest of these measures are designed to increase liquidity and help Canadian firms maintain access to credit in these difficult times.[2] There are also numerous ways in which the government is providing support to individuals in need.[3] The Government has also delayed the tax filing deadlines for individuals and trusts.[4] This is all very well and good, and may prove to be more important than any tax relief measures in the long run.
Of course, in the grand scheme of things, complaining about the tax relief package for small businesses (or lack thereof) seems churlish at this point given what is at stake and what people are going through, particularly those individuals and their families who are directly impacted by the virus. However, it is also important that we keep calm and carry on with business, to the extent possible. Part of carrying on with business is not letting the government claim it is doing something substantive when it’s not.
A detailed review of the tax provisions of the relief package shows that the provisions implemented do not really do very much for Canadian businesses[5] in terms of encouraging employers to continue to keep staff on the payroll, regardless of the government’s propaganda to the contrary. The plan relies heavily on lending, but not all businesses can borrow from BDC/EDC or want to take on debt they may have to personally guarantee if they do not think it can be repaid.
The three measures announced so far are as follows:
- Payment Deferral
The Canada Revenue Agency (“CRA”) has been authorized to waive all interest and penalties related to the late payment of all tax balances and installments due between March 28, 2020 and August 31, 2020 under Part I of the Income Tax Act.
- Audit Stop
The CRA will not initiate any reviews or audits of any small or medium businesses until effectively the end of April and will suspend any ongoing audit contact/interaction taxpayers and their representatives.
- Wage Subsidy
If a Canadian small business(“CCPC”) keeps its employees on payroll for the next three months, it will be allowed to deduct from their monthly Canada Pension Plan, Employment Insurance, and Income Tax withholding an amount equal to 10% of wages, up to a total of $1,375 per employee and $25k per employer.
Payment Deferral is Weak Tea
While the first of the three measures will help firms with cashflow by not requiring payments until September, there is no indication that the entirety of the amounts will not come due then. Effectively this will help with short-term cash-flow because Crown payments of income tax can be pushed back, but if not paid in September, there is no indication that penalties would not apply then. Also, this is only for income tax payments, and it has no impact on salary or wages withholding and remittance by the employer. Moreover, there has been no filing deadline relief granted, so corporations with a December 31 year-end will still have to file Corporate income tax returns on June 30th, even if they do not have to pay tax for 2019 until September 1, 2020. As a result, the burden on most employers is not lessened, and only differed for six months. This falls into the category of “not much” in the way of relief.
Stronger Tea
A more effective mechanism would be to declare an effective July 31st “short tax year” for all December 31 tax-year-end corporations.[6] This would allow companies to determine their profit and loss for the short tax year, which would allow firms to offset “Covid19 year” losses against 2019 and previous years’ profits. This would provide much more in the way of actual relief, as it would likely significantly reduce the amounts owing in September 2020. This is also not really much of a change because as things now stand, many corporations that would owe tax for 2019 and have to pay in September 2020, but then when they would normally file in June 2021 for 2020, their (most likely) substantial 2020 losses would be carried back and the tax paid for 2019 in September 2020 would also very likely be refunded in September 2021.
The issue is obviously cash flow. Anticipated refunds in September 2021 of tax that was already paid in 2020 with minimal relief, is clearly too late to have any impact on companies’ decisions regarding retaining employees in 2020. However, not having to pay much, if any tax (and maybe some refunds) in 2020 would go a lot further to keep people employed, particularly in smaller businesses.
As it currently stands losses from a specific tax year can be offset up to three tax years back, but the Ministry of Finance could just legislate retroactively that the shortened “Covid19 Year” to not be a “year” at all, so it just does not count it for carry-forward and carry back purposes.
Granted, this would make a lot of work for accountants and tax advisors, effectively having a double year to file.
Self-Help for Small Businesses
If the government does not offer to make this change, it may be advisable for firms to engage in a little self-help. Under the Act, if a corporation amalgamates with another corporation, there is a deemed year end.[7] It would not be too hard for a business owner to create a sister corporation to their operating company on July 30th, amalgamate them the next day, declare a short tax year in July 31 or mid-August 2020, tally up their losses to date, and file a return for stub 2020 right away. The corporation would then pay the 2019 tax and then ask for the stub 2020 year refund at the same time. This could help a lot with corporate cash flow.
