4 October 2021 External T.I. 2021-0876292E5 - Deduction under subsection 9(1) or 20(1)(hh)

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: Is a voluntary repayment of the CEWS deductible in computing a taxpayer's profit from a business or property under subsection 9(1)? If so, in which taxation year would the deduction be permitted? If the CEWS was included in income under paragraph 12(1)(x) of the Act, would the voluntary repayment be deductible pursuant to paragraph 20(1)(hh) of the Act?

Position: Where the CEWS was originally included in computing a taxpayer’s profit from a business or property under subsection 9(1) of the Act, if the eligible entity were to complete the necessary steps to cancel the relevant CEWS application(s), a deduction would be permitted in computing a taxpayer's profit from a business or property under subsection 9(1) of the Act, and would not be prohibited by the general limitation in 18(1)(a) of the Act, in the year there is a legal obligation to repay an amount. A deduction would also be permitted under paragraph 20(1)(hh) if an amount is repaid by a taxpayer in the year, pursuant to a legal obligation to repay all or part of a particular amount that was included under paragraph 12(1)(x) of the Act in computing income for the year or a preceding taxation year. A legal obligation, for purposes of subsection 9(1) and paragraph 20(1)(hh), would generally arise at the time the eligible entity completes the necessary steps to cancel the relevant CEWS application(s).

Reasons: See below.

XXXXXXXXXX				Aleksandra Bogdan CPA, CA
					2021-087629

October 4, 2021

Dear XXXXXXXXXX:

Re: Voluntary repayment of the Canada Emergency Wage Subsidy

This is in reply to your email in which you requested our views on a matter relating to the Canada Emergency Wage Subsidy (“CEWS”) under section 125.7 the Income Tax Act (“the Act”).

In the situation you described, an “eligible entity” (footnote 1) qualified and successfully applied for the CEWS for certain “qualifying periods” (footnote 2) in the spring of 2020. However, the eligible entity would now like to repay all the CEWS it received in 2020. Specifically, you would like to know whether a voluntary repayment of the CEWS, which was originally included in computing the eligible entity’s profit from a business or property under subsection 9(1) of the Act, is deductible under that subsection. Or, if the amount of the CEWS had been included in the taxpayer’s income under paragraph 12(1)(x) of the Act, would the voluntary repayment be deductible pursuant to paragraph 20(1)(hh) of the Act. Furthermore, you would like to know if a deduction is available, in which taxation year would the deduction be permitted.

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. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

Deduction under subsection 9(1) of the Act

A taxpayer’s income for a taxation year from a business or property is determined under subsection 9(1) the Act. Subsection 9(1) provides that, subject to the provisions of Part I of the Act, a taxpayer’s income for a taxation year from a business or property is the taxpayer's profit therefrom for the year. Paragraph 18(1)(a) of the Act, which is one of the general limitation provisions in Part I of the Act, provides that in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

The CRA has previously taken the position that the CEWS is generally required to be included in income under either subsection 9(1) of the Act or paragraph 12(1)(x) of the Act, depending on the manner in which a particular eligible entity determines its profit for income tax purposes. (footnote 3)

However, the requirement contained in paragraph 18(1)(a) of the Act that the outlay or expense be “made or incurred” contemplates the actual payment of the expense or a legal obligation to pay the expense in that particular taxation year. Generally, a taxpayer “incurs” an expense when there is a legal obligation to pay a sum of money.

That being said, where an eligible entity decides to voluntarily repay all the CEWS it received, it is our understanding that it would need to formally cancel its application(s) that had already been submitted by following the instructions provided on the Canada.ca website: Canada Emergency Wage Subsidy (CEWS) – Change or cancel your claim. (footnote 4) Upon cancellation of one or more CEWS applications, the eligible entity would be issued a Notice of Determination, pursuant to subsection 152(3.4) of the Act, which would provide the amount that must be repaid in respect of the cancelled applications.

Therefore, in the situation described, if the eligible entity were to complete the necessary steps to cancel the relevant CEWS application(s), a legal obligation would arise at the time of cancellation, in accordance with the Notice of Determination that would be issued, to repay an amount in respect of the cancelled application(s). This would result in an expense being incurred for the purposes of paragraph 18(1)(a) of the Act and provided the CEWS was initially included in computing the eligible entity’s profit from a business or property under subsection 9(1) of the Act, a deduction would be permitted in the year there is a legal obligation to repay an amount.

Deduction under paragraph 20(1)(hh) of the Act

As mentioned above, it may be the case that an eligible entity is required to include the CEWS in income under paragraph 12(1)(x) of the Act. If an amount is repaid by a taxpayer in the year, pursuant to a legal obligation to repay all or part of a particular amount included under paragraph 12(1)(x) in computing income for the year or a preceding taxation year, that amount is allowed as a deduction in computing the taxpayer’s income from a business for a taxation year pursuant to paragraph 20(1)(hh) of the Act.

Therefore, where the CEWS was previously included in income under paragraph 12(1)(x) of the Act, if there is a legal obligation to repay the CEWS, a deduction under paragraph 20(1)(hh) of the Act would be available in respect of amounts repaid in the year.

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette, CPA, CA
Acting Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained

in the original document are shown below instead:

1 This term is defined in subsection 125.7(1) of the Act.

2 Ibid.

3 For the CRA’s position on the tax treatment of the CEWS, refer to Question 25 of the Frequently asked questions – Canada emergency wage subsidy (CEWS) https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-frequently-asked-questions.html and internal interpretation 2020-0865661I7.

4 https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-after-apply/change-cancel-claim.html#h-3