On March 27, 2020, the Government of Canada announced that it would offer a 75% wage subsidy to eligible employers for up to 12 weeks, retroactive to March 15, 2020.
The Canada Emergency Wage Subsidy (“CEWS”), is designed to discourage companies from laying off workers during the COVID-19 pandemic or allow them to rehire workers who have already been laid off.
Prime Minister Trudeau said the wage subsidy was needed at a time when the economy is facing unparalleled economic disruption, “Canada hasn’t seen this type of civil mobilization since the Second World War. These are the biggest economic measures in our lifetimes to defeat a threat to our health,” Trudeau told reporters at the beginning of April.
At the same time Trudeau was announcing the CEWS program, he warned that the government would be actively looking for instances of abuse.
“These are unprecedented times and will require us to pull together as a country and trust each other as Canadians. So, there will be stiff and severe penalties for trying to take advantage of this system and of your fellow Canadians,” Trudeau said. He added, “This money is for workers. Employers will need to attest that they’re doing everything they can to pay the remaining 25% of peoples wages.”
The CEWS wage subsidy will be administered by the Canada Revenue Agency (“CRA”) through the My Business Account portal on the agency’s website. The website indicates that CEWS applications will begin on April 27, 2020.
On April 11, 2020, the COVID-19 Emergency Response Act, No. 2, amending the Income Tax Act (“ITA”), received Royal Assent. The subsidy is expected to cost over $70 billion.
By now you may have seen one of the many articles, blogs or LinkedIn posts regarding eligibility for, and the amount of, the CEWS Subsidy. What has not yet been discussed is the potential for abuse of the CEWS subsidy and the penalties associated with making a false application.
Though we have not yet had the opportunity to review the government’s application form, one can be sure that in the coming months and years CRA Auditors and Investigators will be kept very busy reviewing claims and investigating abuse.
It will be interesting to see how abuse of the CEWS subsidy is treated in regard to abuse or fraud. While certainly any person or corporation that is found to have abused the program will end up having any overpayments clawed back by the CRA, it is unclear whether the Public Prosecution Service of Canada (“PPSC”) will pursue the 25% penalty indicated in section 2.901 of the CEWS legislation, or the more serious criminal consequences contemplated elsewhere in the ITA or the Criminal Code.
If the applicant is “overpaid,” it is expected that the situation would be treated similar to the existing penalties outlined in the Income Tax Act.
Section 2.901 of the legislation includes a 25% penalty for overpayment:
Every eligible entity that is deemed by subsection 125.7(6) to have an amount of qualifying revenue — for a current reference period for a qualifying period — is liable to a penalty equal to 25% of the amount that would be deemed by subsection 125.7(2) to have been an overpayment by the eligible entity during that qualifying period if that amount were calculated by reference to the information provided in the application filed pursuant to paragraph (a) of the definition qualifying entity in subsection 125.7(1).
However, it is worth noting that it is already an offence to make a false statement under section 239(1)(a) of the ITA which reads in part:
239 (1) Every person who has
- (a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,
The penalty for making a false statement under section 239 of the ITA is contained in subsections (f) and (g) and makes it a summary conviction offence liable to a fine of up to 200% of the amount sought to be evaded and a jail term of up to two years.
The legislation also contains an anti-avoidance rule that will deny the CEWS subsidy where an employer, or non-arm’s length person or partnership, enters into a transaction, event or action which reduces qualifying revenues for a reference period and it was reasonable to conclude that one of the purposes of the transaction, event, or action was to cause the employer to qualify for the CEWS subsidy.
It is recommended that individuals or businesses who intend to apply and receive the CEWS benefit keep a close track of funds received from the government how those funds are dispersed to employees with special attention to tax implications.
Obviously, CEWS is an unprecedented emergency government program. The temptation for some may be high to, as Prime Minister Trudeau warned, “game the system,” that is, pocket some or all of the benefit, manipulate past and present revenue records or game the number of employees and wage amounts.
CRA Audit Powers Generally
Sections 152(3.1) and (4) of the ITA allows the CRA to issue reassessments to an individual within three years of the date of mailing of the original notice of assessment. For corporations this limit is four years. However, s.152(4)(a)(i) and (4.01) indicate that if a taxpayer has committed fraud in the filing of a return (or here, potentially something like a CEWS Application) then that return can be reassessed at any time. The clock never runs out.
