Bill C-9 received Royal Assent on November 19, 2020 and the CRA Portal is now open.
The rules governing the CERS assistance program are found in the Income Tax Act. CERS is intended to replace the Canada Emergency Rent Assistance Program (CECRA) which was a stand-alone COVID-19 legislation in the form of a forgivable loan to a property owner. CECRA was challenging to administer as no systems previously existed. Thankfully, that program ended September 2020.
The new CERS legislation piggybacks on the same terms and qualifying periods used for the Canada Emergency Wage Subsidy (CEWS). CEWS recently underwent significant amendments and is reported under separate cover. The government projects the CERS, which anticipates further lockdowns, will cost $2.2 billion.
The program provides a refundable subsidy for certain costs incurred where COVID-19 has negatively impacted revenue. It is available to tenants and, in certain circumstances, owners. Like the CEWS, the taxpayer can apply for each Qualifying Period starting with Period 8 (i.e. Sept. 27, 2020 to October 24, 2020).
According to the legislation, expenses must be paid to qualify for the CERS. However, in a November 19, 2020 press release the government reaffirmed its intention to introduce new legislation to formalize amounts payable as an eligible expense for purposes of the CERS. This may pose cash flow problems and cause further distress to landlords.
Eligibility and Deadlines
To receive the CERS, the following requirements must be met:
- An application must be filed in respect of the Qualifying Period no later than 180 days after the end of the period;
- The individual with principal responsibility for the financial activities of the applicant must attest that the application is complete and accurate in all material respects (Form RC 665E);
- At least one of the following conditions must be met:
- The entity had a registered payroll account with CRA on March 15, 2020 or had one or more employees with a payroll managed by an agent on its behalf;
- The entity had a business number on September 27, 2020 and will provide records and other information that satisfy the Minister in support of the application; or
- The entity meets other conditions prescribed by Regulation that have not yet been disclosed.
- Corporation or a trust (other than those exempt from tax)
- Charity but not a public institution
- Non-profit organization but not a public institution
- Partnership, all of the members of which are described herein or above
- September 27, 2020 to October 24, 2020 (same as Period 8 of CEWS)
- October 25, 2020 to November 21, 2020 (same as Period 9 of CEWS)
- November 22, 2020 to December 19, 2020 (same as Period 10 of CEWS)
- Any other period prescribed by Regulation ending before July 1, 2021
Real estate located in Canada and used by the Eligible Entity in the course of ordinary activities but does not include a residence and contiguous land (or the part thereof that is used as a residence).
Qualifying Rent Expense (QRE)
As shown in the detailed calculations below, the Qualifying Rent Expense (QRE) is used to calculate both the Basic Rent Subsidy and the Top-up Rent Subsidy (Lockdown Support). The QRE represents costs incurred by either tenants or owners. The following amounts are included in QRE if paid/payable pursuant to a written agreement entered into (or assigned) prior to October 9, 2020.
- Gross rent
- Rent based upon a percentage of sales, profit or similar criteria
- Net lease amounts such as:
- Base rent
- Regular instalments of operating expenses (such as insurance, utilities and common area maintenance)
- Property and similar taxes including school and municipal taxes
- Regular instalments of other amounts payable to the lessor for services ancillary to the rental and customarily supplied in connection with rental of real estate and
- Amounts received by the landlord under the CECRA program that were credited to the current Qualifying Period instead of being refunded to the tenant
Note: the QRE does not include sales taxes, amounts related to damages, amounts paid under a guarantee (or security or the like), default payments, interest and penalties on unpaid amounts, fees for discrete special services and reconciliation adjustments.
The following costs incurred by owners are included in the QRE where the property is primarily used by the owner or non-arm’s length parties, for purposes other than earning rental income.
- Interest on a secured debt obligation to the extent the debt does not exceed the lesser of:
(i) the lowest principal amount secured after it was acquired, (so long as there was an amortization period) and generally not including a temporary refinancing; and
(ii) the original cost of the property
- Insurance on the property
- Property taxes (including school and municipal taxes).
The amounts listed above (for tenant and owner costs) that otherwise qualify as QRE must be reduced by any arm’s length rent received by the Eligible Entity either directly or indirectly.
The QRE on which the rent subsidy is calculated for a given period can not exceed $75,000 per Eligible Entity. If there is an affiliated group, along with the $75,000 limit per entity, there is a maximum of $300,000 to allocate amongst the affiliated entities. The allocation must be completed with the application.
Generally, the greater the impact suffered (revenue reduction) the higher the rent subsidy.
The rent subsidy:
- Is considered to be an overpayment of tax in the Qualifying Period and therefore will be refunded even if no taxes are owing by the entity for the year, similar to the CEWS.
- Must be included in income in the Qualifying Period to which it relates.
- Includes (A) a Basic Rent Subsidy and (B) a Top-Up Subsidy (Lockdown Support).
(A) Steps to Calculate the Basic Rent Subsidy
There are four steps to calculate the Basic Rent Subsidy.
- Determine QRE, explained above, (recall there is a maximum of $75,000 per entity and $300,000 per affiliated group).
- Determine Revenue Reduction Percentage (RR%)
- Determine the applicable Rent Subsidy Percentage (RS%)
- Calculate the Basic Rent Subsidy
- Determine Qualifying Rent Expense (QRE)
Please see definition above.
- Determine your Revenue Reduction Percentage (RR%)
The RR% is intended to quantify the degree of revenue reduction during COVID-19 compared to normal operations. The formula for RR% is:
= [1- (revenue for the Current Reference Period / revenue for the Prior Reference Period)]
There are two primary methods of calculating the RR%. For each Qualifying Period, you can choose which one gives the greatest RR%.
