A digitally modernized immigration ecosystem in Canada
Reflecting on the roundtable, Strengthening Canada's Immigration Ecosystem.
Since the Canada Emergency Response Benefit (CERB) program was launched at the beginning of the COVID-19 outbreak, more than 8.4 million unique applicants have submitted over 15.4 million applications between March 15 and June 28 for a total cost of $53.5 billion. This includes recipients who may later repay CERB benefits to Canada Revenue Agency (CRA) because their employers subsequently offered them more generous benefits through the Canada Emergency Wage Subsidy (CEWS) program. In addition, almost 190,000 CERB claimants have repaid benefits that they were not entitled to receive. The federal government has extended the CERB program until October 3, 2020 – for a total duration of 24 weeks.
The 8.4 million unique applicants to the CERB program is higher than the 3 million jobs lost in March and April, confirming that CERB did not require applicants to have worked immediately prior to the lockdown. This safety net was indispensable. Income replacement programs were necessary to avoid suffering and to prevent the economy from a free fall. CERB and other government financial assistance programs also facilitated public support for lockdown and social distancing.
The competing CEWS program paid out an average subsidy of $553 weekly before Canada Pension Plan (CPP) and Employment Insurance (EI) premiums between March 15th and June 15th, and an average of $518 weekly net of CPP and EI premiums. CERB payouts of $500 weekly are not significantly less generous and may have influenced businesses from not applying to CEWS in larger numbers. Between March 15th and June 15th, CEWS had paid out only $13.28 billion of its $73 billion budgeted expenditure. In contrast, CERB has disbursed $43.5 billion in a slightly shorter period (March 15th – June 4th).
The CERB program was the first financial assistance program to be launched by the federal government and has the least stringent criteria for eligibility. The criterion of having earned at least $5,000 during the previous 12 months is easy to meet since there is zero income tax on annual incomes up to $12,298, and most tax audits are geared to detect under-reported incomes (and not over-stated incomes). CERB also requires claimants to have no more than $1,000 of other income in a four-week claim period. Assets have no bearing on eligibility for CERB.
The simple criteria and application program make this an easy program to administer and deliver to Canadians. Service Canada has been re-directing applications for Employment Insurance (EI) to the CERB program for rapid assessment, faster processing of benefit cheques, and to preserve EI benefits for future furlough periods.
CERB allows Canadians to earn up to $1,000 every four weeks without any clawback of CERB benefits. CERB may need to be updated so that this $250 per week cannot be made up of CEWS benefits. Otherwise, employers of low wage employees may just offer $250 of CEWS instead of offering up to 75% of pre-crisis wages. Both CERB and CEWS are taxable at the recipients’ tax rate, with the former being taxable at year-end while the latter taxable at the source.
While CERB provided much-needed liquidity during the lockdown, it may blunt the financial incentives for benefit recipients to return to work. CERB recipients returning to gradual work and earning in excess of $250 per week will lose their weekly CERB benefits of $500 per week, ending up in a worse financial position upon returning to work compared to during the lockdown. Employers are starting to claim that they have to offer employees incentives to return to work.
The fear and the possibility of the spread of the virus will likely continue until we have an effective vaccine, an antiviral that reduces symptoms, or we develop herd immunity. Until then, we may continue to experience lower demand for things requiring close physical interactions (e.g., restaurants, airlines and retail trade) and lower supply for things compatible with social distancing (e.g., communications technology and deliveries).
Many Canadians may therefore not be able to return to the pre-crisis level of working hours due to insufficient demand or insufficient supply. In such a partial reopening, businesses are not finding it feasible to reach their pre-crisis staffing levels. Revenues are not rebounding to pre-lockdown levels since customer traffic is low. Many employees (in the restaurant business, for example) are not able to earn close to their pre-crisis wages because business hours and capacity are constrained by physical-distancing requirements. Businesses are therefore recalling their employees commensurate with the proportion of returning customers. If half the customers come back in July (compared to the pre-COVID-19 period), then businesses will recall their employees for only half the time – presumably for half the weekly compensation. The reopening could be even more gradual if a second wave of the COVID-19 outbreak occurs.
The slow recall further fuels employees’ incentives to remain on CERB and not go back to part-time employment. Businesses unable to find employees willing to work at reduced capacity may not be able to breakeven on their capacity costs. Many low margin businesses with high rents may not survive a slow return to normal. According to a recent Canadian Federation of Independent Business (CFIB) survey, 17 per cent of businesses stated that employee availability kept them from reopening completely, while 37 per cent cited weak customer demand as the main reason for delays in reopening. This vicious and painful cycle could bring about a second wave of business closings and additional job losses that could delay a return to complete economic recovery. While layoffs in March were intended to be temporary, layoffs in July may end up being permanent.
Employees susceptible to the partial recall generally include the lower-paid, less educated, young people and gig workers – many of whom are front-line workers and therefore not able to work remotely. Statistics Canada documents that among parents, fewer women found jobs in May and more women than men were recalled for fewer hours. This could also be due to school and daycare closings, as well as fear of resuming such activities for children. Such lower-than-average-wage employees (the average annual wage of Canadians in 2019 was $52,600) likely spend all of their earnings on the necessities of life and likely overrepresented in those who have lost jobs during this pandemic.
How well CERB works during a partial re-opening could determine how fast and effectively our economy moves to a complete re-opening with unsubsidized paycheques. The government needs to tradeoff between short-term assistance that safeguards low-income Canadians and allowing the market to create sustainable jobs in the long run. If CERB shrinks its support significantly, many Canadians will suffer. But if CERB continues in its present form, some parts of the economy may fossilize. A re-opening of the economy could be stalled if CERB recipients hesitate in returning for partial work hours because they receive more CERB benefits for doing nothing than by working part-time hours. Thus, CERB could be a factor delaying the reopening of some businesses.
Usage of CERB is already on the decline as the number of employed Canadians increased by nearly 290,000 in May. While CRA received an average of over 176,000 applications per day for the period March 15 to June 28, this volume was down to an average of just under 52,000 applications per day between June 22 and June 28. This decline suggests that Canadians are physically returning to work or have found ways of working remotely with newer technologies.
CERB recipients may feel less obligated to return to half-time work compared to CEWS recipients since employers are the conduit for the latter. The average CERB benefit of $500 per week is only marginally less than the average CEWS benefit of $518 per week, with both benefits being taxable. While businesses may be able to terminate CEWS benefits if the employee does not return to work, they have limited leverage to recall employees on CERB. The federal government is attempting to implement rules that would prevent CERB recipients from refusing reasonable employment.
The U.S. is debating a “return-to-work bonus” to over 40 million workers who lost jobs and filed for employment insurance. Some are recommending a one-time payment of $1,200 from the government if they find a job, while others are recommending payments of $450 per week for several weeks to give up unemployment insurance benefits and continue working. Others are recommending a reduction in employee payroll taxes to encourage hiring and additional training for workers to shift to different types of jobs or industries
One approach would be for CERB to offer a one-time $500 or $1,000 “signing bonus” to anyone who signs up for a job and gives up CERB benefits for the rest of the pandemic’s first wave. Such individuals would not have to give up their normal eligibility for Employment Insurance (EI). These incentives need to be debated and implemented to ensure a successful gradual re-opening of the economy, which is a prerequisite for a complete return to normalcy.
Amin Mawani is an Associate Professor of Taxation at the Schulich School of Business at York University in Toronto where he teaches tax policy and tax planning.