COVID-19 Tax Update: A Detailed Review of the New Canada Emergency Rent Subsidy (CERS) and Lockdown Support Programs

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I. Overview

On November 19, 2020, Parliament enacted the Canada Emergency Lease Subsidy (“CERS”). Ostensibly designed to interchange the underutilized Canada Emergency Business Lease Help (“CECRA”), the CERS subsidizes industrial actual property bills incurred by companies negatively affected by COVID-19. For companies topic to a public well being order, the CERS features a separate, however intertwined, “lockdown assist” top-up part.

The CERS is out there as of September 27, 2020. Consequently, as of that date companies qualifying for each the essential CERS and “lockdown assist” top-up might obtain as much as $67,500 per property per 30 days from the federal authorities. Just like the Canada Emergency Wage Subsidy (the “CEWS”), CERS funds come within the type of a refundable tax credit score underneath the federal Earnings Tax Act (Canada) (the “ITA”).

Additionally much like the CEWS, the principles and technical nuances underlying the CERS are startingly complicated. This text goals to help companies, and practitioners advising them, with the instruments and steerage vital to soundly navigate the brand new guidelines – and, finally, maximize the financial quantity of any CERS declare.

The CERS is out there for bills paid from September 27, 2020 onwards, and purposes can already be made on-line. To maximise readability, ideas and definitions used beneath that are derived from CEWS – of which there are numerous – won’t be individually reproduced; readers are suggested to consult with our earlier weblog posts on the CEWS (here and here) as key reference factors.

II. Key Takeaways

Broader Software than “Lease”

Regardless of the title, CERS applies to way over mere hire. A number of varieties of mounted industrial actual property bills are eligible for the subsidy. As detailed beneath, the definition of qualifying hire expense consists of mortgage curiosity, insurance coverage, and property taxes. All such bills are sometimes borne by the true property homeowners, not renters.

Appreciable Overlap with CEWS

The CERS adopts and depends upon most of the identical definitions and ideas because the CEWS. Certainly, the CERS was positioned into the identical part of the ITA implementing the CEWS (part 125.7).

For instance, CERS eligibility is segregated into the identical qualifying intervals, is predicated on an entity’s qualifying income decline (calculated utilizing the prevailing CEWS methodologies), and suits throughout the identical general framework – together with elections, deeming guidelines, and administrative provisions – because the CEWS.

The 2 applications are additionally comparable in design and idea. In essence, the CERS is to industrial actual property bills what the CEWS is to worker wages. Each applications entitle qualifying companies to a proportional reimbursement of mounted enterprise bills (every as decided, usually, on a sliding scale proportionate to the entity’s income decline).

Sarcastically, though such overlap might enhance general effectivity it could even be detrimental in lots of circumstances. Employers looking for to maximise their CEWS claims might take steps – together with submitting sure elections (or not) – which negatively affect their CERS entitlement, or vice versa. For instance, a company group might take into account submitting the “affiliated group” election (in s.125.7(4)(b)) to maximise their mixture CEWS declare, regardless that it could end in much less CERS general. Entities with few workers however excessive actual property bills (or vice versa) needs to be particularly aware of this subject.

Virtually, claimants may have to contemplate each their CEWS and CERS entitlements concurrently. Earlier than submitting a declare for both subsidy, care needs to be taken to make sure that one doesn’t negatively affect the opposite.

As an apart, Invoice C-9 (which enacted the CERS) contained a number of key revisions to the CEWS program. See our Tax Alert summarizing these modifications here.

Widespread Eligibility and Profit

Numerous companies will likely be entitled to the CERS. As famous above, each homeowners and tenants of actual property might qualify, and – as mentioned beneath – solely a modicum of income decline is required to obtain at the very least some profit.

The CERS might present as much as as much as $67,500 per qualifying property per qualifying interval, and isn’t restricted to solely “small companies”. Subsequently, nearly each enterprise no matter dimension ought to take into account its CERS entitlement. Realistically, many teams might obtain a whole lot of hundreds of {dollars} per 30 days underneath the CERS.

