Double-dipping: obtaining funding twice for the same expenditures.
We all understand why this is wrong — but applying the concept to CEWS can be confusing. We at Young Associates have encountered differing viewpoints on how best to treat the relationship between CEWS and other funders, and have spent significant time exploring the issues internally. In our view, there has not been nearly enough public discussion of the issues, or guidance from funders — leaving organizations to work through decisions as best they can.
This eblast is offered as a contribution to the discussion and, we hope, a better understanding of the underlying accounting and public policy issues.
It’s lengthy, so if you’re a client, we recommend reviewing with your Senior Associate. You should also consider flying it past your auditor or a board member, to gain their insight into whether your organization might have any concerns.
Important caveats
This eblast is not intended to serve as advice. We do not consider this to be a conclusive piece of research. Although we offer a few ideas about how you might proceed, we do not intend to provide direction.
Rather, we are contributing some factual information, which we hope will assist our clients and others in discussions they may be having with their auditors and their funders.
Determining how your organization should treat CEWS relative to other funding comes down to a management decision informed by professional interpretation of accounting principles and funding agreements.
If you’re going to make an error with your treatment of CEWS, you may want to err on the side of caution. A government audit might still be years down the road, and you don’t want to receive a demand for repayment that you’re unprepared to fulfill.
The issue
COVID has diverted us from many familiar and well-trodden paths. All of us — legislators, regulators, funders, auditors, managers, service providers — have been forced, to a greater or lesser extent, to adjust our methods as new information presents itself.
For many accounting issues, there is a body of professional literature backed up by years of auditing (annual financial audits plus CRA and funder audits) whereby principles are clarified and interpretations are hammered out. Organizations facing thorny questions know where they can turn for guidance.
With respect to CEWS and other COVID emergency funding, to a large extent, the audits are yet to happen. (We at YA have not yet gone through a CEWS audit, and only one or two project grant audits where CEWS was a factor.) We have been managing as best we can with information as it becomes available. We have come up with various questions for which it has been extremely difficult or impossible to find conclusive guidance from official sources:
Is CEWS a grant, or is it something else?
Should CEWS be treated as a matching grant when it comes to employment grants, or any other funding that supports salaries?
CEWS is calculated on the basis of wages, but is the funding specifically directed towards wages, or is it intended more broadly to maintain operations?
Suppose we were found to have double-dipped. How would that be resolved between CEWS (i.e. the CRA) and the other funder (a different ministry or department, perhaps at a different level of government)? (Spoiler: we have no idea. This is the one question where you won’t find any commentary below.)
Summary of key points
The remainder of this document goes into detail about how we arrived at these conclusions, but here are the highlights:
The CEWS legislation and accompanying FAQ explicitly allow the wage subsidy to be claimed regardless of other funding sources.
Grants may be either restricted or unrestricted. Restricted grants that carry stipulations related to payroll costs need to be explored with reference to your ability to claim CEWS.
Funding terms and conditions typically prevent grantees from “double-dipping.”
CEWS is excluded from the definition of government funding. Rather, it is legally defined as a refund of taxes.
By virtue of being a refund of taxes, CEWS revenue is directly tied to payroll cost.
GAAP sets out a coherent rationale for why CEWS should be treated as “double-dipping” if a restricted grant is in play.
The section of this document entitled “Possible approaches” outlines various paths you might consider taking, to tread carefully around these issues.
CEWS legislation
When CEWS was first announced, there were many unanswered questions surrounding the program. Young Associates devoted significant time to researching, reading the legislation and consulting with other professionals in the industry to arrive at a better understanding of the Wage Subsidy rules.
Notably, we learned that the CEWS legislation does not prevent organizations from claiming CEWS in instances where they have received other funding. Indeed, the CEWS FAQ states the following (emphasis ours):
If an eligible employer has received or is reasonably expected to receive an amount as a subsidy or other assistance based on the salary, wages or other remuneration paid to an eligible employee that would otherwise be eligible for the wage subsidy, the amount of the government subsidy or assistance does not reduce the amount of the eligible remuneration used to calculate the wage subsidy for that employee.
