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A Globe and Mail investigation found that dozens of publicly traded companies received payments under the CEWS and then went on to amass gains in revenue and profit.CHRISTINNE MUSCHI/Reuters

The newest version of the Liberal government’s COVID-19 wage subsidies will be open only to companies whose revenue dropped substantially during the first 12 months of the pandemic, closing a loophole that had allowed firms with healthy growth in sales to claim funds on the basis of short downturns in their operations.

Earlier this year, a Globe and Mail investigation found that dozens of publicly traded companies received payments under the Canada Emergency Wage Subsidy (CEWS), then went on to amass gains in revenue and profit.

In unveiling a slimmed-down successor to CEWS on Thursday, Finance Minster Chrystia Freeland said applicants will now need to demonstrate a “deep and enduring loss,” in addition to a downturn during a four-week claim period. The final claim period for CEWS expires on Oct. 23, and the government has said the replacement programs will remain in effect until May 7.

Canada’s COVID-19 benefits are set to expire on Oct. 23. Here’s what you need to know

CEWS: A massive subsidy, shrouded in secrecy

Under the new Tourism and Hospitality Recovery Program, businesses in those sectors would have to show that their revenue fell by an average of at least 40 per cent in the first 12 months of the CEWS program, with that average calculated over 13 four-week periods. Companies in other sectors, applying under the separate Hardest-Hit Business Recovery Program, would have to show a revenue loss of at least 50 per cent over the same period.

The original CEWS program, retroactive to March, 2020, had no such provisions. It allowed businesses to pocket subsidies even though their revenue and profits subsequently grew during the year. The Globe investigation found that 388 publicly listed companies, or their subsidiaries, had received CEWS payments, despite the fact that a significant number of them did not experience protracted declines in revenue or profits.

Nearly 25 per cent had higher revenue in the second quarter of 2020 compared with the same period in 2019. Only slightly more than half of publicly traded companies receiving CEWS payments at the time saw their profits slip in the second quarter of 2020 versus the same period in 2019.

That doesn’t mean that those companies broke any rules. All they did was benefit from the government’s decision to base subsidy claims on how revenue had declined in any four-week period. If a company’s fortunes rebounded afterward, its CEWS claim was unaffected.

Because claims could be made retroactively, even companies whose sales were already bouncing back sharply could legally receive money from CEWS.

Economists say disregard of the long-term outlook for companies was just one example of how the original CEWS program was poorly targeted.

Miles Corak, a professor at the City University of New York’s Department of Economics, is one expert who has critiqued the program for not focusing on companies that were at risk of laying off employees because of the pandemic. He said the decision to require a long-term drop in revenue is sensible, since it avoids providing subsidies for transitory revenue fluctuations. But he added that there is a danger the more targeted program could end up propping up some companies that have hit a permanent downturn.

If there had been a version of the 12-month rule in place for the original program, few of the publicly traded companies examined by The Globe would have qualified. Of the full roster of 388 companies, 295 had reported full-year results for 2020 when The Globe compiled information. Of those 295, just 50 experienced revenue losses greater than 40 per cent in 2020 compared with 2019. And only 27 – less than 10 per cent – would have qualified for a program that required a 50-per-cent drop in annual revenue.

The original Globe investigation found that the 388 publicly traded companies and their subsidiaries together had received more than $3.6-billion in CEWS payments as of late January, 2021. The companies that did not see annual revenue fall by at least 40 per cent accounted for most of that total, $2.6-billion.

Asked if there should have been a rule in the original CEWS program requiring a protracted revenue decline, Prof. Corak said he is reluctant to criticize policy decisions in hindsight. But he argued that the fact that many companies received subsidies on the basis of what turned out to be fleeting losses buttresses the case for a pandemic-profits tax focused on that group.

“Now, it’s time to ask for a payback,” he said.

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