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CEWS 2.0 – Why I see it as another attack on the small business owner

Published

4 years ago

12 minute read

July 18, 2017 – The Minister of Finance announces draft legislation of the Tax on Split Income (TOSI) rule changes that would have far reaching impact into the small business community and although some changes were made, the rules have negatively impacted small businesses ever since and will continue for years to come.

Three years later, July 17, 2020 – The same Minister of Finance tables legislation of the changes to the Canada Emergency Wage Subsidy (CEWS), what I like to call CEWS 2.0 which will also continue for years to come.

Before you try to correct me and say that the subsidy is only for 2020, please read on.

While many media and politician soundbites like to give the impression of how CEWS 2.0 will help small business, I cannot help but see this as an opposite approach.

Do not get me wrong, money is money, and businesses will take all the help they can get, and if my business qualifies, I will take full advantage of it, but I personally don’t have to pay a tax specialist to figure it out.

There are two new calculations to CEWS 2.0.

  1. a baseline amount based on the percentage of revenue decline in the month compared to either the same month in 2019, or the January-February 2020 average revenue amount.
  2. a top-up amount based on the three-previous month revenue decline where it exceeds 50%.

Instead of an all or nothing at a 30% decline, even a 1% decline will get you a pro-rated payout, although the costs of figuring out your eligible amount might outweigh the benefit.

In fact, you could have an increase in revenue compared to this time last year and still get a payout. Make sense?

If the previous three months were greater than a 50% decline you qualify for the top-up amount regardless of the result for the current month.

The complexity of the CEWS design will reward those that have experts in their corner compared to those that do not.

Consider the following scenario:

A large public corporation that has employees making more than $1,129 a week will be able to not only have a simple calculation, they will not have anyone “related” to the corporation that they have to do extra baseline remuneration calculations for. Just like CEWS 1.0, in CEWS 2.0 every employee including the CEO will be subsidized in a public corporation, with no clawback mechanism (as recommended in my earlier article, the Keep it Simple S…ubsidy).

In the large public corporation, the bookkeeping, payroll, and accounting function will be up to date and (I would hope) accurate because of internal controls. They also frequently have large accounting and I.T. departments to easily calculate the eligibility and amounts for such a subsidy.

But let us compare this to a small owner-managed business like a restaurant for example. The profit margins in restaurants are already sliced thinner than the meat on a charcuterie board. Add to this the extra costs of social distancing and safety precautions, as well as the inconsistency of regulations for being closed, re-opened, and closed again as we navigate the pandemic and restaurants seem like a lost cause for a business owner.

Assuming they are able to still successfully navigate the minefield that COVID19 has placed on their livelihoods, many restaurants have dozens of part-time staff, including family members.

So right away we have a glaring difference: relatives.

The rules in CEWS 2.0 has not reduced any of the requirements for calculations to be made with respect to relatives working in the business. Relatives must have been being paid as a wage employee during one of a few optional calculation periods prior to March 15, 2020 to be eligible for any of the CEWS.

Do you remember TOSI?

TOSI basically was designed so you could only income split dividends with related persons under a complex set of strict rules.  Even though restaurants are considered “food services”, the Canada Revenue Agency (CRA) and Finance have in Example 4B of their TOSI explanatory notes an example of a restaurant which would not be considered a service. In doing so, they sent the message to continue to pay yourselves in dividends if you run a family owned restaurant.

As a result, family owned restaurants continued to do just that.

Fast forward to 2020 and you now have family members working in a low margin business, with no support for their dividend remuneration under CEWS 1.0 or CEWS 2.0.

Even if the small business owner was one of the lucky fortune tellers that decided to pay themselves wages, they still have to do a baseline calculation (two different ways – weekly or bi-weekly – for each claim period) just to figure out how much they might be able to get.

Keep in mind the bi-weekly periods are the periods that were set by finance, not the period you may already be using for your payroll cutoff.

Now we have the part-time restaurant staff in my example. The family business now must calculate the average weekly earnings of each individual staff member during the claim period to figure out what the maximum amount of benefit is.