Thus: the CEWS legislation allows you to claim CEWS on salaries that are subsidized by other programs. However, the CEWS FAQ acknowledges that other funders may not take a reciprocal approach. Without adding any detail, guidance or qualification, the CEWS FAQ states:
The amount of the wage subsidy received could affect an eligible employer’s entitlement under other federal or provincial funding programs.
Restricted and unrestricted funding
Before going further, let’s confirm a couple of core definitions. On a practical level, managers experience these concepts as part of the infrastructure of government funding. But, at heart, they belong to Generally Accepted Accounting Principles (GAAP — more on that below).
A restricted grant is subject to externally imposed stipulations as to how the grant can be spent. Employment grants offer a prime example. Once you have accepted funding from Canada Summer Jobs, Young Canada Works, or any other such program, you are required to use the funds only to pay salary and benefits — and, generally, only for the agreed position. (You can’t tell them that you’re creating a marketing position and then go off and hire a technician instead.)
An unrestricted grant still has a purpose, of course — but there are no stipulations as to how the grant can be spent. Arts council project grants offer a perfect example. When you accept the funding, you are expected to utilize it in service of executing the project, within the project budget you set out — but the funder does not stipulate that a certain amount of money must be spent on this or that. As long as the project is delivered as promised, the grantee has latitude to decide how to apply the funds.
And, there are grants that occupy a middle ground, where some spending components may be stipulated, and others left more to management’s discretion. For example, we have seen Ontario Trillium Foundation grants with a capital component stipulating that a certain number of dollars are to be spent on acquiring a computer — and with a program component where management can decide as the project progresses how exactly to spend that portion of the funding.
It is management’s responsibility to identify, understand and adhere to any restrictions, as part of the responsibility of accepting the funding.
Funding agreement terms and conditions
We have not found any public guidance or commentary that we can share from “other funders” on the topic of CEWS and how grant recipients should or should not proceed when preparing their CEWS subsidy claim.
By way of background, at the federal level, at least, all funding terms and conditions must be approved by the Treasury Board. Thus, although grant materials may be drafted at the program level, they are approved by a central authority, which applies a set of standards and rules. The Treasury Board’s Transfer Payments Policy mandates how terms and conditions must operate. The objective of this policy is to:
“ensure that transfer payment programs are managed with integrity, transparency and accountability in a manner that is sensitive to risks; are citizen- and recipient-focused; and are designed and delivered to address government priorities in achieving results for Canadians.”
However, we reviewed the terms and conditions of a handful of sample funding agreements and found little in the way of common wording between programs. Therefore, management must review each contract carefully. This is a management responsibility.
For example, one contract states, “The Grantee acknowledges that the amount of Grant funds available to it is based on the actual costs to the Grantee, less any costs (including HST and other taxes) for which the Grantee has received, will receive, or is eligible to receive a rebate, credit or refund.”
Another states, “The Host agrees that they will not substitute the remaining portion of the Participant’s salary with funding from another federal or provincial funding body.”
These clauses represent two quite different “takes” on the issue of double-dipping. Logically, funders want to prevent organizations from receiving money from different streams to pay the same expenses on the same project. But, how does either of these examples relate to eligibility for a CEWS claim?
(Note: we don’t believe there’s any question that CEWS can be used to “top up” a restricted grant. So, for instance, if your Canada Summer Jobs grant pays for 65% of the cost of your student employees, there’s nothing against you claiming the value of CEWS applicable to the other 35% of their salary. The question is whether you can base your CEWS claim on 100% of their salary.)
When asked about it, some funders have requested that grantees recalculate and repay CEWS with their funding taken into account — but other funders have not had an issue. Given our own challenges with trying to get a handle on CEWS and other funders, we have been left wondering about the funders’ capacity to get to grips with these complex and challenging issues. Are our clients getting an answer based on (say) Treasury Board guidance — or are the program staff providing their best interpretation?
The flip side of that last paragraph is that, at the end of the day, an audit evaluation of CEWS — or of your other funding — will be based on the legal facts, not on the advice of your grant officer.
So, what exactly is CEWS?