CERS Broader than CECRA

A key level of rivalry underneath the CERS’ conceptual forebearer – CECRA – was that landlord buy-in was required. Absent a landlord agreeing to forego accumulating 25% of hire in any other case payable, CECRA was unavailable to a tenant. In lots of circumstances this proved to be a bridge too far for a lot of small enterprise homeowners.

CERS eliminates that requirement. A tenant might thus qualify and apply by itself accord with out reliance on a 3rd celebration. Any CERS acquired is paid on to the affected enterprise. That mentioned, landlords not directly profit in that they keep tenants whose hire legal responsibility is partly (or largely) financed by the federal authorities.

“Lockdown Assist” Extremely Useful

Parliament enacted a key “lockdown assist” measure alongside the CERS. In essence, companies topic to a public well being restriction are entitled to a “top-up” of 25% of qualifying hire bills all through any qualifying interval through which such restrictions are in place.

Conceptually, the “lockdown assist” program is an add-on to the CERS – very like how the CEWS comprises a top-up mechanism for companies with essentially the most extreme income decline. In contrast to the CEWS, nevertheless, the lockdown assist is out there to all companies negatively affected by a public well being restriction, no matter general income loss (much like the “cliff” impact in place for the primary three qualifying intervals of the CEWS).

III. CERS – Eligibility

Qualifying Property

The CERS applies to bills paid in reference to a qualifying property. That time period usually consists of any industrial actual property in Canada. The one exceptions are “self-contained home institutions” – that’s, private dwellings utilized by the proprietor (or a non-arm’s size particular person) as a residence. That may seemingly disqualify bills paid on residence workplaces or in respect of different companies run from the claimant’s residence.

Qualifying Durations

As with the CEWS, entitlement to the CERS is segregated into intervals (i.e., qualifying intervals). The identical qualifying intervals used for the CEWS applies to the CERS, with the primary qualifying interval for which the CERS is out there being September 27, 2020 to October 24, 2020.

An entity’s entitlement to the CERS might fluctuate by qualifying interval. That’s, an entity might qualify for the CERS in a single qualifying interval however not one other, relying on (amongst different issues) their relevant income decline. Nonetheless, the deeming guidelines in s.125.7(9) of the ITA – which allow an entity to depend on its income discount within the immediately-preceding qualifying interval, if advantageous – additionally apply to the CERS.

For the reason that CERS is simply efficient as of September 27, 2020, it solely applies to the eighth qualifying interval any past. No CERS declare could also be made in respect of bills incurred throughout any of the primary seven qualifying intervals.

Qualifying Renter

To qualify for the CERS in any given qualifying interval, an applicant have to be a qualifying renter. As famous elsewhere on this weblog, this definition will not be restricted to entities that solely “hire” actual property. Relatively, a qualifying renter is any eligible entity that:

• recordsdata an software for the CERS no later than 180 days after the tip of the related qualifying interval;
• obtains an attestation, by the person with principal accountability for the monetary actions of the eligible entity, that the applying is full and correct in all materials respects; and
• meets one of many following situations:
  • on March 15, 2020, the eligible entity had a payroll account registered with the Canada Income Company (the “CRA”);
  • on March 15, 2020, the eligible entity had a payroll service supplier in place to make remittances on its behalf concerning a number of of its workers (and the payroll service supplier continues to make such remittances); or
  • on September 27, 2020, the eligible entity had a CRA enterprise quantity.

An eligible entity means:

• a company or belief, apart from a public establishment or tax-exempt company or belief;
• a person;
• a registered charity, apart from a public establishment;
• sure tax-exempt entities, apart from a public establishment; or
• a partnership, all the members of that are an entity referred to above.

Public establishments don’t qualify for the CERS (or CEWS). These usually embody municipal authorities, crown companies, faculties, faculty boards, hospitals, and public universities or faculties.