(i) For each Qualifying Period, the RR% is determined by comparing the revenue of the month in which the Qualifying Period ends (Current Reference Period) to that of the same month in the prior year (Prior Reference Period).
(ii) For each Qualifying Period, the RR% is determined by comparing the revenue of the month in which the Qualifying Period begins (Current Reference Period) to that of the same month in the prior year (Prior Reference Period).
Alternative Approach to Prior Reference Period
There is an alternative elected method of using the above choices as Current Reference Periods and using an average of January and February 2020 revenue as the Prior Reference Period. This election is the same election permitted under CEWS. If this election was made for July 2020, it must be used for CERS Qualifying Periods.
This is summarized in the following table:
|Qualifying Period||General Approach||Alternative Approach|
|Period 8||September 27 to October 24, 2020||October 2020 over October 2019 or
September 2020 over September 2019
|October 2020 or September 2020 over average of January and February 2020|
|Period 9||October 25, 2020 to November 21, 2020||November 2020 over November 2019 or
October 2020 over October 2019
|November 2020 or October 2020 over average of January and February 2020|
|Period 10||November 22 to December 19, 2020||December 2020 over December 2019 or
November 2020 over November 2019
|December 2020 or November 2020 over average of January and February 2020|
- Determine the applicable Rent Subsidy Percentage (RS%)
Use the following chart to determine the RS%:
|Revenue Reduction Percentage (RR%)||Rent Subsidy Percentage (RS%)|
|70% and over||65%|
|50% to 69%||40% + (RR% less 50%) x 1.25|
|1% to 49%||80% x RR%|
- Calculate the Basic Rent Subsidy
The Basic Rent Subsidy can now be calculated as Qualifying Rent Expense (QRE) x RS%.
(B) Top Up Rent Subsidy (Lockdown Support)
- The additional Lockdown Support is only available if the property was subject to a Public Health Restriction (see below) and the Eligible Entity has an RR% greater than zero.
- The amount of the subsidy is 25% of the QRE, prorated for the number of days in the Qualifying Period that were subject to a Public Health Restriction.
For example, assume for the Qualifying Period September 27 to October 24, 2020 (i.e. 28 days) an Eligible Entity incurred $80,000 of rent expense, had an RR% greater than zero and the property was subject to a Public Health Restriction for one week (i.e. 7 days). The Top-Up Rent Subsidy would be $4,687.50 calculated as follows:
25% x $75,000 x 7 days/28 days = $4,687.50
A Public Health Restriction is generally defined as a government order or decision made in response to COVID-19 where all of the following apply:
- The decision or order is limited in scope based upon:
- defined geographical boundaries.
- type of business or activity; or
- risks associated with a particular location.
- Noncompliance with the order is an offense and the restriction did not arise as a result of a violation of an order listed above.
- As a result of the order or decision, some or all of the activities that would have otherwise occurred, are required to cease based upon the type of activity (rather than the extent of the activity or limits based upon the time the activity may be performed).
- It is reasonable to conclude that at least approximately 25% of the Qualifying Revenue of the Prior Reference Period were earned from, or in connection with, the restricted activities.
- The activities are restricted for a period of at least one week.
The definition of Qualifying Revenue is identical to that used for CEWS.
- It includes the inflow of cash, receivables or other consideration arising from the sale of goods, rendering of services, and use of the Eligible Entity resources by others.
- Relates only to business carried on in Canada.
- Excludes extraordinary items and amounts on account of capital.
- Excludes CEWS and Temporary Wage Subsidy payments (currently the legislation does not exclude the CERS which might be a temporary oversight).
- Excludes non-arm’s length revenues.
- Charities and non-profit organizations will be allowed to choose to include or exclude government funding in their revenues for the revenue reduction test.
Special Situations and Elections
The same situations/elections that pertained to the CEWS apply to the CERS and include the following.
- Cash vs. Accrual – An Eligible Entity may elect to compute revenue on a cash basis or an accrual basis provided the election is in place for all Qualifying Periods.
- Affiliated Group – If each member of an affiliated group jointly agrees, they may calculate Qualifying Revenue on a consolidated basis to be used for each member of the group.
- Revenue from Non-Arm’s Length Parties – If substantially all of the Eligible Entity’s Qualifying Revenue otherwise determined is from non-arm’s length parties, it can elect with all such parties to compute its revenue for the Qualifying Period by reference to the Qualifying Revenue of the non-arm’s length persons. If there are more than one such non-arm’s length persons, their Qualifying Revenues from such periods are allocated to the Eligible Entity on a pro-rata basis.
- Joint Ventures – Revenues of a joint venture may be used as the Qualifying Revenue for the Qualifying Period if:
- All of the interests in an Eligible Entity are owned by participants in the joint venture, and
- Substantially all of the Eligible Entity’s Qualifying Revenue for a Qualifying Period is in respect of the joint venture
- Asset Purchases – special rules permit the purchaser’s Prior Reference Period revenue to be that of the vendor.
Amendments of elections are permitted within CEWS filing deadlines, the later of 180 days after the period end and January 31, 2021.
Example – Basic Rent Subsidy
The calculations below are based upon the following assumptions:
- Actual rent is equal to or greater than $75,000 so that the $75,000 ceiling applies.
- The minimum subsidy reflects the lowest Revenue Reduction Percentage for that threshold.
- The maximum subsidy reflects the highest Revenue Reduction Percentage for that threshold.
|Revenue Reduction Percentage (RR%)||Rent Subsidy Percentage (RS%)||Minimum
(assumes QRE is at max. rent of $75k)
(assumes QRE is at max. rent of $75k)
|70% and over||65%||$48,750||$48,750|
|50% to 69%||40% + (RR% less 50%) x 1.25||$30,000||$47,813|
|1% to 49%||80% x RR%||$600||$29,400|