The 30 percent decline in revenue needed for businesses to be eligible for the federal government’s 75 percent wage subsidy will be determined by a company’s revenue from the same month last year.
“This clause might be a killer for the tech ecosystem.”
Minister of Finance Bill Morneau announced further details on the subsidy program on Wednesday afternoon, noting that companies will need to reapply for the subsidy each month and the 30 percent eligibility requirement will be determined based on year-over-year revenue from the corresponding month from 2019.
The 75 percent wage subsidy will be available for Canadian businesses that have experienced a 30 percent decline in revenue due to COVID-19. The revenue decline will be assessed based on gross revenue and employers will be required to attest that they are doing “everything they can” to pay the remaining 25 percent of employee wages.
“This clause might be a killer for the tech ecosystem,” said Matt Roberts, partner at ScaleUp Ventures, calling out the year-over-year revenue comparison. Early-stage startups that may not have been operating the year prior or were not drawing in revenue in the corresponding month in 2019 would not be able to benefit from the 75 percent wage subsidy based on the current criteria.
Startup I just spoke to has had their Revenues 4X in a comparable between March 2019 & 2020. They also 4Xd their Team headcount. Down 70% from March 2020 to April 2020…
But it's not a 30% decline year over year…
Need to help bring these examples to Attn: of @NavdeepSBains
— matt roberts (@mattroberts) April 1, 2020
When asked how pre- or low-revenue startups might be effected, Morneau stated that the government is still working out details, suggesting that revenue could potentially be compared to the month directly prior, for example, February 2020 revenue compared to March 2020. He emphasized that in this unprecedented global crises the government is having to come up with programs that would typically take years, in one week. He expressed openness to implementing new measures and indicate that future announcements may be coming that would support startups.
The 75 percent subsidy does not replace the 10 percent wage subsidy that was originally introduced a couple of weeks ago. Small businesses concerned that they do not meet the criteria for the 75 percent are still able to apply for the 10 percent subsidy. That subsidy is focused specifically on small businesses and non-profit, charity organizations and does not come with a decline in revenue criteria. Canadian small businesses that have not seen a direct decline in revenue due to COVID-19, or cannot prove the 30 percent decline criteria for the 75 percent subsidy, could still be eligible for the 10 percent subsidy. As per direction from the finance minsitry, eligible companies will be able to utilize both subsidies at the same time, but if a company collects on the 10 percent program it will affect how much it can recieve through the other program.
On a call this afternoon with the Council of Canadian Innovators (CCI), Minister of Industry Navdeep Bains, stated that the new wage subsidy replaced the 10 percent subsidy. This comes despite senior finance officials offering detail on how the programs are both in place and small businesses are still eligible for the original subsidy. BetaKit has reached out to Bains’ office to clarify. Bains’ communications team has since clarified that both programs are available.
Bains also acknowledge on the call that pre-revenue startups do not qualify for the 75 percent subsidy based on the revenue criteria. They don’t fit into this revenue model, he said.
Bains echoed Minister Morneau’s statement on how the federal government is being forced to implement programs within a week’s time rather than months or years. He said that the government is doing its best to see what can be done to support startups, noting that details of potential new measures are still being figured out.
Details on the 75 percent subsidy
Applications for the 75 percent subsidy program are set to open soon and will be available through the Canada Revenue Agency’s website. Morneau said today that he expects funds to be available for companies in approximately six weeks. The capital will be sent to businesses through the CRA via direct deposit, with Morneau encouraging businesses to sign up for the direct deposit system, noting that, currently, only 50 percent of Canadian businesses are. The finance minister also indicated that the program is set to cost an expected $71 billion.
Companies that receive Scientific Research and Experimental Development (SR&ED) financing are still eligible for the subsidy.
Prime Minister Justin Trudeau emphasized on Wednesday that “stiff and severe” penalties will be in place for companies that try and take advantage of the program.