A specific legal definition of CEWS arrived in an unexpected source: the June 2021 Excise and GST/HST News:
Under the Income Tax Act (ITA), the CEWS takes the form of a deemed overpayment of liability under Part I of the ITA by an eligible entity, which is then refunded to the eligible entity. The Minister of National Revenue has statutory authority under the ITA to refund the deemed overpayment. Therefore, the CEWS is a refund of taxes imposed under the ITA and excluded from the definition of government funding.
(Again, the emphasis is ours.)
For our client base, it’s fair to say that CEWS subsidy has greatly exceeded the value of payroll taxes remitted over the same period. So, the “deemed overpayment of liability” may be difficult to see with reference to any given organization’s case. However, this definition does provide clarity on one point: it clearly ties CEWS revenue to payroll expense.
Earlier, we had raised the question of whether CEWS is intended to be applied specifically to payroll costs, or whether it is intended to support the organization generally (despite being calculated on payroll costs). Though it is called the “wage subsidy”, it is tempting to think of it as a lost revenue subsidy, since revenue drop is the critical factor in determining eligibility. But, according to this definition, CEWS is indisputably linked to payroll cost.
Further, since CEWS is excluded from the definition of government funding, it is tempting to believe that, unless the terms and conditions of other grants specifically refer to refunds of taxes (as our first example does), it is acceptable to claim CEWS on 100% of your restricted employment grants. This brings us to one final item...
Generally Accepted Accounting Principles (GAAP)
GAAP states that you cannot recognize a restricted grant as revenue unless you’re able to match it directly to an eligible expense. This means that — properly — all restricted grants, when received, should be posted to deferred revenue (a liability account). Restricted grants meet the definition of a liability because you are not entitled to the money unless you can prove that it was used as stipulated. Over the duration of the project, as expenses are properly incurred, the related portion of the grant can be recognized — that is, moved out of liability and into revenue.
Let’s use a specific example. Say we were awarded a Young Canada Works grant of $6,500, covering 65% of intern payroll costs of $10,000. When we receive the first YCW grant installment, we should book that money to deferred revenue. We can recognize it in tandem with our YCW intern’s payroll costs.
Based on the definition of CEWS as a refund of a deemed tax liability, we must consider the wage subsidy to be a direct offset to payroll expense. That is: CEWS reduces our payroll cost.
Now, suppose we had applied for CEWS for 100% of our YCW intern’s salary. Under GAAP, we would not be allowed to recognize any of the YCW grant in this period. If we did, we would be claiming both the CEWS and the restricted grant — double-dipping!
Note that the concept of a “matching grant” is irrelevant here. What matters is that GAAP allows us to apply only one revenue source — of any nature — to a given expense.
Under this interpretation, recipients of restricted grants should not apply for CEWS, to the extent that payroll costs are already funded by the restricted grants. Or — more broadly — if the grantee did apply for CEWS despite having a restricted grant, then the restricted grant cannot be recognized as revenue. Only one source of funding — either CEWS or the other funder, not both — can be recognized, and the rest must sit on the balance sheet as a liability.
How lenient are your other funders? Would they be okay with you applying for maximum CEWS as long as the program is available, holding your other grant in deferred revenue, and expending your other grant after CEWS is gone? Perhaps a question worth asking.
Possible approaches
As we stated above, we are offering factual content rather than conclusions or direction — and we are aware of different audit firms taking different approaches to the issues we’ve laid out. But, if you are struggling to resolve questions of CEWS and the other funder, and you are looking to err on the side of caution, we can offer some suggestions:
Read grant terms and conditions carefully, and evaluate the strictness of any restrictions. Do you have any latitude for interpretation? Or are the stipulations categorical?
Avoid claiming the CEWS for payroll costs that are 100% subsidized by a restricted grant.
Do claim CEWS for the portion of payroll costs that are not subsidized by a restricted grant. (That is, if your restricted grant covers 65%, go get the other 35%!)
If you have claimed CEWS in situations where you also have restricted funding, discuss accounting treatment with your auditor. Our research suggests that you are onside with GAAP as long as restricted revenue is properly deferred, and recognized only in sync with eligible costs.
