Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Are amounts received by an eligible entity from a business interruption insurance policy included in an entity's qualifying revenue as defined in subsection 125.7(1)?
Position: Generally, yes.
Reasons: Insurance proceeds meant to replace all or a portion of an eligible entity's lost revenues or profits would generally be considered qualifying revenue.
David Gagné-Therrien
Dedicated Telephone Service, Section I 2020-085257
Canada Revenue Agency Sarah Springate
May 3, 2021
Dear Mr. Gagné-Therrien,
RE: Insurance Proceeds and Qualifying Revenue
We are writing in response to your question regarding the Canada Emergency Wage Subsidy (“CEWS”). You would like to know whether an eligible entity should include business interruption insurance proceeds, received due to a halt in the entity’s operations and meant to replace lost revenue, in their qualifying revenue as that term is defined in subsection 125.7(1) of the Income Tax Act (the Act). Additionally, where the insurance proceeds are included in revenue in a prior period, and are based on a gross revenue benchmark less cost of sales, you have asked whether an eligible entity can determine their qualifying revenue for the particular prior reference period based on the insurance proceeds plus a notional amount to represent what their revenue would have been during this period had they been able to operate.
The CEWS, which is calculated under subsection 125.7(2) of the Act, is calculated with reference to the reduction in qualifying revenue experienced by a eligible entity for a particular qualifying period. In determining the revenue reduction for a qualifying period, an eligible entity compares its qualifying revenue for the current reference period with that of the prior reference period.
For purposes of the CEWS, qualifying revenue of an eligible entity for a prior reference period or a current reference period, means the inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of the eligible entity in Canada in a particular period, subject to certain inclusions and exclusions. Paragraph (c) of the definition of qualifying revenue states that for greater certainty, qualifying revenue excludes extraordinary items. Generally, an extraordinary item would meet all three of the characteristics described in Question 6-2 on the Canada.ca webpage, Frequently asked questions — Canada Emergency Wage Subsidy (CEWS).
Subsection 125.7(4) provides that for the purposes of the definition qualifying revenue in subsection 125.7(1), the qualifying revenue of an eligible entity is to be determined in accordance with its normal accounting practices, subject to certain specified exceptions and elections available to the eligible entity. An amount will generally be included in an eligible entity’s qualifying revenue when the amount is recognized for accounting purposes under their normal accounting practices.
Whether business interruption insurance proceeds are included in an eligible entity’s qualifying revenue is a question of fact that can only be determined after a review of the particular terms of the insurance coverage and consideration of other relevant facts and surrounding circumstances. It is our understanding that an entity would typically acquire business interruption insurance to replace lost revenue when the entity is unable to carry on its ordinary activities. Accordingly, it is our view that business interruption insurance proceeds would generally be included in qualifying revenue and would generally not be considered an extraordinary item.
Only amounts resulting in an inflow of cash, receivables or other consideration are included in qualifying revenue, therefore, an eligible entity would not be able to gross up their qualifying revenue by a notional amount.
We trust these comments will be of assistance to you.
Yours truly,
Amanda Couvrette, CPA, CA
Acting Manager
Business Income and Capital Transactions
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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