On November 19, 2020, Bill C-9 entitled An Act to Amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy), received Royal Assent and is now law. As discussed in our prior articles, the purpose of the legislation is to provide new relief measures for eligible entities that continue to be economically impacted by COVID-19. In particular, the Government of Canada has enacted a new program through the bill known as the Canada Emergency Rent Subsidy (CERS) to provide, in its words, "easy-to-understand" subsidies for rent and property expenses that are incurred by qualifying tenants and property owners. CERS is meant to replace the previous commercial rent relief program offered by the Federal and Provincial governments known as CECRA which ended on September 30, 2020.
CERS will be available until June 2021, and qualifying entities will be able to make claims under the program retroactively for the period commencing on September 27, 2020. The program is divided into qualifying periods (each a "Qualifying Period"). Period 8 (September 27, 2020 - October 24, 2020) is currently open for applications. Period 9 (October 25, 2020 - November 21, 2020) will open for applications beginning November 30, 2020 and Period 10 (November 22, 2020 - December 19, 2020) will open for applications beginning December 23, 2020. Qualifying Periods from December 20, 2020 onwards will be later determined by regulation.
The CERS program consists of two components, (i) a base subsidy, and (ii) a top-up subsidy. The base subsidy provides support to qualifying entities by subsidizing up to a maximum of 65% of eligible expenses (see below for what qualifies as an eligible expense). This subsidy will be based on a sliding scale, whereby the amount of the subsidy that may be received by an eligible entity depends on its revenue loss. In addition to the base subsidy, the top-up subsidy (also known as the Lockdown Support) will provide a 25% subsidy for eligible entities that have been subject to a lockdown or other public health order issued under the laws of Canada, a province or territory (including orders made by a municipality or regional health authority under one of those laws) for one week or longer.
CERS is available to a qualifying renter to subsidize eligible expenses based on the percentage of revenue reduction that an entity has experienced. Unlike CECRA, qualifying entities under CERS can apply directly for the subsidies rather than relying on landlords to do so on their behalf, and there is no minimum amount of revenue reduction or gross revenue cap required for eligibility. However, as noted below, there are limits on who may receive the subsidy and the dollar amount of the subsidy offered.
Under CERS, both tenants and property owners can be considered a "qualifying renter" so long as the following conditions are satisfied:
- an application is made no later than 180 days after the end of the Qualifying Period in question;
- the individual who has principal responsibility for the financial activities of the eligible entity provides an attestation as to the completeness and accuracy of the CERS application; and
- the party is an "eligible entity" that satisfies one of the following requirements: (1) it has a payroll account as of March 15, 2020 or has been using a payroll service provider; (2) it has a business number as of September 27, 2020 (and satisfies the CRA that it has a bona fide rent subsidy claim); (3) it has purchased the business assets of another person or partnership who meets the requirements set out in item (2) directly above and has made an election under the special acquisition rules; or (4) has met other prescribed conditions that may be introduced in the future.
An "eligible entity" includes: (I) individuals (other than a trust); (II) corporations (or trusts) that are not exempt from income tax under Part I of the Income Tax Act; (III) the following persons that are exempt from income tax under Part I of the Income Tax Act: non-profit organizations, agricultural organizations, boards of trade, chambers of commerce, non-profit corporations for scientific research and experimental development, labour organizations or societies, and benevolent or fraternal benefit societies or orders; (IV) registered charities; (V) partnerships consisting of eligible employers (including partnerships where at least 50% of the interests in the partnership are held by eligible employers); and (VI) the following prescribed organizations: certain Indigenous government-owned corporations that carry on a business, partnerships consisting of eligible employers and certain Indigenous governments, registered Canadian amateur athletic associations, registered journalism organizations, and private schools or private colleges.
Notably, (i) an eligible entity also includes a partnership that is up to 50% owned by non-eligible members and (ii) public institutions are not eligible for the CERS subsidy (this includes municipalities and local governments, Crown corporations, public universities, colleges and schools, and hospitals).
Furthermore, as discussed in the next section, property owners that primarily use the subject property to earn rental income from arm's length parties are not eligible for the subsidy for that property.
Eligible Expenses in Qualifying Properties
The CERS program covers a portion of eligible expenses with respect to the Qualifying Period in question for each qualifying property, subject to the revenue subsidy percentages for the program.
A "qualifying property" includes any "real or immovable property" (buildings or land) in Canada that an eligible entity owns or rents and uses in the course of its ordinary business activities. However, a "qualifying property" would not include homes, cottages, or other residential properties used by the applicant or its family members, nor would a property that is primarily used, whether directly or indirectly, to earn rental income from arm's length parties.
Notably, this last exclusion prohibits commercial landlords from receiving the subsidy for properties where their primary business is to receive rental income from arm's length tenants. The idea behind this exclusion is likely based on the principle that in such cases the arm's length tenants of these commercial landlords will be claiming the subsidy and thereby meeting their rent obligations under the lease. Furthermore, the distinction is made for arm's length tenants versus non-arm's length, as a property used by an eligible entity to primarily earn rental income from a non-arms length tenant may still be eligible to claim CERS in respect of other eligible expenses (other than rent from the non-arm's length tenant).
For an eligible property owner, eligible expenses for a qualifying property with respect to the Qualifying Period are (i) property and similar taxes (such as school taxes), (ii) property insurance, and (iii) interest on commercial mortgages for the purpose of purchasing the subject property for a mortgage amount not exceeding the lesser of (i) the lower principal amount secured by one or more mortgages on the property at the time it was acquired, or (ii) the purchase cost of the property. Payments made to a non-arm's length entity, or amounts that were paid or were payable for a period of time outside of the Qualifying Period, are not eligible.
