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

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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.

CEO | Director, Canadian Tax Advisory CGL Strategic Business & Tax Advisors 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://www.CGLtax.ca/Litzenberger-Cory.html

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Red Deer Downtown Business Association

Downtown Business Spotlight : Barbershop on Gaetz

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This week, we shine our ‘Business Spotlight’ on Barber Shop on Gaetz. Did you know Barber Shop on Gaetz holds the title of being the longest-running barbershop in Red Deer? Originally opening in 1947, this unique shop has been operating under Selene Fraser for the past 11 years and has a very loyal clientele who have supported the Shop even through a temporary relocation following a fire. You can find them in the basement of Evergreen Massage right next to the Club Café until they are able to return to their regular location. Selene would like her clients to know that she’s happy to go mobile for any clients that are unable to access the basement. Read on to learn more!

What is your business?

We are Barber Shop on Gaetz.

When did your business open?

The business originally opened in 1947 and I am the 8th owner, operating for 11 years now.

What makes your business unique?

The customers! We have the best customers and I’m not kidding – I say that every time. I’ve worked in so many shops in my career, I’ve been doing hair for 35 + years and I’ve had the most fun here. Not because I own the place, it’s the people that make it great.

What are some products/services that you offer?  

We offer full services for men including hot shaves, colors, and highlights although we don’t do a lot of those. We do a lot of hot shaves. As for products, we offer the Maverick line, Crew line, Carina Organics line, beard oils, anything to do with shaving we supply. Ladies and children’s cuts are also available.

 

Why did you choose Downtown Red Deer as the location for your business?

I knew a lady who worked here years before. It was a busy little shop with old-timers and farmers. The entire rural community knew about it because 50th Ave was the main road through town. This building has always been a barbershop. The history of it was one of the main reasons I chose the location. I like the downtown core, it’s diverse.

What do you think makes Downtown vibrant?  

The people! The small businesses, the ‘mom & pop’ owned places and the cultural aspect. 

I love Downtown Red Deer because…  It’s central and it’s community. I like the little shops, businesses, and the friendly, non-judgemental, awesome community.

Barber Shop on Gaetz brings a definite charm to Downtown Red Deer. Its unique, friendly atmosphere is a real reason people keep returning! Selene and her team are leaders in their craft and care greatly for their Downtown community. Make sure to stop in for your next hair or beard service!

 

 

If you would like to see your Downtown business spotlighted, please contact us at 403-340-8696 or [email protected].

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Business

Downtown Business Spotlight: Ross Street Ice Cream Co.

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This week’s Business Spotlight shines on Ross Street Ice Cream Co., located at 4924 50 St on the Ross Street Patio. We caught up with Michael Ubbing during the heat wave to learn more!

What is your business?

Ross Street Ice Cream Co.!

 

 

 

 

 

 

 

 

 

 

When did you open?

When it was a lot cooler than this! A week before May long.

What would you say makes your business unique?

We have lots of dietary options! Lots of dairy free, gluten free cones, we have no sugar added ice cream, we have a special cooler to prevent any cross contamination and then we make what we call “Super Allergy Ice Cream”, which, if you are allergic to everything in the world, you’re probably not allergic to that ice cream!

What are some products/services that you offer?

We offer ice cream and ice cream accessories. Some of those accessories keep expanding including gourmet cotton candy, Saskatoon lemonade, soda floats with Mexican Jarritos pop, and we do banana splits now!

   

Why did you choose Downtown Red Deer as the location for your business?

We chose Downtown Red Deer because its cheap! 

What do you think makes Downtown vibrant?

Me, of course! I think Taco Loft makes it vibrant. The music scene makes it vibrant.

 Finish this sentence: I love Downtown Red Deer because…

It’s the center to everything and accessible to everyone.

Ross Street Ice Cream Co. is the place to check out if you’re looking for a cool treat on a hot day! Follow them for updates:

Instagram: https://www.instagram.com/rossstreeticecream/

Facebook: https://www.facebook.com/RossStreeticecream

 

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