Likewise, consider a discussion with your funder. Can you negotiate any avenue by which you could defer the restricted grant until after the end of the CEWS program?
Do your best to quantify your risk. What is the dollar amount of the overlap between CEWS and your restricted funding? That’s the amount you might be required to repay if you were to undergo an audit. Make sure to reserve that cash in case of a future demand to repay.
As the pandemic continues, and in particular as CRA progresses with its CEWS audit program, no doubt we will learn more and gain greater clarity. Meantime, we would be very happy to hear from readers about their views, any research they have undertaken, and any discussions they are having on this important area of risk management.
We will leave you with a selection of key definitions gathered in the course of our research. We hope that you have found this helpful!
Definitions
The following explanation of CEWS comes from the Excise and GST/HST News - No. 109.
The purpose of the CEWS is to enable businesses to re-hire workers previously laid off as a result of COVID-19, help prevent further job losses, and better position businesses to resume normal operations following the crisis… The definition of government funding excludes a refund, rebate, or remission of, or credit in respect of, taxes imposed under any statute. Under the Income Tax Act (ITA), the CEWS takes the form of a deemed overpayment of liability under Part I of the ITA by an eligible entity, which is then refunded to the eligible entity. The Minister of National Revenue has statutory authority under the ITA to refund the deemed overpayment. Therefore, the CEWS is a refund of taxes imposed under the ITA and excluded from the definition of government funding. Furthermore, the CEWS is not paid for the purpose of financially assisting NPOs in carrying out its purpose. As such, the CEWS is not included in the government funding amount in the percentage of government funding calculation… [I]t is a statutory obligation under the ITA for the Minister to refund the deemed overpayment to eligible CEWS applicants.
The following definitions related to government transfer payments (which include grants and contributions) come from the Government of Canada glossary:
Transfer payment
Is a monetary payment, or a transfer of goods, services or assets made, on the basis of an appropriation, to a third party, including a Crown corporation, that does not result in the acquisition by the Government of Canada of any goods, services or assets. Transfer payments are categorized as grants, contributions and other transfer payments. Transfer payments do not include investments, loans or loan guarantees.
Contribution
Is a transfer payment subject to performance conditions specified in a funding agreement. A contribution is to be accounted for and is subject to audit.
Grant
Is a transfer payment subject to pre-established eligibility and other entitlement criteria. A grant is not subject to being accounted for by a recipient nor normally subject to audit by the department. The recipient may be required to report on results achieved.
Other transfer payment
Is a transfer payment, other than a grant or contribution, based on legislation or other arrangement, that may be determined by a formula. Examples of other transfer payments are transfers to other orders of government such as Equalization payments as well as Canada Health and Canada Social Transfer payments.
The following definitions of accounting terms come from the CPA Canada publication, A Guide to Financial Statements for Not-For-Profit Organizations:
Note that the publication addresses philanthropic support more than government funding, and is worded accordingly — but the concepts can be transferred to public support.
Contribution
Contributions are a type of revenue unique to not-for-profit organizations. The main characteristic of a contribution that sets it apart from other types of revenue is that it is a non-reciprocal transfer. In other words, the contributor does not receive anything in exchange for the contribution. Government funding to an NPO is considered to be a contribution.
Restricted contribution
A restricted contribution is a contribution subject to externally imposed stipulations as specified by the donor.... [A] restriction might be to use the contribution only for one particular program, or to purchase a capital asset, or it may be that the contribution is not to be used at all, but rather invested as an endowment with the income from the invested funds to be used for a particular program. Accepting such restricted contributions places an obligation on the organization to respect those restrictions, and to use those monies only in accordance with donors' wishes.
This tip sheet was created by the Young Associates team based on the best information available to us as of the date of posting.
Although every effort has been made to provide complete and accurate information, Young Associates makes no warranties, express or implied, or representations as to the accuracy of content in this tip sheet. Young Associates assumes no liability or responsibility for any error or omissions in the information contained in the tip sheet.
Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, with a focus on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005, 2020), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.