To make it better, the bookkeeping records better be pristine and accurate on a month to month basis, rather than on an annual basis like many, if not most, small businesses do.

Enter in that sale on the 1st of this month instead of the 31st of last month, and you could be looked at as “gaming the system”.

If you are a late-night pub restaurant, make sure that you are closing out the tills at 11:59pm on the 31st of the month – or your numbers would be inaccurate and you could be called a “tax cheat.”

I can’t wait for the Halloween pub crawls this year, when the weekly earnings of those late-night pub staff will have to also be cut off at midnight Saturday, October 31st. At least there will be plenty of mask wearing that night.

So, we now have increased the compliance costs for the small restaurants for monthly reporting, weekly payroll calculations, overnight cutoffs on month-ends, and special treatment for relatives of the business.

It doesn’t take a tax specialist, a cost-accounting CPA, or a PhD in mathematics to figure out that this is going to cost more per employee in overhead costs to the small family business in comparison to the large public corporation.

While I am more than happy to receive money from my clients for doing the immense research and calculations that will be required, the fact remains for the small business owner, is all of this extra work and compliance cost worth it in the end?

Sadly, you will not know if it is worth it, until after you have put in the work to calculate it.

If you happen to be one of the lucky ones that qualifies, you will then have to track the amount of CEWS you received for each employee separately.

This is because the CRA in question 29 of their Frequently Asked Questions on CEWS said that there will be a new box at the bottom of the T4 required to be filled in for the amount of CEWS received for that employee.

But what about my earlier statement that CEWS will impact businesses for years to come? With your calculation and compliance is going on until the end of February 2021 with the addition of the T4 box, does it end there?

February 2021 will just be the beginning. This will begin the audits of the CEWS claims (if they have not already started).

Since the CEWS is required to be reported on the 2020 T4 slips filed by the business in February 2021, would it be fair to say that the three-year tax compliance clock only begins at that time?

This means from now until February of 2024 you can expect to have a call from (likely the payroll audit division of) the CRA to take a look at:

  • your weekly employee wage calculations;
  • the monthly revenue calculations;
  • the monthly cut-offs;
  • the timing of your invoices;
  • the CEWS amounts allocated to individual staff members; and
  • the scrutiny of amounts paid to relatives;

All while you have the joy of having an internal debate with yourself on whether to pay your tax specialist to deal with them, or to try and go at it alone and confused.

July 2017 – TOSI

July 2020 – CEWS 2.0

I wonder what July 2023 will bring.

This article was originally published on July 23, 2020.

—

Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr is the founder of CGL Strategic Business & Tax Advisors (CGLtax.ca). Cory is an advocate for small business in his role as Alberta Governor for the Canadian Federation of Independent Business (CFIB); converts legislation into layman terms for fun; and provides Canadian tax advisory services to other CPA firms across Canada; opinions are his own.

Biography of Cory G. Litzenberger, CPA, CMA, CFP, C.Mgr can be found here.

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CEO | Director CGL Tax Professional Corporation With the Income Tax Act always by his side on his smart-phone, Cory has taken tax-nerd to a whole other level. His background in strategic planning, tax-efficient corporate reorganizations, business management, and financial planning bring a well-rounded approach to assist private corporations and their owners increase their wealth through the strategies that work best for them. An entrepreneur himself, Cory started CGL with the idea that he wanted to help clients adapt to the ever-changing tax and economic environment and increase their wealth through optimizing the use of tax legislation coupled with strategic business planning and financial analysis. His relaxed blue-collar approach in a traditionally white-collar industry can raise a few eyebrows, but in his own words: “People don’t pay me for my looks. My modeling career ended at birth.” More info: https://CGLtax.ca/Litzenberger-Cory.html

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When politicians gamble, taxpayers lose

Published on May 2, 2024

By

From the Canadian Taxpayers Federation

Author: Jay Goldberg

Trudeau and Ford bragged about how a $5 billion giveaway to Honda is going to generate 1,000 jobs. In case you’re thinking of doing the math, that’s $5 million per job.

