CRA adopts a cautiously-worded interpretation of what constitutes additional rent for purposes of the CERS definition of qualifying rent expense

The availability of the Canada emergency rent subsidy (“CERS”) turns, in part, on the application of the definition of a “qualifying rent expense,” whose definition includes:

amounts required to be paid under a net lease by the eligible entity either to the lessor or a third party, as … base rent …[or] regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease [emphasis added]

CRA interprets this definition as meaning, that “if a net lease requires a tenant to pay utilities as part of regular instalments of operating expenses customarily charged to the tenant, this payment is a qualifying rent expense” and “this could include payments for utilities made to a third party, such as an energy distributor, provided the other requirements in the definition are satisfied.” However, “where a lease states only that a tenant is responsible for a certain cost … this would generally not constitute a qualifying rent expense.”

For example, if the tenant under a net lease of premises in a shopping mall is required under the lease to pay its proportionate share of the HVAC, electricity, water, property taxes and insurance costs for the shopping centre, initially borne by the landlord, such tenant payments would qualify. However, “if the net lease stated that the tenants were responsible for their own electricity, the amount paid by Tenant for electricity would not be a qualifying rent expense, whether it is paid to Landlord or to a third party, such as an energy distributor.”

This interpretation seems to be drawing some sort of subtle, but largely unarticulated, distinction, between net leases that indicate that the tenant’s “own” expenses are its responsibility, and net leases that require particular expenses to be paid by the tenant directly to a third party. The definition seems to indicate that if the recurring item in question, for example, property taxes, is “customarily” charged as additional rent under a net lease, it will be included even if the net lease states that the tenant will be responsible for the direct payment of that item to the third party.

Neal Armstrong. Summary of 23 February 2021 External T.I. 2020-0873491E5 under s. 125.7(1) – qualifying rent expense.