With regards to tax returns, the CRA has four years to audit. This generally means that if you receive the assessment for your 2019 tax return in June 2020, the CRA has until approximately June 2024 to audit your 2019 return. Since the CEWS legislation is in fact merely an amendment to the ITA, it appears therefore that CEWS applications will include similar timelines and the application made in the coming weeks could be audited in April 2024 or even four years after the date you receive your 2020 tax assessment (i.e. approximately June 2025).
However, if the CRA believes that there is a suspicion of fraud, it can audit as far back as records allow. This is also true if the CRA believes that you misrepresented your situation on your tax return or statement, either due to carelessness or wilful action. However, in order to audit further than 4 years, the CRA must be able to prove fraud, neglect, or wilful fault.
CRA Auditors have broad powers under section 231.1(1)(a) of the ITA to demand and examine the books and records of a taxpayer or any other person that may relate to the information that is or should be in the books and records. Audits can take the form of “desk audits” where the taxpayer is informed of the audit and asked to provide records to the auditor by mail or via a “field audit” where the Auditor visits the business and reviews the books and records on site.
Auditors can also formally require records be produced (penalties arise if requirements are not complied with) or even obtain orders from the Court to ensure compliance.
A CRA Auditor cannot however force a taxpayer to answer questions. In an audit of Cameco Corp., the CRA asked that Cameco provide 25 employees to answer oral questions. The corporation refused. The CRA sought a compliance order. It was denied. The CRA appealed and in Canada (National Revenue) v. Cameco Corporation, 2019 FCA 67 (CanLII), the court held that the CRA had no power to compel an audit target to answer questions (one has to provide the books and records requested –if available, and a manager should answer questions about where to find records but that is all). The court mused however that if an audit target refused to answer questions then the CRA could reassess based on assumptions and the documents it possessed at the time.
In cases where an Auditor suspects fraud, audit files can end up being transferred to CRA Investigations which reviews, investigates, applies for and executes Criminal Code Search Warrants and Production Orders and refers the matter to PPSC prosecutors for charge approval consideration.
Federal Crown prosecutors will be tasked with prosecuting incidences of CEWS abuse. They will review matters submitted to them by CRA Investigations and, if it is reasonable to believe that a crime has been committed and it is in the public interest to proceed, can approve the laying of criminal charges.
Criminal Fraud charges
The PPSC may elect to proceed with charges under the ITA or fraud under the Criminal Code even though the CEWS legislation includes a penalty provision.
Fraud section 380 of the Criminal Code carries a maximum jail sentence of 14 years imprisonment and, more recently, a minimum 2 years in jail if the fraud exceeds $1 million:
380 (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,
- (a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
- (b) is guilty
o (i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or
o (ii) of an offence punishable on summary conviction,
where the value of the subject-matter of the offence does not exceed five thousand dollars.
(1.1) When a person is prosecuted on indictment and convicted of one or more offences referred to in subsection (1), the court that imposes the sentence shall impose a minimum punishment of imprisonment for a term of two years if the total value of the subject-matter of the offences exceeds one million dollars.
Elements of Offence
In the course of a criminal prosecution for a false CEWS application/statement or fraud, the PPSC will have to prove all the necessary criminal elements beyond a reasonable doubt. Any such offence would be true “criminal” offences and require the Crown to prove mens rea (intent).
In general, in the course of a prosecution under the CEWS legislation, or for fraud, the Crown would have to prove:
- Actus reus (conduct component)
- Mens rea (intent)
The jurisdiction of the Court is established by section 244(3) of the ITA:
244.(3) An information or complaint in respect of an offence under this Act may be heard, tried or determined by any court, judge or justice if the accused is resident, carrying on business, found or apprehended or is in custody within the territorial jurisdiction of the court, judge or justice, as the case may be, although the matter of the information or complaint did not arise within that jurisdiction.
The phrase “of the [location]” has been judicially approved as triggering section 244(3) of the Income Tax Act and section 332(3) of the Excise Tax Act.
Re Dockery and The Queen, (1974), 19 C.C.C. (2d) 315 (Alta.S.C.)