IV. CERS – Subsidy Quantity

Lease Subsidy Proportion

A qualifying renter’s subsidy for a given qualifying interval is predicated on their hire subsidy proportion. That proportion is calculated by reference to the entity’s income discount proportion (“RRP”). Usually, an entity’s RRP is their income decline as in contrast between a present reference interval and the relevant prior reference interval. The CERS largely adopts the prevailing CEWS framework – together with reference months, elections, and deeming guidelines – in figuring out income decline.

Conceptually, an entity’s hire subsidy proportion represents the share of qualifying hire bills which the federal authorities will subsidize (topic to top-up underneath the “lockdown assist” mechanism, analyzed beneath). There are three normal guidelines for calculating an entity’s hire subsidy proportion, based mostly on its relevant income decline:

• If an entity’s RRP is 70% or extra, their hire subsidy proportion is 65%.
• If an entity’s RRP is at the very least 50% however lower than 70%, their hire subsidy proportion is the quantity calculated underneath the next method:

40% + (income discount proportion – 50%) x 1.25

• If an entity’s RRP is lower than 50%, their hire subsidy proportion is 80% of their RRP.

The next desk summarizes (in 5% increments) a qualifying renter’s hire subsidy proportion based mostly on their RRP:

These quantities are along with any top-up obtainable underneath the “lockdown assist” mechanism. As such, every subsidy fee might enhance by as much as 25% (to a most of 90% complete).

Qualifying Lease Bills

At its core, the CERS subsidizes a portion of an entity’s qualifying hire bills. There are usually two varieties of eligible bills – hire and specified realty prices. Every are described in additional element beneath.

The qualifying hire expense definition comprises just a few notable features of broad software:

• Bills are aggregated on a property-by-property foundation. Every qualifying property is topic to its personal calculation of qualifying hire bills. A single entity might thus have to make a number of calculations relying on what number of industrial actual property properties it makes use of.
• The utmost month-to-month expense pool for every qualifying property is $75,000. The CERS thus supplies for a most base subsidy of $48,750 (being 65% of $75,000) per qualifying property per qualifying interval (topic to an mixture $300,000 expense restrict, mentioned beneath).
• Bills have to be paid pursuant to a written settlement entered into earlier than October 9, 2020 (or pursuant to the renewal, on considerably comparable phrases, or project of such settlement). Thus, events can not enter in a brand new settlement now as a way to entry the CERS.
• Bills paid to a non-arm’s size entity don’t qualify. That features intercompany hire and curiosity prices. Solely quantities paid to arm’s size events might represent qualifying hire bills.
• Any hire acquired or receivable from an arm’s size celebration reduces the eligible entity’s expense pool. For instance, an entity that has $75,000 of qualifying hire bills, however receives $10,000 of rental earnings through the related qualifying interval, will solely be capable of declare the CERS on $65,000 of bills. Word that hire acquired from a non-arm’s size entity doesn’t contribute to that discount.

The primary class of qualifying hire bills is, naturally, hire. The laws particularly contemplates several types of rental preparations – together with mounted hire preparations, hire paid as a proportion of gross sales or income, or “internet lease” preparations whereby the tenant pays extra property-related bills (resembling insurance coverage, property taxes, and utilities). Gross sales taxes, funds for damages, curiosity and penalties, and “charges payable for discrete objects or particular providers” are expressly excluded from the hire calculation.

The present laws supplies that solely hire truly “paid” qualifies for the CERS. This could current important cashflow points since tenants would wish to first pay hire earlier than receiving the CERS. To alleviate that subject, on the identical day that the CERS was enacted into regulation the Division of Finance (“Finance”) tabled legislative proposals stipulating that hire payable (not simply paid) is a qualifying hire expense if:

• the entity attests that it’s going to pay the topic hire inside 60 days after receiving the CERS; and
• the entity does, in actual fact, pay such hire inside 60 days.

Small companies with restricted liquidity might vastly profit from that change. Finance has already said that candidates might calculate their CERS claims on the belief that these amendments will change into regulation with full retroactive impact.

