CEWS is government assistance and must be deducted from SRED
Claiming CEWS and SR&ED is new for 2020. And it’s a bit tricky.
The CRA has confirmed that CEWS is considered to be government assistance with respect to SRED so it must be deducted from SRED expenses on some “reasonable” basis.
There is no formal methodology available from the CRA for deducting CEWS from a 2020 SRED claim.
It’s critical to deduct only a “reasonable” CEWS amount from SR&ED expenditures
We can look to well-established procedures for deducting IRAP payments from SRED expenditures to start to develop a reasonable way to deduct the appropriate amount of CEWS from 2020 SRED claims.
IRAP payments are not deducted from SRED when the IRAP payments are made to non-SRED personnel. For example, let’s take the case of a company which receives IRAP funding for 5 headcount consisting of 4 engineers and a business development person. Let’s say that each head is IRAP funded at $2,000 per month for 12 months for total IRAP funding of $120,000. The IRAP amount which will be deducted from SRED expenditures will be $96,000, not the full $120,000. The BD person cannot be claimed for SRED, therefore his portion of IRAP is not considered to be government assistance with respect to SRED.
Likewise, IRAP payments are not deducted from SRED expenditures if there is a period mismatch between an IRAP subsidy and the SRED work performed. Say a company has a July 31 YE. In fiscal year 2019, the company carries out a SRED project from Sept 1, 2018 to Dec 31,2018. The company then receives IRAP funding in the same fiscal year from April 1, 2019 to July 31, 2019. The IRAP payments are not deducted from the SRED expenditures for FY19 because the SRED work and the IRAP subsidy period do not overlap.
Finally, extending the above concepts, we can see that government assistance is only deducted from SRED expenditures when the assistance is “in respect of” SRED work. Consider two identical 10 person companies each receiving identical CEWS payments. Company A has each employee working on SRED 10% of the time for annual SRED expenditures of 100K. Company B has all SRED carried out by 1 employee 100% dedicated to SRED for the same SRED expenditure total of $100K. It is reasonable to see that these two otherwise identical companies have received the same government assistance “with respect to” SRED. Therefore it is reasonable that the CEWS amount deducted from both companies’ SRED expenditures should be the same.
Match CEWS subsidies to SR&ED salary expenditures
In summary then, the amount of the CEWS deduction must be calculated person by person based on the percentage of time that person spent on SRED work This can be stated as a formula as follows:
CEWS deducted from SRED expenditures = % of time spent on SRED x CEWS received
This formula looks simple, but it can be difficult to apply in practice. As of October 2020 we have 7 CEWS claiming periods, 2 more periods have been announced and CEWS is now likely to be extended to mid-2021. This means we will likely have 11 total claiming periods for CEWS by Dec 31, 2020.
The CEWS subsidy will vary by employee by period, especially for modestly-paid employees who do not max out the CEWS subsidy in a given period. For example, in CEWS periods 1 to 4, employees earning less than $1129 per week will attract less than the $847 per week CEWS maximum benefit. The percentage of time spent on SRED per employee will likely often vary by CEWS claiming period too.
So the formula above to calculate the appropriate amount of CEWS for a company to deduct must be calculated per SRED employee per CEWS claiming period. A 10 person company with 10 SRED practitioners and a Dec 31st year end will require the above CEWS formula to be calculated and summed up to 110 times to calculate the proper CEWS deduction for their 2020 SRED claim (10 SRED employees x up to 11 possible CEWS claiming periods in 2020). To paraphrase Roy Scheider in Jaws: “We’re going to need a bigger spreadsheet!”
CEWS can’t reduce your SR&ED claim to zero
Again as with IRAP, CEWS deductions do not reduce a SRED claim’s proxy amount. So there is a limit to the percentage amount that CEWS can reduce a SRED claim. In a worst case scenario, all SRED would be conducted during CEWS claiming periods by personnel who all earn less than the $1,129 per week maximum claiming amount of salary. Put the CEWS salary subsidy at 75% of all SRED employees’ pay. Even in this scenario, the SRED claim will be worth 52% of it’s original pre-CEWS amount because of the proxy amount. (Proxy = 0.55 salary expense, salary expense netted to zero due to CEWS, therefore Surviving SRED claim = (0.25 x salary expenditure + 0.55 x salary expenditure)/1.55 x salary expenditure = 52%)
More Information on CEWS and SR&ED
Here’s the formal announcement of the CEWS and SR&ED policy from June 19, 2020:
The Canada Emergency Wage Subsidy and the 10% Temporary Wage Subsidy for Employers are considered government assistance. Assistance received under either wage subsidy reduces the amount of expenses eligible for SR&ED investment tax credits. The announcement is here.
Tax credit claiming ins and outs here.
Try the G6 Consulting SR&ED calculator