CEWS and SR&ED - What you need to know

CEWS and SR&ED – What you need to know

On April 11, 2020, the Canadian government implemented legislation regarding a new Canada Emergency Wage Subsidy (CEWS); the implications of this $73 billion subsidy and SR&ED claims is yet to be determined.  This post will look at the legislation and how it may impact SR&ED.

Canada Emergency Wage Subsidy (CEWS)

The purpose of CEWS is to help employers rehire or keep employees if their revenue has decreased due to COVID-19 and to help position Canadian companies to resume normal operations once the crisis has passed.1  According to the Government of Canada:

The subsidy amount for a given employee on eligible remuneration paid for the period between March 15 and June 6, 2020 is the greater of:

  • 75% of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
  • the amount of remuneration paid, up to a maximum benefit of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.

In effect, employers may be eligible for a subsidy of up to 100% of the first 75% of pre-crisis wages or salaries of existing employees. These employers are expected where possible to maintain existing employees’ pre-crisis employment earnings.1

Allowing corporations to continue to employ their personnel enables them to reduce the loss of future revenue.

An upside to this is that it will allow corporations to continue any ongoing SR&ED activities. The downside is that CEWS is currently classified as government assistance and must be included both (a) as income earned by employers while filing their 2020 taxes and (b) must be counted in SR&ED calculations, if applied to eligible employees for eligible SR&ED activities.

For full details of CEWS please visit their website.

CEWS as Income Earned

According to the Government of Canada’s website:

The usual treatment of tax credits and other benefits provided by the government applies. As a consequence, the wage subsidy received by an employer is considered government assistance and is included in the employer’s taxable income.

Assistance received under either wage subsidy reduces the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration.1

For those corporations or individuals who use the Proxy Method to file their SR&ED ITC, CEWS earnings for employees not directly engaged in SR&ED should not reduce the pool of deductible SR&ED expenditures; instead, the amount of CEWS received for these employees is considered income earned.

From “Assistance and Contract Payments Policy

The amount of government assistance or non-government assistance (see sections 4.1.1 and 4.1.2) that relates to the prescribed proxy amount (PPA) will not reduce the pool of deductible SR&ED expenditures. This is because the PPA is not an expenditure that is included in the pool of SR&ED deductible expenditures. The PPA is a notional amount that is used in lieu of the actual overhead expenditures in calculating qualified SR&ED expenditures with the proxy method. The portion of assistance that relates to the PPA should be included in income in the tax year that it is received (see section 6.1). For more information on the PPA, please refer to the Prescribed Proxy Amount Policy.4

CEWS as Government Assistance

CEWS used for employees directly engaged in SR&ED will need to be deducted on the T661 as government assistance.

Line 431 – Other Government Assistance

T661 Lines 429, 431, & 432

All direct funding from government programs must be reported on this line. Standard items for SR&ED purposes include IRAP grants and other government (provincial or federal) funding related to employment. 5Only projects directly related to the SR&ED activities need to be reported here. If a $10,000 IRAP contract was received, and $7,000 went to an SR&ED employee and $3,000 was targeted towards an employee performing marketing of the product being developed, only $7,000 should be recorded on Line 431. Be aware that documentation will need to exist to justify this split.

Under the current guidelines, CEWS will be treated in a similar manner as IRAP funding and recorded on Line 431.  This means only recording the amount of CEWS received and used for employees directly engaged in SR&ED.  The amount of CEWS used toward employees not directly engaged in SR&ED should be included as income, as discussed above.

Line 515 – Other Government Assistance

Part 4 - T661 Form

T661 Part 4

Again, treating CEWS in a similar manner as IRAP means recording the amount on Line 515, along with similar programs. This amount should be identical to Line 431.6

How will CEWS affect your SR&ED ITC?

It is still unknown exactly how CEWS will affect future SR&ED ITCs as this is a new program and uncertain times.  Treating it like other government assistance programs such as IRAP can give us an idea of how it will affect returns.

Use our calculator to estimate how CEWS may impact your SR&ED ITC.

Show 6 footnotes

  1. “The Canada Emergency Wage Subsidy.” Government of Canada, 11 Apr. 2020, https://www.canada.ca/en/department-finance/economic-response-plan/wage-subsidy.html. Accessed 16 Apr 2020.
  2. “The Canada Emergency Wage Subsidy.” Government of Canada, 11 Apr. 2020, https://www.canada.ca/en/department-finance/economic-response-plan/wage-subsidy.html. Accessed 16 Apr 2020.
  3. “The Canada Emergency Wage Subsidy.” Government of Canada, 11 Apr. 2020, https://www.canada.ca/en/department-finance/economic-response-plan/wage-subsidy.html. Accessed 16 Apr 2020.
  4. Government of Canada. (December 18, 2014.) Assistance and Contract Payments Policy. Retrieved April 16, 2020, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/assistance-contract-payments-policy
  5. Canada Revenue Agency. (20 April 2020). T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661.” Retrieved from https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf.
  6. Canada Revenue Agency. (20 April 2020). “T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim – Guide to Form T661.” Retrieved from https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf.

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