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- Various questions on the eligibility of utilities expenses for the CERS
2- Does an eligible entity have to compute its qualifying revenue using the same approaches and elections for both the CEWS and the CERS for a particular qualifying period?
3- What are the deadlines to file an application for the CEWS and the CERS?
POSITION: 1- Amounts that are required to be paid under the net lease by the tenant as a regular instalment of an operating expense, such as utilities, may be a qualifying rent expense.
3- Starting with qualifying period 6 of the CEWS, no later than 180 days after the end of the qualifying period.
REASONS: 1- Wording of the Act
2- Wording of the Act
3- Wording of the Act
TEI 71st Virtual Midyear Conference – March 22 to 25, 2021
Question 1 - CERS and Net Leases
The Canada Revenue Agency has received a number of questions from taxpayers and their representatives about qualifying rent expenses and, in particular, whether utilities paid by a tenant may be claimed under the Canada Emergency Rent Subsidy (or “CERS”).
The CERS is based on a qualifying tenant or property owner’s (qualifying renter) qualifying rent expenses in respect of a qualifying property for a particular qualifying period.
In the case of a tenant, a qualifying rent expense is generally an amount paid to an arm’s length party under a written agreement entered into before October 9, 2020, or pursuant to the renewal of a the agreement on substantially similar terms, for rent for the use of, or right to use, a qualifying property. For these purposes, rent includes:
- Gross rent
- Rent based on a percentage of sales, profit or a similar criterion, and
- Amounts required to be paid by the tenant under a net lease, either to the landlord or a third party. These amounts must be paid as:
- Base rent,
- Regular instalments of operating expenses that are customarily charged to the tenant under a net lease,
- Property taxes and similar taxes, including school and municipal taxes, and
- Regular instalments of other amounts payable to the landlord for services ancillary to the rental of real or immovable properties and customarily supplied or rendered in connection with the rental of such properties.
If a tenant pays utilities in addition to rent under a lease that is not a net lease, are these amounts qualifying rent expenses for the purposes of the CERS?
No. According to the definition of “qualifying rent expense” in subsection 125.7(1) of the Income Tax Act (“the Act”), the only time an amount for utilities may be claimed is if it is required to be paid as regular instalments of operating expenses customarily charged to the tenant under a net lease. Where a tenant has a lease other than a net lease, only rent paid by the tenant may be a qualifying rent expense for the purpose of the CERS. For example, assume a tenant pays gross rent to its landlord under a lease, which is not a net lease. The tenant is also responsible for paying the cost of its electricity. Since the electricity is not required to be paid under a net lease, it is not a qualifying rent expense for the tenant; only the gross rent may be claimed under the CERS.
If a tenant has a net lease and pays utilities, are these amounts qualifying rent expenses?
Maybe. Where a tenant has a net lease, amounts that are required to be paid under the net lease by the tenant as a regular instalment of an operating expense, such as utilities, may be a qualifying rent expense. The types of operating expenses that qualify would be those customarily charged to the tenant under a net lease, and generally relate to the operation of the qualifying property.
For example, at the start of each year, the landlord of a shopping mall estimates the monthly cost of the natural gas, electricity and water for the mall. The landlord then allocates this estimated cost to each of the tenants of the shopping mall according to amount of space they occupy.
Under its net lease, a tenant in the mall pays base rent to the landlord. The lease also requires the tenant to pay its proportionate share of the operating expenses of the mall to the landlord, which includes the estimate for natural gas, electricity and water. In this example, the amount for utilities paid by the tenant is required to be paid under a net lease as a regular instalment of operating expenses customarily charged to the tenant. Accordingly, the amounts paid by the tenant to the landlord for base rent and utilities are qualifying rent expenses.
If a net lease states that a tenant is responsible to pay for their utilities, are these amounts a qualifying rent expense? For example, if telephone service is not included in a net lease but the lease states that the tenant is responsible for any such cost, are amounts paid by the tenant for telephone a qualifying rent expense?
Likely not. In this example, the tenant is not required to pay for telephone service under the lease. While the tenant is responsible for paying for their telephone costs, it is not a requirement under a net lease as part of their rent.
If, under a net lease, a tenant is required to pay utilities to a third party, are these amounts qualifying rent expenses?