Politicians are rolling the dice on the electric vehicle industry with your money.

If they bet wrong, and there’s a good chance they have, hardworking Canadians will be left holding the bag.

Prime Minister Justin Trudeau and Premier Doug Ford announced a $5-billion agreement with Honda, giving another Fortune 500 automaker a huge wad of taxpayer cash.

Then Trudeau released a video on social media bragging about “betting big” on the electric vehicle industry in Canada. The “betting” part of Trudeau’s statement tells you everything you need to know about why this is a big mistake.

Governments should never “bet” with taxpayer money. That’s the reality of corporate welfare: when governments give taxpayer money to corporations with few strings attached, everyday Canadians are left hoping and praying that politicians put the chips on the right numbers.

And these are huge bets.

When Trudeau and Ford announced this latest giveaway to Honda, the amount of taxpayer cash promised to the electric vehicle sector reached $57 billion. That’s more than the federal government plans to spend on health care this year.

Governments should never gamble with taxpayer money and there are at least three key reasons why this Honda deal is a mistake.

First, governments haven’t even proven themselves capable of tracking how many jobs are created through their corporate welfare schemes.

Trudeau and Ford bragged about how a $5 billion giveaway to Honda is going to generate 1,000 jobs. In case you’re thinking of doing the math, that’s $5 million per job.

Five million dollars per job is already outrageous. But some recent reporting from the Globe and Mail shows why corporate welfare in general is a terrible idea.

The feds don’t even have a proper mechanism for verifying if jobs are actually created after handing corporations buckets of taxpayer cash. So, while 1,000 jobs are promised through the Honda deal, the government isn’t capable of confirming whether those measly 1,000 jobs will materialize.

Second, betting on the electric vehicle industry comes with risk.

Trudeau and Ford gave the Ford Motor Company nearly $600 million to retool a plant in Oakville to build electric cars instead of gasoline powered ones back in 2020. But just weeks ago, Ford announced plans to delay the conversion for another three years, citing slumping electric vehicle sales.

Look into Ford’s quarterly reports and the danger of betting on electric vehicles becomes clear as day: Ford’s EV branch lost $1.3 billion in the first quarter of 2024. Reports also show Ford lost $130,000 on every electric vehicle sold.

The decline of electric vehicle demand isn’t limited to Ford. In the United States, electric vehicle sales fell by 7.3 per cent between the last quarter of 2023 and the first quarter of 2024.

Even Tesla’s sales were down 13 per cent in the first quarter of this year compared to the first quarter of 2023.

A Bloomberg headline from early April read “Tesla’s sales miss by the most ever in brutal blow for EVs.”

There’s certainly a risk in betting on electric vehicles right now.

Third, there’s the question of opportunity cost. Imagine what else our governments could be doing with $57 billion?

For about the same amount of money, the federal government could suspend the federal sales tax for an entire year. The feds could also use $57 billion to double health-care spending or build 57 new hospitals.

The solution for creating jobs isn’t to hand a select few companies buckets of cash just to lure them to Canada. Politicians should be focusing on creating the right environment for any company, large or small, to grow without a government handout.

To do that, Canada must be more competitive with lower business taxes, less red tape and more affordable energy. That’s a real recipe for success that doesn’t involve gambling with taxpayer cash.

It’s time for our politicians to kick their corporate welfare addiction. Until they do, Canadians will be left paying the price.

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Business

WEF panelist suggests COVID response accustomed people to the idea of CBDCs

Published on May 1, 2024

By

Central Bank of Bahrain governor Khalid Humaidan

From LifeSiteNews

By Tim Hinchliffe

When asked how he would convince people that CBDCs would be a trusted medium of exchange, Bahrain’s central bank governor said that COVID made the digital transformation ‘something of a requirement’ that had ‘very little resistance.’

Central bank digital currencies (CBDCs) will hopefully replace physical cash and become fully digital, a central banker tells the World Economic Forum (WEF).

