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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 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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Economy

Trudeau’s bureaucrat hiring spree is out of control

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From the Canadian Taxpayers Federation

Author: Franco Terrazzano

Bureaucrats love to think of themselves as “public servants,” but who is really serving who around here?

Prime Minister Justin Trudeau added another 10,525 bureaucrats to the taxpayer payroll last year. Since becoming prime minister, Trudeau has added more than 108,000 new federal bureaucrats.

That’s a 42 per cent increase in the federal bureaucracy in less than a decade.

Ask yourself, are you getting 42 per cent better services from the federal government? Unless your paycheque comes from taxpayers, the answer is a big fat NO.

While Trudeau’s bureaucracy grew by 42 per cent, Canada’s population grew by 14 per cent.

That means there would be 72,491 fewer federal paper pushers had Trudeau kept growth in the bureaucracy in line with population growth.

It’s not just the size of the bureaucracy that’s ballooning – the cost is too.

The total cost of the federal payroll hit $67 billion last year, a record high. That’s a 68 per cent increase over 2016.

Trudeau gave federal bureaucrats more than one million pay raises in the last four years alone.

Since taking office, Trudeau also rubberstamped about $1.4 billion in taxpayer-funded bonuses to bureaucrats working in federal departments.

The bonuses were paid out despite the Parliamentary Budget Officer finding “less than 50 per cent of [performance] targets are consistently met.”

Then there’s the bonuses at failing Crown corporations.

CBC dished out $15 million in bonuses last year, while their President and CEO Catherine Tait whined about “chronic underfunding” and begged the government for more taxpayer cash. The CBC takes more than $1 billion from taxpayers every year.

The Canada Mortgage and Housing Corporation dished out $102 million in bonuses over the last four years, while Canadians couldn’t afford to buy a home. The bonuses rained down, despite the CMHC repeatedly claiming it’s “driven by one goal: housing affordability for all.”

The Bank of Canada dished out more than $60 million in bonuses over the last three years, even though it failed to do its one and only job: keep inflation low and around two per cent.

The average annual compensation for a full-time federal bureaucrat is $125,300, when pay, pension and perks are accounted for, according to the PBO.

There are now more than 110,000 federal bureaucrats taking home a six-figure base salary – an increase of 154 per cent since Trudeau took power.

Meanwhile, data from Statistics Canada suggests the average annual salary among all full-time workers in Canada was less than $70,000 in 2023.

Here’s why all this matters:

First, it’s an issue of fairness. The last few years have spelled hardship for Canadians who don’t work for the government, but do pay the bills.

Countless Canadians were sent to the ranks of the unemployed, lost their business and struggled to afford rising rents and costly grocery trips.

They’re paying higher taxes so more highly-paid bureaucrats can take bigger paycheques.

Second, more than half of the federal government’s day-to-day spending is consumed by the bureaucracy. That means any government that wants to fix the budget dumpster fire must shrink the bureaucracy.

Let’s recap:

Taxpayers paid for 108,000 new federal bureaucrats. Taxpayers paid for more than one million pay raises over the last four years. Taxpayers paid for more than $1 billion in bonuses.

And bureaucrats barely meet even half of their performance targets – targets they set for themselves.

It’s clear Trudeau’s bureaucratic bloat isn’t serving taxpayers. It’s time to find a pin and pop Ottawa’s ballooning bureaucracy.

This column was first published in the Western Standard on July 202, 2024.

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International

‘Really, Really Difficult’: Bureaucrats Worry Behind Closed Doors They’ll Be Sent Packing Under Trump

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From Heartland Daily News

“He’s going to get people in place that are more intelligent and are more loyal to him,” a park service employee said. “Now I think he could do a lot of damage.”

Government workers are reportedly in a state of panic over the prospect of former President Donald Trump winning another term in office, according to E&E News.

Bureaucrats up and down the federal hierarchy are concerned that a second Trump administration could cost them their jobs and put an end to liberal programs they worked to implement under President Joe Biden, E&E News  reported.  Trump has, if elected, pledged to implement reforms that would allow him to fire up to 50,000 civil servants at will, with the former president singling out workers who are incompetent, unnecessary or undermine his democratic mandate.

“The first rendition of the Trump administration was really, really difficult, and we saw a mass exodus of employees retiring,” a National Park Service employee told E&E News. “If we do have an administration shift, other employees will also reconsider their positions and move to the private sector. I don’t know what I’ll end up doing.”

Of the civil servants that didn’t exit during Trump’s first term, many worked internally to deliberately obstruct his agenda, according to Miles Taylor, who served as chief of staff in the Department of Homeland Security from 2017 to 2019 and admitted to engaging in such behavior. Bureaucrats are worried that Trump may seek to appoint administrators who agree with his agenda this time around.

“He’s going to get people in place that are more intelligent and are more loyal to him,” a park service employee said. “Now I think he could do a lot of damage.”

To replace large numbers of federal employees, Trump would reclassify them as Schedule F employees, allowing him to fire them at will. The Biden administration finalized a rule in April that would prevent their status from being changed involuntarily, however, allies of the former president have shrugged off the rule by pointing out that a Trump administration could simply reverse it, according to The New York Times.

Amid fear that Trump’s plans may come to fruition, bureaucrats are making moves to ensure the Biden administration’s policies are as hard to repeal as possible, a senior employee at the Interior Department told E&E News.

“The concern hasn’t been focused on who the Democratic nominee is as much as concerns about Trump winning and what that would mean,” they said. “From everyone’s perspective it is get as much done as possible. Also trying to bury into the agency programs [like environmental justice] so they can survive a Trump administration.”

Conservatives are increasingly optimistic about Trump’s chances of defeating Biden in November as the president lags behind Trump in the polls and the Democratic Party grapples with internal disputes regarding whether or not he should be their nominee.

“The mood is somber and incredulous,” one long-time employee of the Department of the Interior told E&E News. “The hope is we will not suffer through another term with the prior leadership, but the fear [is] that if we do, they will target employees they don’t like, make things up to justify whatever punishment they want and just cripple the good work we are doing.”

Staff at the Environmental Protection Agency (EPA), meanwhile, are also upset and agitated, the president of a union representing some of the agency’s employees told E&E News. “So many of our members lived through the absolutely disastrous first Trump administration and his attempted dismantling of EPA,” she said.

Originally published by The Daily Caller. Republished with permission.

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