On October 9, 2020, the Department of Finance announced the introduction of the Canada Emergency Rent Subsidy (CERS). This new subsidy will provide direct relief to businesses, non-profits and charities that continue to be economically impacted by the COVID-19 pandemic.
The CERS is a replacement of the Canada Emergency Commercial Rent Assistance (CECRA) program, which ended in September 2020. The CECRA program was generally viewed as unsuccessful since the application process was complex and it required the landlord to apply for unsecured forgivable loans that were based on tenants meeting stringent criteria (i.e., 70% decline in pre-COVID-19 revenues).
The CERS will provide benefits directly to qualifying renters and property owners, without requiring the participation of landlords. The CERS is available retroactive to September 27, 2020 until June 2021. The Federal government has only provided details for the first 12 weeks of the program, until December 19, 2020.
Eligibility criteria for the CERS generally aligns with the Canada Emergency Wage Subsidy (CEWS) program. Eligible entities include individuals, taxable corporations and trusts, non-profit organizations and registered charities. Eligible entities also include the following groups:
- Partnerships that are up to 50% owned by non-eligible members;
- Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible entities;
- Registered Canadian Amateur Athletic Associations;
- Registered Journalism Organizations; and
- Non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.
In addition, an eligible entity must meet one of the following criteria:
- Have a payroll account as of March 15, 2020 or have been using a payroll service provider;
- Have a business number as of September 27, 2020 (and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim); or
- Meet other conditions that may be prescribed in the future.
Eligible expenses for a location for a qualifying period will include the following:
- Commercial rent (including gross rent, rent based on a percentage of sales, profits or similar criterion, and amounts paid under a net lease);
- Property taxes (including school taxes and municipal taxes);
- Property insurance
- Interest on commercial mortgages (subject to limits) for a qualifying property.
Please note that subleasing revenues would reduce eligible expenses. As well, any sales tax (e.g., GST/HST) component of these costs would not be considered an eligible expense.
Eligible Expense Limitations:
- Eligible expenses would be limited to those who paid under agreements in writing entered before October 9, 2020 (and continuations of those agreements) and would be limited to expenses related to real property located in Canada.
- Expenses that relate to residential property used by the taxpayer (e.g., their house or cottage) would not be eligible.
- Payments made between non-arm’s length entities would not be eligible expenses.
- Mortgage interest expenses in respect of a property primarily used to earn – directly or indirectly – rental income from arm’s-length entities would not be eligible.
- Expenses for each qualifying period would be capped at $75,000 per location and be subject to an overall cap of $300,000 that would be shared among affiliated entities.
- Revenues will be calculated in the same manner as under the CEWS program.
- Entities must calculate their revenue from their ordinary activities in Canada earned from arm’s-length sources, determined using their normal accounting practices.
- Revenues from extraordinary items or amounts on account of capital are excluded.
- Registered charities and non-profit organizations have the option to exclude revenue from government sources as part of the calculation. Once selected, the same approach would have to apply throughout the program period.
- The subsidy includes special rules to account for certain non-arm’s length transactions, such as where an entity earns all or substantially all of its revenue from a related party that in turn earns arm’s-length revenue.
- Affiliated groups that do not normally compute revenue on a consolidated basis may elect to do so.
Reference Periods for the Drop-in Revenues Test
- To claim the CERS, entities will be required to calculate their revenue, and compare this amount to a reference period to determine their revenue drop, in the same manner as under the CEWS program.
- Once an entity has chosen to use either the general or alternative approach, they must use that approach for each of the three periods. The approach chosen would apply to both the base CEWS and the CERS.
- An eligible entity would use the greater of its percentage revenue decline for the current qualifying period and that for the previous qualifying period in order to determine its subsidy rate. This aligns with the CEWS program.
Rent Subsidy for Entities Impacted by the Crisis
- Qualifying entities that have suffered a revenue drop would be eligible for a subsidy on eligible expenses. As shown in the table below, the base rate structure mirrors the CEWS rate structure.
Lockdown Support Subsidy
- A new Lockdown Support Subsidy of 25% will be available to entities with locations that are temporarily forced to close, or temporarily have their business activities significantly restricted due to COVID-19. This “top-up” CERS of 25% would apply to the same eligible expenses noted above.
- In order for an entity to qualify for the Lockdown Support Subsidy for a qualifying property, it must meet the following conditions:
- The entity qualifies for the base CERS; and
- A public health order requires that the entity completely shut down the location OR cease some or all of the activities that account for at least 25% of the entity’s pre-pandemic revenues at that location for at least a week.
- Entities may be eligible for the subsidy for public health restrictions such as:
- Restrictions that disallow indoor dining
- Closure of retail stores, bars, theatres, or fitness centres
- Restrictions on the types of personal services that can be provided
- Closure in relation to a COVID-19 outbreak on the premises
- The Lockdown Support Subsidy is not available for entities that reduced business hours, or were affected by travel restrictions or physical distancing requirements, etc.
- If an entity is subject to a public health restriction and has to ceases activities for only part of a qualifying period, the Lockdown Support Subsidy would be pro-rated for the number of days in the period during which the relevant location was affected.
- Expenses for the Lockdown Support Subsidy for each qualifying period would be capped at $75,000 per location but would not be subject to the overall expense cap of $300,000 shared among affiliated entities that applies to the CERS.
- Legislation to implement the new CERS and Lockdown Support Subsidy received first reading in the House of Commons on November 2, 2020 and is expected to soon pass into law.
- The application process for these new subsidies is not yet available.
- The subsidy is deemed to be government assistance received by the eligible entity immediately before the end of the relevant qualifying period the claim relates to, regardless of when the eligible entity applies for or receives the subsidy. It will be included as income for tax purposes at that time.
- The legislation includes anti-avoidance rules to address transactions that increase the qualifying rent expenses of an eligible entity, where one of the main purposes of the transaction is to increase the amount of the subsidy.
Please contact Segal GCSE LLP for any assistance required.