- v. Wilson (1980), 53 C.C.C. (2d) 283 (Man. C.A.)
The Crown must show that the accused was resident, carried on business and was found in the same province in which the criminal charges were laid (i.e. British Columbia).
The Crown must prove the accused’s identification. In personal tax evasion cases this is normally done with records such as passports and driver’s licenses seized during the execution of search warrants on the accused’s home or business. In a fraudulent CEWS application matter, we expect the Court would be provided with copies of the applications themselves, SIN numbers, and evidence showing the government provided the funds to the accused and were deposited into accounts that the accused controlled. In addition, the Crown tends to call various witnesses to the stand who know the accused historically and/or did business with the accused in the relevant time period.
Where the accused is a corporation, the Crown files records showing the details of incorporation and who the Director(s) were during the relevant time periods.
For income tax evasion, the Crown must prove the actus reus of the evasion. In R. v. Kennedy, 2004 BCCA 638, the British Columbia Court of Appeal approved of the Ontario Court of Appeal’s articulation of the actus reus of tax evasion in R. v. Klundert (No.1) 2004 CanLII 21268 (ONCA):
 … The conduct component of the crime of evading tax contrary to s. 239(1)(d) is made out if the Crown proves that the accused voluntarily performed an act or engaged in a course of conduct that avoided or attempted to avoid payment of tax owing under the [Income Tax] Act.
The clearest statement of intent for tax evasion is found in Klundert (No.1), at para. 47:
 In most cases of tax evasion, the trial judge will adequately describe the elements of the offence by instructing the jury that they must be satisfied beyond a reasonable doubt that the accused:
- did something or engaged in a course of conduct that avoided or attempted to avoid the payment of tax imposed by the Act;
- knew there was tax imposed by the Act; and
- engaged in the conduct for the purpose of avoiding or attempting to avoid payment of tax imposed by the Act or knowing that avoiding payment of tax imposed by the Act was a virtual certain consequence of his actions.
Criminal Code fraud
In R. v. Theroux,  2 S.C.R. 5, McLaughlin J. summarized the elements of fraud:
These doctrinal observations suggest that the actus reus of the offence of fraud will be established by proof of:
- the prohibited act, be it an act of deceit, a falsehood or some other fraudulent means; and
- deprivation caused by the prohibited act, which may consist in actual loss or the placing of the victim’s pecuniary interests at risk.
Correspondingly, the mens rea of fraud is established by proof of:
- subjective knowledge of the prohibited act; and,
- subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist in knowledge that the victim’s pecuniary interests are put at risk).
As can be seen, the definition of fraud is broad. “Deceit” and “falsehood” are established when the accused represented that a situation was of a certain character, when, in reality, it was not–“other fraudulent means” are to be determined objectively, based on what a reasonable person would consider to be dishonest.
Intent is established when the accused is aware of undertaking a prohibited act which could cause deprivation or the risk of deprivation; the fact that the accused had good intentions and may have hoped the deprivation would not take place or felt there was nothing wrong with what he or she was doing, is not a defence.
I would not be surprised to see a variety of frauds associated with the CEWS subsidy. Bad actors will not hesitate to apply for funds greater than they are entitled to or keep funds the receive rather than disperse them to employees.
Add in more complicated fictitious business applications, “straw man” directors and account holders, and it is easy to predict that a certain percentage of the CEWS subsidy funds will be lost to fraud.
If your CEWS applications end up being audited and subsequently investigated by the CRA early legal advice will be critical to ensure that the CRA are provided with the proper books and records and advice is received on the limits of what responses have to be provided and which do not.
Potential defences may include pre-application reliance on accounting or legal advice, mistake or third-party error, and/or Jarvis arguments related to the inadmissibility of evidence obtained by CRA Auditors rather than CRA Investigators (to name but a few).
Make no mistake, a CRA Audit or Investigation can potentially lead to serious civil penalties and lengthy jail sentences. Accordingly, prosecutions of any CEWS related fraud will be a criminal matter requiring the Crown to prove both the mens rea and actus reus of the offence at a lengthy criminal trial.
If you have any questions or feel that you have an urgent and essential matter, please contact our office.
The Canada Emergency Wage Subsidy (Government of Canada)
My Business Account (CRA)