Speaking at the WEF Special Meeting on Global Collaboration, Growth and Energy Development on Sunday, Central Bank of Bahrain governor Khalid Humaidan told the panel “Open Forum: The Digital Currencies’ Opportunity in the Middle East” that one of the goals of CBDC was to replace cash, at least in Bahrain, and to go “one hundred percent digital.”

Humaidan likened physical cash to being an antiquated “analogue” technology and that CBDC was the digital solution that would hopefully replace cash:

“I thank this panel and this opportunity. It forced me to refine my thoughts and opinions where I’m at a place comfortably now that I’m ready to verbalize what I think about CBDC,” said Humaidan.

If we think cash is the analogue and digital currency is the form of digital – CBDC is the digital form of cash – today, clearly we’re in a hybrid situation; we’re using both.

We know in the past when it comes to cash, central bankers were very much in control with all aspects of cash, and now we’re comfortable to the point where the private sector plays a big role in the printing of the cash, in the distribution of the cash, and with the private sector we use interest rates to manage the supply of cash.

The same thing is likely to happen with CBDC. Yes, the central bank will have a role, but at some point in time – the same way we don’t call it ‘central bank cash’ – we’re probably going to stop calling it central bank digital currency.

“It’s going to be a digital form of the cash, and at some point in time hopefully we will be able to be one hundred percent digital,” he added.

When asked how he would convince people that CBDC would be a trusted medium of exchange, Bahrain’s central bank governor said that people were already used to it and that COVID made the digital transformation “necessary” and “something of a requirement” that had “very little resistance.”

“Right now, many of our payments are digital. The truth is, I said that we’re in a hybrid model; there’s less and less use of cash,” said Humaidan.

I think from predominantly digital with a little physical, I think the transition to fully digital is not going to be a stretch.

People are used to it, people have engaged in it and certain circumstances did help. Its adoption rates increased because of COVID.

“This is where contactless started to become something of a necessity, something of safety, something of a requirement, and because of that there is very little resistance; trust is already there,” he added.

Meanwhile, European Central Bank president Christine Lagarde has been going around the world telling people that the digital euro CBDC would not eliminate cash, and that cash would always be an option.

Speaking at the Bank for International Settlements (BIS) Innovation Summit in March 2023, Lagarde said that a digital currency will never be as anonymous as cash, and for that reason, cash will always be around.

“Is it [digital euro] going to be as private as cash? No,” she said.

A digital currency will never be as anonymous and as protecting of privacy in many respects as cash, which is why cash will always be around.

If people want to use cash in some countries or in some transactions, cash should be available.

“A digital currency is an alternative, is another means of payment and will not provide exactly the same level of privacy and anonymity as cash, but will be pretty close in terms of complete neutrality in relation to the data,” she added.

A WEF Agenda blog post from September, 2017, lists the “gradual obsolescence of paper currency” as being “characteristic of a well-designed CBDC.”

Last year at the WEF’s 14th Annual Meeting of the New Champions, aka “Summer Davos,” in Tianjing, China, Cornell University professor Eswar Prasad said that “we are at the cusp of physical currency essentially disappearing,” and that programmable CBDCs could take us to either a better or much darker place.

“If you think about the benefits of digital money, there are huge potential gains,” said Prasad, adding, “It’s not just about digital forms of digital currency; you can have programmability – units of central bank currency with expiry dates.

You could have […] a potentially better – or some people might say a darker world – where the government decides that units of central bank money can be used to purchase some things, but not other things that it deems less desirable like say ammunition, or drugs, or pornography, or something of the sort, and that is very powerful in terms of the use of a CBDC, and I think also extremely dangerous to central banks.

The WEF’s Special Meeting on Global Collaboration, Growth and Energy Development took place from April 27-29 in Riyadh, Saudi Arabia.

“Saudi Arabia’s absolute monarchy restricts almost all political rights and civil liberties,” according to D.C.-based NGO Freedom House.

In the kingdom, “No officials at the national level are elected,” and “the regime relies on pervasive surveillance, the criminalization of dissent, appeals to sectarianism and ethnicity, and public spending supported by oil revenues to maintain power.”

Reprinted with permission from The Sociable.

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