The subsidy will be available for three months and is retroactive until March 15. The federal government has not offered comment on how the program might be extended if self-isolation measures continue past the three month period.
The program applies to all Canadian businesses, both large and small, as well as nonprofits and charities. There is no restriction on the numbers of employees. The 75 percent wage subsidy will be available on the first $58,700 of an employee’s salary, meaning that the government could provide up to $874 per week for individual Canadians.
Along with the year-over-year 30 percent revenue decline criteria, companies that are publicly funded are not eligible for the program. On the CCI call, Bains clarified that companies that receive Scientific Research and Experimental Development (SR&ED) financing are still eligible for the subsidy. He also noted that the wage subsidy applies to all employees on eligible company payrolls, which includes those on maternity leave for example.
The minister of industry also clarified Trudeau’s earlier statement on companies paying the remaining 25 percent of wages, noting that it is not mandatory for companies to do so, rather highly encouraged. The government understands that larger companies will likely be able to supplement the 25 percent, while smaller companies will not, he said.
Trudeau announced the 75 percent employee wage subsidy last Friday as an addition to the already approved 10 percent wage subsidy for small businesses, which was passed by Parliament last week as part of the $82 billion emergency support package. Since Parliament was recalled and passed the support package, new announcements, including the 75 percent wage subsidy, have increased the federal government’s package to $107 billion.
The decision to offer a larger wage subsidy came at the urging of a number of organizations and companies and is now more in line with measures taken in countries like the United Kingdom and Denmark.
Conservative MPs, including Pierre Poilievre, who represents the Carleton riding, have called out the newly introduced measure, arguing for the need to recall parliament to approve them.
1/3 Parliament will need to be recalled to salvage the government’s wage subsidy promise. Trudeau’s announcement is not legal under the law his government wrote last week. Morneau probably just realized that and that’s why he suddenly cancelled his press conference.
— pierrepoilievre (@PierrePoilievre) March 31, 2020
Morneau and Minister of Small Business Mary Ng had been set to provide more details on the 75 percent wage subsidy on Tuesday but faced delays, with the Canadian Press reporting that the government was still ironing out the fine print of the program and trying to sort out whether there was a need to recall parliament to authorize the new wage subsidy.
In his daily briefing on Wednesday, Trudeau called on the other parties, asking to bring back parliament yet again in order to approve the wage subsidy program. “This must be a team Canada effort,” Trudeau stated, noting the current COVID-19 measures now account for the largest economic support program in Canadian history.
While many welcomed the larger wage subsidy, questions remained. Speaking with BetaKit, Canadian startup CEOs who have already had to make decisions on layoffs expressed the need for more details before making any decisions to rehire, with many wondering how the 30 percent revenue decline would be calculated.
The government measures, including the subsidy and government loans, have been criticized as insufficient in supporting startups, which are often more focused on growth rather than profitability. Many questioned whether startups would be eligible for the 75 percent subsidy.
A prominent venture capitalist with direct knowledge of the government response told BetaKit that startups that currently do not have revenue “are missing the objective.” The VC emphasized that the program is designed to help Canadian companies that have seen their top line negatively impacted by COVID-19 and to save those businesses from going bankrupt.
Morneau emphasized a similar point on Wednesday, noting that the government is specifically trying to protect individuals that are working for companies that have seen a significant drop in revenue. “We are trying to make sure at each step that we can support Canadians and Canadian businesses in an appropriate way,” he said.
Noting that the 30 percent revenue decline is fair, the VC added that the program should not be used to support companies that were not already proven to be sustainable. They called, rather, for the VC community to step up and support such startups.
This echoes a similar call from the CVCA, which penned an open letter to Minister Ng last week, calling for BDC to increase investor liquidity. The CVCA called for BDC to provide matching convertible note loans, on a one-for-one basis with General Partners (GPs). According to a report by The Logic, BDC is considering a similar measure, with more details on the program are expected in the coming days.
Image source The Canadian Club of Toronto via Flickr