23 February 2021 External T.I. 2020-0873491E5 - CERS - Energy Costs

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: 1. If a gross lease does not contain a requirement for a tenant to pay for utilities, would any payments made by the tenant to an energy distributor be a qualifying rent expense? 2. If a net lease requires a tenant to make payments for utilities directly to an energy distributor, is the energy distributor a “third party,” such that the payments are a qualifying rent expense? 3. Does the requirement to pay the third party need to be stated in the lease

Position: 1. No. 2. Maybe. 3. Yes.

Reasons: 1. Under the definition of “qualifying rent expense” in paragraph 125.7(1) only rent may be a qualifying rent expense under a lease that is not a net lease. 2. Provided the other conditions are met, a payment for utilities made directly to a third party such as an energy distributor may be a qualifying rent expense. 3. The payment must be a requirement under a net lease.

XXXXXXXXXX					2020-087349
						Matthew Ross, CPA, CA

February 23, 2021

Dear XXXXXXXXXX:

Re: Utilities and the Canada Emergency Rent Subsidy

We are writing in response to your questions concerning whether utilities may be claimed as a “qualifying rent expense” for the Canada Emergency Rent Subsidy (“CERS”) as provided in section 125.7 of the Income Tax Act (“the Act”).

You have asked us the following:

• If a gross lease does not contain a requirement for a tenant to pay for utilities, would any payments made by the tenant to an energy distributor be a qualifying rent expense?
• If a net lease requires a tenant to make payments for utilities directly to an energy distributor, is the energy distributor a “third party,” such that the payments may be a qualifying rent expense?
• Does the requirement to pay the third party need to be stated in the lease? For instance, if a lease agreement is silent regarding the payment of utilities and the tenant has an independent billing relationship with the energy distributor, would payments made by the tenant for utilities to the energy distributor be a qualifying rent expense?

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.

Qualifying rent expense, in respect of a qualifying property, for an eligible entity for a qualifying period, is defined in subsection 125.7(1) of the Act to mean the total of certain amounts paid – under a written agreement entered into before October 9, 2020, or pursuant to the renewal (on substantially similar terms) or assignment of a written agreement entered into before October 9, 2020 – in respect of the qualifying period by the eligible entity to a party with which the eligible entity deals at arm’s length.

Paragraph (a) of the definition provides that qualifying rent expense means a payment that is rent for the use of, or right to use, the qualifying property, including, among other things, and subject to the exclusions listed in subparagraph (a)(ii),

• gross rent,
• rent based on a percentage of sales, profit or a similar criterion,
• amounts required to be paid under a net lease by the eligible entity either to the lessor or a third party, as
  o base rent,
  o regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease,
  o property and similar taxes, including school and municipal taxes, and
  o regular instalments of other amounts payable to the lessor for services ancillary to the rental of real or immovable properties and customarily supplied or rendered in connection with the rental of real or immovable properties.

Whether a lease is a net lease is a question of fact and law.

According to the definition of qualifying rent expense in subsection 125.7(1) of the Act, where a tenant has a lease other than a net lease, only the gross rent paid by the tenant may be a qualifying rent expense. As a result, where a lease that is not a net lease contains a requirement for a tenant to pay for utilities, or notes that a tenant must pay utilities, any payments made by the tenant for utilities will not be a qualifying rent expense.

Where a tenant has a net lease, however, the definition provides that additional amounts required to be paid under the net lease by the eligible entity may be a qualifying rent expense. For example, 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.

The definition of qualifying rent expense includes an amount required to be paid under a net lease either to the lessor or a third party. In our view, 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.

In order for an amount paid under a net lease to be considered a qualifying rent expense, the lease must require the payment; a lease that is silent with respect to a particular item does not, in our view, satisfy this condition. Similarly, where a lease states only that a tenant is responsible for a certain cost, in our view, this would generally not constitute a qualifying rent expense.

Consider the following example:

• Tenant, an eligible entity for the purpose of the CERS, operates a retail store in a shopping mall. Tenant leases its premises under a net lease with Landlord. The lease was entered into before October 9, 2020, and Tenant and Landlord deal at arm’s length.
• Under the net lease, Landlord provides the tenants of the shopping mall with heating, air conditioning and ventilation (“HVAC”), electricity and water. Landlord also pays the property taxes and insurance for the shopping mall. The lease states that Landlord will not provide phone or internet service for the tenants and the tenant is responsible for paying their phone and internet costs.
• The net lease requires that each tenant must pay their proportionate share of the HVAC, electricity, water, property taxes and insurance (“the Property Expenses”). Landlord determines this amount and invoices each tenant for their Property Expenses each month.
• The net lease states that Tenant is required to pay, each month, a base rent and its share of the Property Expenses to Landlord.
• Tenant also pays its monthly invoice for phone and internet service to its provider.

In this example, Tenant’s net lease requires it to pay base rent and an amount for its share of the Property Expenses each month. These payments meet the conditions in the definition and, accordingly, are qualifying rent expenses for Tenant. While Tenant also pays for phone and internet each month, this payment is not a requirement under the net lease (but is simply Tenant’s responsibility if they choose to have phone and internet service). As a result, amounts paid by Tenant for phone and internet are not qualifying rent expenses.

Similarly, in the above example, 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.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch