CRA may consider that gratuitous COVID-alleviation payments to a contractual counterparty are excluded from the latter’s qualifying revenues
The operator of a mine (the “Operator”) suspended operations at its mine for COVID-19 reasons, but made gratuitous payments (the “Payments”) to third-party contractors (the “Contractors”) to cover a portion of their payroll costs, in order that the Contractors could maintain their work force pending resumption of operations. Unless the Payments were considered qualifying revenue, the Contractors would qualify for the CEWS – but if they receive it, the Operator will reduce future amounts paid by a corresponding amount.
Will the Contractors be required to include the Payments in computing their qualifying revenue?
After repeating its position in Q.6-2 on its FAQ page as to the scope of the CRA policy for excluding “extraordinary items” from qualifying revenues, CRA – before stating that it was a question of fact whether the Payments were extraordinary - stated:
Relevant considerations in the current situation could include whether the Contractor had received payments in the past upon the temporary suspension of operations at the mine, whether the Contractor was entitled to receive compensation upon a suspension of operations at the mine under its contract with the Operator and the degree of control the Contractor had with respect to the Payments and Payment Adjustments.
This seems to indicate that if, indeed, the Payments were made gratuitously on a one-off basis because of COVID, they would be excluded as extraordinary items.
CRA indicated that it needed more details to assess whether the anti-avoidance rule in 125.7(6)(a) could be relevant in determining any impact on the qualifying revenues of the subsequent Payment adjustments.
Finally, CRA indicated that the “returned” amount adjustment in para. (c) of the “eligible remuneration” definition would not cause the eligible remuneration of the Contractors’ employees to be reduced by the Payments.
Neal Armstrong. Summaries of 15 July 2020 External T.I. 2020-0847141E5 under s. 125.7 -qualifying revenue.