The second class of qualifying hire bills consists of curiosity on mortgage-backed debt (topic to an higher restrict, mentioned beneath), insurance coverage, and property (or comparable) taxes. For that class, nevertheless, properties used primarily to generate rental earnings don’t qualify, until rented to a non-arm’s size one that makes use of it primarily for functions apart from to generate rental earnings (e.g., to be used in its personal energetic enterprise).

As famous, curiosity on mortgage-backed money owed is topic to a most quantity. Such curiosity is simply included “to the extent that” the underlying debt obligation doesn’t exceed the lesser of:

• the bottom mixture principal quantity of mortgage-backed money owed on the qualifying property at any time after its acquisition (excluding any momentary refinancing interval); and
• the value quantity (i.e., tax value) of the property to the entity.

The primary restriction seemingly excludes any refinancing which leads to a better mortgage principal (whether or not undertaken to extend a CERS declare or in any other case). The coverage rationale for such a broad limitation is unclear.

Equally unclear is the end result which arises if the debt obligation exceeds the lesser of these two quantities. The phrase “to the extent that” suggests a proportionate discount to the quantity of expense included, such {that a} portion of the curiosity (notionally computed on a debt obligation that’s the lesser of these two quantities) stays a qualifying hire expense. The converse view is that no curiosity is so included if the debt obligation is extreme. Readability from Parliament (or the CRA) on that time could be welcome.

Most Expense Restrict and Affiliated Teams

The CERS method comprises an higher restrict of $300,000 for all qualifying hire bills incurred by a qualifying entity in a given qualifying interval. Thus, an entity utilizing greater than 4 industrial properties (for instance) might have a restricted CERS declare, even when it expends $75,000 or extra per qualifying interval on every property.

Additional, that $300,000 restrict have to be shared between all affiliated entities. Particularly, if a qualifying renter is affiliated with every other eligible entity claiming the CERS, every affiliated entity should enter into an settlement (in prescribed type) allocating a proportion of that mixture $300,000 restrict amongst themselves – much like the principles allocating the $500,000 “small enterprise deduction” enterprise restrict amongst related entities.

As a consequence, the utmost primary CERS cost per qualifying interval is $195,000 (being 65% of $300,000). The $75,000 restrict per qualifying property nonetheless applies, nevertheless, and thus it isn’t attainable (for instance) to easily mixture all actual property bills paid throughout an affiliated group.

Notably, the “affiliated group” language for the CERS is broader, and arguably extra exact, than underneath the CEWS. It extra carefully matches the language used within the small enterprise deduction context for related firms. As well as, there’s a “transitivity” rule in s.125.7(11) of the ITA which supplies that if two eligible entities are affiliated with the identical third eligible entity, they’re deemed to be affiliated with one another. This mirrors the rule in s.256(2) of the ITA for figuring out affiliation, albeit with out an election equal to s.256(2)(b)(ii) if such transitivity causes inequitable outcomes.

Lastly, this transitivity rule solely applies to figuring out the combination CERS entitlement of an affiliated group, not their qualifying revenues. Consequently, a corporation might have one affiliated group for functions of calculating their mixture CERS entitlement and a unique affiliated group for functions of calculating their qualifying revenues.

Anti-Avoidance Rule

The prevailing anti-avoidance rule in s.125.7(6) of the ITA has been expanded to cowl the CERS. Beforehand, that rule solely utilized if a transaction, or collection of transactions, resulted in a discount to an entity’s qualifying revenues and was undertaken for the aim of enabling the entity to assert the CEWS or enhance its CEWS entitlement.

The anti-avoidance rule now applies if a transaction, or collection of transactions, has the impact of accelerating the qualifying hire bills of the related entity. The aim take a look at has additionally been expanded to cowl transactions undertaken to extend the quantity of a CERS declare.

Curiously, falling afoul of that rule successfully ends in the entity dropping its income decline, not reducing (or eliminating) its qualifying hire bills pool. That may result in a draconian end result. For instance, if a transaction was supposed to solely marginally enhance an entity’s qualifying hire bills, the anti-avoidance rule would seemingly end in a complete lack of the CERS (not simply negating the marginal profit sought).