For an eligible tenant, eligible expenses for a qualifying property with respect to a Qualifying Period are commercial rent (including percentage rent and additional rent paid with respect to operating expenses and taxes) and any other amount(s) required to be paid or are payable by the tenant under a net lease, whether to the landlord or a third party (such as a utility provider). Sales tax components of the foregoing eligible expenses, payments made as damages, and interest or penalties on unpaid amounts are not tenant eligible expenses.
For both property owners and tenants, eligible expenses are limited to those expenses paid under agreements in writing entered into before October 9, 2020 (including, for example, a written lease entered into before that date).
Much to the dismay of larger qualifying renters, eligible expenses for each Qualifying Period are capped at $75,000 per qualifying property for both the base subsidy and top-up subsidy. The base subsidy will also be subject to an overall cap of $300,000 for each Qualifying Period that would be shared among affiliated entities, such as in the case of a property owner and a non-arm's length tenant. There is no overall cap for each Qualifying Period with respect to the top-up subsidy.
Notably, the language in the current legislation requires eligible expenses (including rent) to have been paid before an eligible entity can claim relief under the CERS program. However, in response to concerns raised by stakeholders about the program, the Government of Canada has reaffirmed its intention to propose an amendment to CERS in order to allow applicants to include eligible expenses in their application before these expenses are actually incurred. Amounts that have not yet been paid at the time of the application will have to be paid no later than 60 days after payment of the subsidy.
In order to calculate the subsidy under CERS, an applicant will need to determine (i) the applicable revenue reduction percentage (RRP), (ii) the applicable rent subsidy percentage (RSP), and (iii) the amount of the eligible expenses with respect to the Qualifying Period in question.
An eligible entity's revenue for purposes of this subsidy is its revenue from ordinary activities in Canada earned from arm's length sources, determined using its normal accounting practices (revenues from extraordinary items and amounts on account of capital will be excluded). Other details can be found on the Government of Canada website for revenue calculation relating to registered charities and non-profit organizations and certain affiliated non-arm's length transactions that ultimately lead to arm's length revenue.
There are two approaches under the CERS programs when determining the RRP: (a) the general approach, whereby an entity can choose to calculate its monthly revenue decline, year-over-year, for the calendar month in question, and (b) the alternative approach, whereby an entity can choose to calculate its revenue decline by comparing its current reference month revenues with the average of its January and February 2020 revenues. Importantly, once an entity has chosen to use either the general or alternative approach, they must use that approach for each of the Qualifying Periods 8, 9, and 10 and this approach would apply for both the CERS program and the Canada Emergency Wage Subsidy program.
The RRP is calculated by comparing the revenue in the current reference periods to the revenue in the prior reference periods. For each Qualifying Period, an eligible entity will use the greater of its percentage revenue drop between the current reference period and the previous reference period in order to determine its base subsidy rate.
For example, in order to determine the relevant reference period for determining the RRP for Period 8 (September 27, 2020 - October 24, 2020), (A) the general approach would take the greater of its percentage revenue drop based on either (i) the September 2020 revenue over September 2019 revenue comparison or (ii) the October 2020 revenue over October 2019 revenue comparison, or (B) the alternative approach would take the greater of its percentage revenue drop based on either (I) September 2020 over the average revenue of January and February 2020 or (II) October 2020 over the average revenue of January and February 2020.
In order to determine an eligible entity's base subsidy rate, the RSP for a Qualifying Period will depend on the RRP experienced by the eligible entity with respect to the Qualifying Period in question. The RSP for Periods 8, 9, and 10 are calculated as follows:
|70% or greater||65% (the maximum rate)|
|50% to 69%||(RRP - 50%) x 1.25 + 40%|
|Less than 50%||0.8 x RRP|
The RSP for Periods 11 and onwards will be later determined by regulation.
An eligible entity's top-up subsidy rate is calculated as follows:
25% multiplied by (the number of days within the Qualifying Period in question that the eligible entity was subject to lockdown) divided by (the number of days within the Qualifying Period in question).
CERS is paid by direct deposit or by cheque. Applications will begin to be processed as of November 30, 2020, with payments expected to be made to eligible entities beginning on December 4, 2020.
Key Takeaways from the CERS Program
- Unlike CECRA, CERS will not only be applicable to small businesses. So long as the eligibility criteria above are met, the size of the business will not be a determinative factor.
- Unlike CECRA, CERS allows eligible entities to apply directly for assistance under the program, rather than relying on landlords to do so on behalf of the eligible entities.
- The CERS program will be administered by the CRA and unlike the CECRA program, the support provided under this program will be in the form of a subsidy rather than a forgivable loan. As an amendment to the Income Tax Act, CERS operates like the Canada Emergency Wage Subsidy (CEWS), whereby the subsidy amount paid to the eligible entity will be deemed an overpayment of tax by the entity under the Income Tax Act, such that the entity's tax payable would be reduced or a tax refund would be issued.
- While the program name may suggest otherwise and while an eligible entity that qualifies for financial relief under the CERS program is referred to as a "qualifying renter," the eligible entity under this program is not necessarily a tenant under a lease - a property owner may also qualify under the program.
- A property that is used primarily to earn rental income from arm's length parties is not eligible for the program.
- For each Qualifying Period, you can claim eligible expenses up to a maximum of (I) $75,000.00 per qualifying property (base subsidy and top-up subsidy) and (II) $300,000.00 in total for all qualifying properties (including any amounts claimed by affiliated businesses) with respect to the base subsidy only (there is no maximum for the top-up subsidy across all qualifying properties).
- Applicants can apply for the program here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.