Canada Emergency Wage Subsidy Audits: Are you Prepared?

On March 15, 2020, the federal government introduced the Canada Emergency Wage Subsidy (CEWS) program to assist qualifying employers adversely impacted by the COVID-19 pandemic. To date, CEWS has provided significant subsidies to Canadian employers that applied and received claims under the program. 

Now the Canada Revenue Agency (CRA) has commenced its post-payment audit of the CEWS program, beginning with a small sample audit of CEWS claims back in August 2020. On December 7, 2021, the CRA sent out communications to tax practitioners and other stakeholders that it would be continuing its audit activities in the fall of 2021. These audit activities are expected to continue into 2022. As of the date of this article, taxpayers and tax practitioners are starting to see these letters come in from the CRA.

What does a CRA post-payment audits mean for businesses who have received the CEWS?

• Taxpayers have 30 days to respond to these CRA audit requests. The 30 day deadline is from the date on the letter, not when received by the taxpayer.

• Completing an audit requires providing all information requested by the CRA in this time period. This can be a time consuming process given the amount of information the CRA is requesting.

• If a taxpayer cannot support their claims or are determined to have errored in computing their claims, this could result in a claw back of some or all of the CEWS subsidies received as well as interest on these amounts.

• In cases of serious non-compliance, significant penalties may be applied. Where anti-avoidance rules apply, the penalty is equal to 25% of the amount of wage subsidy that is applicable. Where it is determined that an employer knowingly, or under circumstances amounting to gross negligence, has omitted information or made false statements in relation to their CEWS claims, the penalty can be as much as 50% of the excess wage subsidy received.

Information being requested by the CRA

• Listed below is just a sample of some of the information and documentation the CRA has been requesting in relation to these CEWS audits.

• Corporate records: minute books and governance documents as they relate to CEWS claims as well as a list of all entities and businesses within the business group.

• Corporate agreements: agreements in respect of inter-company loans/advances as well as employee loans.

• Qualifying revenues: general ledgers, trial balances, and monthly trial balances have been requested for taxation years 2019 to 2021, as well as documents supporting revenues and substantiating the computation of “qualifying revenue.”

• Payroll information and wage subsidy calculations: payroll journals, gross CPP, EI, QPP, QPIP, tax and net calculations by pay period and employee. Employee SINs, detailed payment information, lists and dates of furloughed employees, as well as employment contracts, bank statements, and proof of payment to employees are also being requested.

• Miscellaneous information: attestations filed with applications, details related to other subsidies that impact CEWS claim as well as other information.

Takeaways

• If you have applied under the CEWS program and have received CEWS amounts, be aware that you may receive an audit letter.

• Taxpayers should be prepared to defend their claims.

• If you receive an audit letter, do not delay in addressing it. The earlier you begin compiling the information, the better.

• Ensure that you retain detailed books and records sufficient to support the claims you have made.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.