Canada Emergency Wage Subsidy (CEWS) audits
The Canada Revenue Agency’s (CRA) audits seek to find and recover any amounts paid to CEWS recipients in excess of what they were entitled to under the program, whether the ineligible or inflated claims were made intentionally or inadvertently.
The CEWS audit can result in the CEWS recipient being required to repay any ineligible amounts received plus interest and penalties. The CRA also will consider applying third-party penalties to representatives – such as accountants or tax preparers – who have filed incorrect claims on behalf of their clients.
In addition to these potential civil penalties, if the CRA concludes that an ineligible or inflated claim was made fraudulently, it can initiate a criminal investigation which can lead to criminal charges and prosecutions. A person convicted of a criminal offence related to a fraudulent the CEWS claim can face additional fines on top of the civil penalties, and even the possibility of imprisonment. Third party representatives who have assisted clients in making fraudulent claims can also find themselves the targets of the CRA criminal investigation.
Eligibility for the CEWS is based on lost revenues. The CRA’s review is focusing on the calculations of revenue and revenue reduction under the legislation. The process may be as simple as replying to a letter and providing supporting documentation or could involve extremely document-intensive queries.
The requests for documents under subsection 231.1(1) of the Income Tax Act (ITA) can be extensive:
- Documents from the minute books, including governance documents and resolutions relating to the CEWS claim, the shareholder register, information regarding all entities and businesses of the corporate group, and the agreements with respect of inter-company and employee loans/advances;
- Revenue details in respect of the 2019 and 2020 taxation years, including monthly sales report, sales and cash receipts journals, bank statements, adjusting entries, reconciliation of revenues and working papers detailing how qualifying revenues for CEWS were determined;
- Revenue information for purposes of computing the CEWS revenue decline percentages, including detailed working papers for the current and prior reference periods, the revenue recognition policy for all items included in revenues and supporting information with respect to qualifying period that were deemed to meet the revenue decline test;
- General payroll information, including a detailed version of the payroll journal by pay period and by employee and working papers reconciling payroll data on the CEWS application, manual calculation data for irregular pay periods, list of furloughed employees and dates, employment contracts for all employees and proof of payment to employees;
- Information relating to other subsidies and other government programs that impact the CEWS claim, namely the 10% Temporary Wage Subsidy and Work-sharing amount along with all supporting documentation related to amounts claimed;
- A signed copy of the Attestation filed with the CEWS application;
- Various information and documents regarding elections made on the CEWS application;
- Information on employees not getting paid for more than 14 days, on non-resident employees, on employees dealing at non-arm’s length with the employer and on independent contractors; and
- Exclusions from qualifying revenues with a detailed breakdown of the extraordinary items, revenues from non-resident related parties, revenues from non-arm’s length persons and government subsidies.
In addition, the CRA may not provide a lot of time to provide all the information it is asking for. Sloppy reply may have significant consequences:
- An employer who is determined to not have met the eligibility requirements following the audit will have to reimburse the amounts paid under the CEWS, plus interest and possibly 25% penalty;
- An employer who has made a false or misleading statement in its application could be subject to fines and penalties totalling up to 275% of the amounts claimed;
- A person who certified the accuracy of an application that proves to be ineligible could personally incur a penalty of up to $100,000.
Given the financial implications, employers who have applied for the CEWS should maintain their records to be prepared for a possible CRA audit. It is advisable to engage tax advisors to assist if that audit comes.