The wage subsidy: A windfall for Canadian corporations

Allan Lanthier is a retired partner of an international accounting firm and has been an adviser to both the Department of Finance and Canada Revenue Agency.

The federal government has introduced sweeping changes to the Canada Emergency Wage Subsidy. CEWS has been extended to December, 2020, and the requirement that an employer suffer a revenue decline of at least 30 per cent has been repealed.

Starting in July, an employer that has any revenue decline at all is entitled to a subsidy, even if the decline is unrelated to COVID-19. The new rules will be a windfall for many large and profitable Canadian corporations.

When CEWS was introduced, retroactive to March, 2020, the government decided to subsidize the wages of both active employees and those who were laid off. The same rules applied to both categories: In general terms, if an employer’s revenue declined by at least 30 per cent in any four-week period, it received a 75-per-cent subsidy for all wages paid in that period. The argument was that, in the early stages of the pandemic, subsidies should apply for both furloughed individuals and, to minimize further layoffs, for active employees.

CEWS was extended in late July. The 75-per-cent subsidy rate has been replaced for active employees by lower rates starting in July. But there was little need to continue subsidizing businesses for active employees: The economy is recovering and many employers are saying they can’t find enough workers, not that they have too many and are considering a second wave of layoffs. And with any revenue decline now giving rise to the subsidy, tens of millions of dollars will be given to businesses that don’t need the cash.

One example is Rogers Communications Inc. Rogers has announced that, for its quarter ended June 30, 2020, it had a revenue decline of 17 per cent as compared with 2019. But we won’t be starting a GoFundMe page – Rogers had net income of $279-million for the quarter and paid $252-million of dividends. Nonetheless, the revenue decline should deliver handsome cash subsidies to the company.

For the month of July, 2020, Rogers will compare its revenue with July, 2019, (or with the average revenue for the months of January and February, 2020, if that gives a better result). Rogers has 25,000 active employees, and if it has a 17-per-cent revenue decline in July, it should receive a subsidy of about $25-million for that month.

Or consider Royal Bank of Canada. The bank has more than 70,000 active employees in Canada. For its quarter ended April 30, 2020, the bank reported a revenue decline of 10 per cent. If that decline persists into the month of July, the bank should receive a subsidy of about $40-million – this even though the bank earned $1.5-billion in its most recent quarter and paid dividends of the same amount.

Twenty-five million here, 40 million there, and pretty soon you’re talking about real money. There is no mischief on the part of these companies: Management has a fiduciary responsibility to the company’s stakeholders – shareholders, employees and customers – to claim any amounts that are legally due. It is government policy that is out of whack.

Some smaller businesses may retain a few active employees as a result of the new subsidy. However, the subsidy will not be relevant to employment decisions of large and profitable corporations, and the subsidy for active employees will therefore not protect existing employees to any significant extent.

There was a much simpler solution: The subsidy should have been eliminated for active employees, with an exception for small business. Small firms are always at greater risk of failing – and terminating employees as a result – than large corporations.

A number of other countries, including Britain, Denmark and Australia, have introduced wage subsidy programs. While the rules vary from country to country, there are few countries that subsidize the wages of active employees.

The new rules provide much needed support for individuals who are still out of work and that is appropriate. But with the economy on the mend, there was no reason to continue doling out cash for employees who are active and working productively in a business.

The government had many weeks to develop rules that provide wage support in a sensible and fiscally responsible way. It failed in that effort.

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