If this anti-avoidance rule applies, the claimant can be topic to a particular penalty equal to 25% of the subsidy quantity claimed. That penalty has been expressly expanded to CERS claims.

V. Lockdown Assist

Just like the CEWS, the CERS comprises a “top-up” idea which supplies a further subsidy to sure companies. In contrast to the CEWS, nevertheless, the CERS top-up will not be restricted to companies struggling essentially the most extreme income declines. As a substitute, the main focus is on whether or not the entity it topic to a public well being restriction. Finance aptly described the mechanism as “lockdown assist”.

Public Well being Restriction

A public well being restriction is basically a public well being order issued in response to COVID-19 which requires the entire cessation of sure enterprise actions inside an outlined space. Particularly, a public well being restriction is outlined as an “order or choice” which:

• is made underneath the legal guidelines of Canada or a Province;
• is made in response to COVID-19;
• is restricted in scope (based mostly on, e.g., outlined geographical boundaries, enterprise kind / actions, or location-specific dangers);
• supplies that non-compliance may end up in fines or different authorized sanctions;
• doesn’t end result from an entity’s violation of a earlier public well being order;
• requires the particular eligible entity to wholly stop – for at the very least one week – some or all the actions which it could have in any other case carried out at, or in reference to, the particular qualifying property (so-called “restricted actions”); and
• prevents restricted actions which generated “at the very least roughly” 25% of the particular entity’s qualifying revenues for the prior reference interval that it earned from, or in reference to, the qualifying property.

Notably, an entity might declare the CERS top-up subsidy even when their general revenues solely minimally declined. Take a restaurant prevented from in-room eating which shifted its enterprise mannequin to take-out, for instance. Or a health heart offering on-line lessons. Their general revenues might not have suffered vastly, although their enterprise mannequin has been vastly disrupted. In that means, the CERS top-up subsidy might arguably be considered as “enterprise disruption” help.

Not all public well being orders will set off entry to the CERS top-up. Orders which solely restrict the hours inside which a enterprise might function, or mandate that bodily distance measures be applied, for instance, wouldn’t qualify. Companies topic to these orders could be restricted to claiming the essential CERS (and/or CEWS) subsidy.

Prime-Up Subsidy Calculation

An entity’s top-up entitlement is predicated on its hire top-up proportion. That proportion is 25% if the eligible entity is topic to a public well being restriction all through everything of the relevant qualifying interval. If a public well being restriction is simply in impact for a portion of the related qualifying interval, the share is prorated accordingly; for instance, the hire top-up proportion is 12.5% if the restrictions are in place for under two out of 4 weeks in a given qualifying interval.

An entity’s hire top-up proportion is then multiplied by its qualifying hire bills to find out its CERS top-up subsidy. As with the essential CERS calculation, eligible bills for a given qualifying interval are capped at $75,000 in calculating the top-up subsidy.

In contrast to the essential CERS, nevertheless, there isn’t any general restrict to an entity’s top-up subsidy declare. Additional, for affiliated teams every entity is entitled to its personal top-up subsidy with out regard to claims made by different entities throughout the group. Bigger company teams may benefit considerably from that lack of aggregation.

On account of the lockdown assist mechanism, a qualifying entity with a income decline of at the very least 70% will likely be entitled to an mixture CERS subsidy per qualifying interval of 90%. Virtually, on the primary $75,000 of eligible bills an entity might thus declare $67,500 from the federal authorities.

VI. Purposes

The CRA has already opened purposes for the CERS. The CRA’s fundamental webpage concerning the CERS, with normal data and hyperlinks to the applying course of, will be discovered here.

As famous above, eligible entities have till 180 days after the tip of the related qualifying interval to use for the CERS and/or lockdown assist. For the primary qualifying interval through which these subsidies can be found – that’s, September 27, 2020 to October 24, 2020 – the applying deadline is thus April 22, 2021.