Audit “Relief” Would Have Happened Anyway
The second measure is a non-issue. The CRA is routinely busy and has all hands on deck in April dealing with calls from taxpayers so often April is kind of a “dead zone” for audits in any event. This year with the proposed changes for individuals,[8] is likely to be even more ‘taxing’ on the CRA, so audit personnel would be redeployed in any event.
Employment Subsidy is More Weak Tea
The third measure, the “employment subsidy” is not going to make much difference. For example, Jake has a small business, and he employs three people making $20 per hour. His normal monthly employment bill is ($20 X 40 hrs per week X 4 weeks X 3 people =) $9,600 per month, so effectively Jake could get a subsidy of ($9,500 X 10% =) $960 for three months (=$2,880 in total) if he keeps all three staff on. However, the fine print of the measure clearly states that subsidy is taxable, so assuming that Jake is a small business and pays only 15% corporate tax[9] he only gets $816, or $2,448 in total.
This may seem like something is better than nothing, but Jake still pays employer CPP and EI contributions for these staff, in the amounts (roughly) $619 per month plus other benefit costs. So, if he lets all 3 of them go, he reduces his out of pocket expense by at least $10,219[10], but loses $816 in subsidy, so he is still up by $9,403. On the math, we doubt that anyone will be keeping their employees on staff because of this subsidy.[11] The subsidy will therefore not make a difference on macro-economic scale if it does not make any difference on the micro-economic scale.
Very Strong Tea
Although it would be more expensive, a better solution would be simply for the government to forego employee withholding for EI, CPP and income tax withholding for the next six months. Not to delay it until September 2020, but just to forego the revenue. The result would be at least a 30% to 40% reduction in cash cost to employers of keeping people on the payroll. The UK is paying 80% of employee’s wages up to a maximum amount, other countries are talking about similar subsidies.[12] The 2020 budget is going to be a blow-out anyway, so why not move more aggressively to keep people employed? This would impact small business cash flow from day one and might be enough to encourage Canadian businesses to keep people on the payroll.
Conclusions
Overall, the government’s tax relief
for corporations and businesses is intended to look like it is doing something,
when in fact our analysis shows that it is doing very little. There are much
more expensive and slightly more complicated options that would actually make a difference to what really
matters for sustaining employment, which is small business cash flow. However,
the government’s response was made effectively off-the-cuff with limited input
from small business owners and their advisors and representatives. Given this
situation, the government can perhaps be forgiven this time for rushing out
whatever the Ministry of Finance and the CRA had on hand as tax relief proposals.
We are quite certain that there will be at least a second round of economic and
tax relief. We hope that the government will take its time to speak to the
business-owners it is trying to help before it announces its next relief plan.
[1] See https://www.canada.ca/en/department-finance/news/2020/03/canada-outlines-measures-to-support-the-economy-and-the-financial-sector.html for the official government announcement last week.
[2] See https://www.canada.ca/en/department-finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html#Ensuring_Businesses_Have regarding the liquidity and lending measures.
[3] See https://www.canada.ca/en/department-finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html#Support_for_Canadians for details.
[4] See https://www.canada.ca/en/department-finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html#Extension_of_Deadline
[5] See https://www.canada.ca/en/department-finance/news/2020/03/canadas-covid-19-economic-response-plan-support-for-canadians-and-businesses.html#Support_for_Businesses for the official tax package from the government.
[6] With a correspondingly off-set short tax year
[7] Canadian Income Tax Act, section 87(2)(a), Normally triggering a short tax year is an adverse result, so it may not be advisable in all cases.
[8] Which will be the subject of another blog
[9] Note previous comment about carry-back of losses from the 2020 tax year so there is a tax cost)
[10] Jake also must pay employee withholding on CPP, EI and income tax, but that all comes out of the employees’ wages, and is not an additional amount of cost to the employer.
[11] What is mostly keeping people employed is the cost of severance, but most companies will be just putting people on “notice” in lieu of paying them out, making people work out their time, and then letting them go. But that is a different issue and not tax-related.
[12] See https://www.theguardian.com/society/2020/mar/24/coronavirus-benefits-sick-pay-and-lost-hours-your-rights-in-the-uk and https://www.government.se/articles/2020/03/economic-measures-in-response-to-covid-19/