Possibly. If a net lease requires an amount to be paid to a third party as a regular instalment of operating expenses customarily charged to the tenant under a net lease, this payment may be a qualifying rent expense. Examples of third parties might include property managers or utility service providers.
Question 2 - Qualifying revenue for the CERS
Does an eligible entity have to compute its qualifying revenue using the same approaches and elections for both the CEWS and the CERS for a particular qualifying period?
Generally speaking, the Canada Emergency Wage Subsidy (“CEWS”) and the Canada Emergency Rent Subsidy (“CERS”) are available to a qualifying eligible entity that has experienced a reduction in its qualifying revenue for a qualifying period.
The revenue reduction of an eligible entity for a qualifying period, for both the CEWS and the CERS, is its decline in qualifying revenue from the relevant prior reference period to the relevant current reference period. Special rules exist to determine the qualifying revenue of an eligible entity under various elections and approaches that are available in certain circumstances.
The revenue reduction is the same calculation for both subsidies and must be calculated using the same rules (that is, the same elections and approaches) that are applicable to a specific qualifying period for an eligible entity. Therefore, an election, if made for a qualifying period, must be used in calculating qualifying revenue for both the CEWS and the CERS.
For example, Corporation A and Corporation B, both eligible entities, are members of an affiliated group and have jointly elected that the qualifying revenue of the affiliated group be determined on a consolidated basis in accordance with relevant accounting principles under paragraph 125.7(4)(b) of the Income Tax Act for qualifying period 9 for purposes of the CEWS. Because of this election, Corporation A can apply for the CEWS for its employees. Corporation B did not apply for the CEWS for qualifying period 9, but wishes to apply for the CERS for period 2 (the corresponding qualifying period). Since Corporation A and Corporation B have jointly elected that the qualifying revenue of the affiliated group be determined on a consolidated basis for that qualifying period, the consolidated amount must be used as the qualifying revenue by Corporation B in determining its revenue reduction for the CERS. Therefore, Corporation B cannot determine its qualifying revenue on an individual basis or using different elections for that specific qualifying period.
The CERS relies on many of the same principles as the CEWS, in particular those related to the determination of qualifying revenue. Therefore, although the “CEWS Frequently Asked Questions”, which are available on the Canada.ca website, only refer to the CEWS, in general, the guidance provided in the FAQs can be applied to both the CEWS and the CERS. For additional information on CERS, please refer to the “Canada Emergency Rent Subsidy (CERS)” webpage available on the Canada.ca website.
Question 3 - Deadlines for the CEWS and the CERS
What are the deadlines to file an application for the CEWS and the CERS?
For purposes of the CEWS, applications in respect of a qualifying period can be made only after the end of the qualifying period, and provided the eligible entity has paid to the eligible employee, the eligible remuneration used to calculate the wage subsidy for that period. CEWS applications must be made on or before the later of January 31, 2021 and 180 days after the end of the qualifying period.
Given the deadline for qualifying periods 1 to 5 for the CEWS was on January 31, 2021 (actual deadline was Monday February 1, 2021 since January 31, 2021 was on a Sunday), beginning with qualifying period 6, the deadline will be 180 days after the end of the qualifying period. Therefore, the application deadline for qualifying period 6, which began on August 2, 2020 and ended on August 29, 2020, was on February 25, 2021 and for qualifying period 7, which began on August 30, 2020 and ended on September 26, 2020 will be on March 25, 2021.
For purposes of the CERS, an eligible entity must also file its application in respect of a qualifying period no later than 180 days after the end of the qualifying period. The dates of qualifying periods for the CERS align with those for the CEWS. Qualifying period 8 for the CEWS was the first period for which the CERS was in effect, which is the period that begins on September 27, 2020 and ends on October 24, 2020. The deadline to file an application for this qualifying period, for both the CEWS and the CERS, is April 22, 2021, which is 180 days after the end of that qualifying period.
The following table shows all the upcoming application deadlines for periods 7 to 13 for the CEWS, along with the corresponding periods for the CERS (periods 1 to 6).
Based on the information provided, you will notice that starting with the application deadline for qualifying period 6 for the CEWS on February 25, 2021, there will be an application deadline for the next qualifying period every four weeks.
Information about the application deadlines for these two subsidies is available on the Canada.ca website. See “How to apply” on the CEWS webpage and “Periods you can apply for” on the CERS webpage.
|March 23, 2021
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