How COVID-19 Impacts the Construction Industry

The construction industry is having to balance the safety of their employees and families with the struggle of maintaining some sense of normalcy through the COVID-19 pandemic. Businesses are reducing on-site teams to allow for physical distancing. The construction pace has slowed as companies use rotating teams to minimize the number of people in contact with each other.

We also see significant steps being taken by those in the realty, new home construction and renovation segment of our economy. Realtors have suspended all open houses and private appointments include strict hand sanitation practices. Open houses are conducted at best on a virtual basis. Sales centres are either completely closed or regulating the number of people permitted in the building. Renovations have come to a complete stand-still.

New home builds are delayed due to the slow down in the supply chain. In light of the potential implications on new home construction, Tarion, an Ontario new home warranty provider, has recently issued an advisory to new home buyers and builders as to the impact of COVID-19 on the industry.

Financial institutions have been less clear as to the potential impact to interest rates on mortgages for new and renewing applicants. Many financial institutions have advised their customers that mortgage lending rates may increase rather than decrease as a result of COVID-19. Canadian banks are anticipating a rise in mortgage default rates as unemployment rises and economic conditions continue to be uncertain. Applicants’ income situations continue to be challenged and certain incomes, like employment insurance, do not qualify as earned income for mortgage applicants. Additional scrutiny and attention is being given to mortgage applications that were previously approved.

The real estate industry embraced a promising start to 2020, with capital markets surging to unprecedented heights and the real estate market demonstrating strong growth demands. New single-family home sales in February 2020 in the Greater Toronto Area (GTA) were up 228 percent year over year, eclipsing the sales peak of February 2004. Condominium prices in the GTA rose 21.3 percent in February 2020, when compared with the prior year, according to the Building Industry and Land Development Association (BILD).

Home builders are now strategizing how best to meet the needs of their customers while preserving the health and welfare of their employees and business. The following are some strategies that may assist in this process:

Maintaining cash flow through the crisis

A full understanding of your cash flow situation for the next 13 or more weeks is critical for determining the funding needs of your business. Given the current level of uncertainty, several scenarios will need to be developed to increase working capital, improve order to cash processes and determine quick-win solutions that can be implemented immediately.

An undertaking to assess vendor and customer engagement strategies is required. Identify which customers and vendors are critical accounts. Specific procedures can then be created to deal with strategic versus non-strategic partners.

Businesses should consult their tax advisors as to the necessity of paying corporate income tax instalments for the balance of the year given that income and profitability is projected to be significantly lower than 2019.

The federal government has announced many programs to allow for deferring the payment of corporate income taxes, corporate income tax instalments and GST / HST payments. These deferral mechanisms may assist with resolving temporary cash flow needs of business owners.

To further assist with temporary cash flow needs, the government, the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) have launched new small and medium sized enterprise loan and guarantee programs that will provide up to $40 billion in additional lending. The programs are as follows:

• The government introduced the new Canada Emergency Business Account (CEBA), which guarantees interest-free loans up to $40,000 for small businesses to help cover operating costs during a period where revenues have been temporarily reduced. To be eligible for this program, businesses need to demonstrate they paid between $20,000 and $1.5 million in total payroll in 2019. If the loan is repaid by December 31, 2022, up to 25 percent of the loan may be forgiven, to a maximum of $10,000. Application for the CEBA is made through financial institutions.
• A new program partners the BDC with financial institutions to co-lend term loans to small and medium sized businesses for their operational cash flow requirements. Eligible businesses may obtain incremental credit amounts up to $6.25 million, with the BDC providing 80 percent and the financial institution providing the remaining 20 percent.
• As part of a new domestic mandate enhancing their role in supporting Canadian businesses through the COVID-19 crisis, EDC will provide guarantees to financial institutions issuing new operating credit and cash flow term loans of up to $6.25 million to small and medium sized businesses. These loans will be 80 percent guaranteed by EDC and are to be repaid within one year.

Maintaining corporate profitability and revenue growth

We will get through the pandemic and there will be a resurgence once this crisis is over. Meeting the pent-up demand will be the next challenge as businesses will need time to return to pre-pandemic levels of supplies and staff. However, for 2020, the focus should continue to be on profitability and revenue targets; different actions may be considered in order to optimize performance in the short term.

As several federal government programs have been announced to support businesses and workers, a good place to start is with an assessment of labour requirements and staffing levels. The following programs may provide assistance with retaining your workforce:

• The Canada Emergency Wage Subsidy (CEWS) is a new program providing eligible entities with a subsidy of 75 percent of employee wages for a 12-week period, from March 15 to June 6.
  • The subsidy is payable on the first $58,700 normally earned by an eligible employee, representing a benefit of up to $847 per week.
  • Eligible entities would include employers of all sizes and across all sectors of the economy; public sector entities are specifically excluded from the subsidy.
  • Eligible entities must demonstrate a decline in revenues of at least 15 percent in March 2020 and 30 percent in April or May 2020, when compared to the same month in 2019; alternatively, employers may compare revenue using an average of revenue earned in January and February 2020, provided they had a payroll number on March 15, 2020.
  • Eligible entities can elect to calculate revenue using either the accrual method or cash method; however, the same method must be used for all periods.
  • An eligible employee is an individual employed in Canada by an eligible entity, who has not been without remuneration for 14 or more consecutive days in the qualifying period.
  • Eligible employers may access the CEWS by applying online through the Canada Revenue Agency (CRA) My Business Account or the new application portal which will be available on April 27. Entities may also have their accountant apply on their behalf through the CRA Represent a Client

• The Temporary Wage Subsidy for Employers is also available to businesses; however, any amounts eligible to be received under this program will reduce the amount that can be claimed under the CEWS. This subsidy is equal to 10 percent of remuneration paid from March 18 to June 20, 2020, up to a maximum of $1,375 per employee and $25,000 per employer.

In addition, builders who must temporarily lay-off staff due to the COVID-19 impact on their business may refer their employees to other programs for financial assistance. The Canada Emergency Response Benefit (CERB) is a support program for individuals who have stopped working due to reasons related to COVID-19. The CERB is a temporary program providing $500 per week for a maximum of 16 weeks. Applications can be made through the CRA, online or by telephone. Payments received under the CERB will be included in the recipient’s taxable income.