As part of Canada’s COVID-19 economic response plan, the federal government recently provided the framework for the new Canada Emergency Rent Subsidy (CERS) program, which serves as a replacement to and stands separate from the now-expired Canada Emergency Commercial Rent Assistance (CECRA) program. Bill C-9 introduced the new CERS program on November 2 and it received royal assent on November 19. The CERS program shares many legislative and definitional features with the Canada Emergency Wage Subsidy (CEWS) program. For more information on the CEWS program, please see our previous bulletins published on April 12 and July 23, 2020.
Overview of the CERS program
The CERS program will provide targeted financial relief to entities affected by the ongoing COVID-19 pandemic. Like the CEWS program, it is not necessary for an entity to demonstrate a link between the pandemic and the entity’s revenue decline, though part of the subsidy is specifically designed to support those entities that have been affected by public health lockdown orders.
The CERS is available to assist with certain expenses incurred with respect to “qualifying property” (e.g., rent, as well as certain mortgage interest payments, insurance costs and property and similar taxes paid for an owned qualifying property). The expenses that qualify under the CERS program are referred to as "qualifying rent expenses" and must have been paid by the entity claiming the rent subsidy, even though not all of these expenses relate to leases.
An entity that uses a qualifying property primarily to earn rental income will generally not receive a rent subsidy under the CERS program, unless the rental income is earned from a non-arm’s length party that is not itself using the property to earn rental income. The CERS is also not available for properties that are “self-contained domestic establishments.” These exclusions appear to disqualify most commercial landlords and those who work out of their homes from eligibility under the CERS program.
Who can apply?
Many of the eligibility criteria for the CERS program are shared with the CEWS program. An organization that is an "eligible entity" under the CEWS program (including individuals, taxable corporations, certain partnerships, non-profit organizations and registered charities) will qualify to participate in the CERS program if (in addition to meeting certain application requirements) the entity (i) had a payroll account or had been using a payroll service provider as of March 15, 2020, or (ii) had a business number on September 27, 2020, and provides records and other information satisfactory to the Canada Revenue Agency (the CRA) in support of its application. Additional program requirements may be prescribed by regulation at a future date. An eligible entity that qualifies for the CERS is referred to as a "qualifying renter," which may lead to confusion since the entity need not necessarily lease property from a landlord.
The applicable period
Currently, the CERS program would apply to four-week periods beginning retroactively on September 27, 2020, until December 19, 2020 (mirroring the "qualifying periods" under the CEWS program), with the potential that the program may be extended for additional periods until June 30, 2021, albeit perhaps with adjustments.
The CERS is available to qualifying renters that have suffered a revenue decline in the particular qualifying period, computed in the same manner as under the CEWS program. There are two components to the CERS:
- Base Subsidy. Much like the wage subsidy under the CEWS program, the amount of the base subsidy under the CERS program is determined on a sliding scale based on the revenue decline experienced in the relevant period by the qualifying renter. The maximum base subsidy available to a qualifying renter is based on a 65% subsidy of qualifying rent expenses paid for qualifying properties, up to a maximum of $75,000 per qualifying property (e.g., 65% x $75,000 = $48,750 CERS payment per qualifying property). This would be available to a qualifying renter that experienced a revenue decline of 70% or more. A qualifying renter, together with all eligible entities with which it is affiliated for the purposes of the Income Tax Act (Canada) (the Tax Act), may collectively claim the base subsidy in respect of up to $300,000 in qualifying rent expenses paid for all qualifying properties per qualifying period.
- Lockdown Support. The CERS program includes an additional “lockdown support top-up subsidy,” which may apply where a qualifying renter has experienced any revenue decline in the qualifying period and is subject to certain “public health restrictions” made in response to the COVID-19 pandemic. The additional lockdown support equals 25% of qualifying rent expenses paid for qualifying properties, up to a maximum of $75,000 per qualifying property (e.g., 25% x $75,000 = $18,750 CERS payment per qualifying property). This top-up subsidy is prorated by the proportion of the qualifying period during which the qualifying property is subject to the public health restriction. In contrast to the base subsidy component, the lockdown support component is not subject to an overall cap.
Further key elements of the new CERS program
- No Restriction on Business Size. While the CECRA program was limited to small business owners paying a maximum of $50,000 in monthly gross rent per location, the CERS would not be limited to small businesses, but will be available to entities of any size that meet the eligibility criteria.
- Direct Rent Support. Notably, the CERS will be made available directly to affected entities. This means that the CERS will provide financial support to qualifying renters without the need for such entities to rely on their landlords to apply. Accordingly, rent reduction agreements between landlords and tenants that formed part of the CECRA application process will not be required. Such agreements may still be sought by tenants to address the balance of rent obligations not covered by the CERS.
- Public Heath Restrictions. A public health restriction is, generally, an order or decision made in response to the COVID-19 pandemic pursuant to which some or all of the activities of the eligible entity at or in connection with the qualifying property are required to cease for at least one week.
- Subsidies instead of Forgivable Loans. In contrast to the CECRA program, the CERS will not be distributed as forgivable loans to commercial property owners but rather the CERS program is structured as a subsidy paid to the entity incurring certain expenses and it will be administered by the CRA.
- Delivery Mechanism and Tax Treatment. The amount of the CERS paid to a qualifying renter will be deemed to be an overpayment of tax under the Tax Act by such qualifying renter in the applicable qualifying period. The qualifying renter's tax payable will be reduced accordingly or a tax refund will become owing to the qualifying renter and distributed by the CRA. As with the CEWS program, the amount of the CERS received will be treated as government assistance and included in computing the income of the qualifying renter, although this income inclusion should generally be offset by an equivalent deduction for the qualifying rent expenses paid, resulting in a neutral tax effect. The CRA will begin processing applications on November 30, 2020, and if a qualifying renter is registered for direct deposit, they should generally expect to receive payment within three to eight days of filing a claim.
How do anti-avoidance measures come into play?
The legislation contains anti-avoidance rules, which may be triggered if an eligible entity takes or fails to take an action, resulting in the reduction of qualifying revenues or the increase of qualifying rent expenses. If one of the main purposes of such action or inaction can reasonably be considered to be to increase the amount of CERS received, the applicant will be denied CERS and may also be liable for a penalty of 25% of the amount claimed. Accordingly, CERS applicants should be mindful about inadvertently triggering anti-avoidance rules and should consult with their legal counsel regarding any future transactions that may engage these measures.
The legislation appears to have addressed some of the limitations of the CECRA program, notably by eliminating the requirement that landlords apply for their tenants (thereby granting tenants control over the application process) and the restrictions on business size, making the new program more direct, accessible and “tenant friendly.” One obvious challenge is timing (payment of qualifying expenses vis-à-vis receipt of the CERS) and the potential cash flow issue that qualifying renters may still face. As the CERS program appears to engage certain tax-specific matters, we encourage future applicants to remain vigilant in light of potentially adverse tax implications.
The authors would like to thank Richard Li, articling student, for his contribution to this legal update.