27 October 2022 External T.I. 2021-0892441E5 - CEWS Asset Acquisition Rules

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: Whether a particular entity can be considered the “seller” contemplated in subsection 125.7(4.1) and (4.2) of the Act when it did not sell its assets directly to the relevant eligible entity?

Position: No.

Reasons: Subsection 125.7(4.1) requires that the eligible entity acquire assets directly from the seller.

XXXXXXXXXX							2021-089244
								Sarah Springate, CPA, CA

October 27, 2022

Dear XXXXXXXXXX:

Re: Canada Emergency Wage Subsidy (CEWS) — Asset Acquisition Rules

We are writing to you in response to your query regarding the determination of “qualifying revenue” for purposes of the CEWS under subsection 125.7(2) of the Income Tax Act (“the Act”) in a situation where assets were acquired of a person or partnership.

In your query, you describe the following situation:

• *XXXXXXXXXX (CanCo) operates various retail stores.
• XXXXXXXXXX was a franchisee of a number of CanCo branded stores (the Stores), however, in 2020, XXXXXXXXXX sold all of its assets required to carry on each of the Stores (the Transferred Assets) to CanCo.
• On the same day, after acquiring the Transferred Assets, CanCo transferred the Transferred Assets to various incorporated, non-arm’s length subsidiaries (individually referred to as the Eligible Entity), each of which is responsible for operating an individual store. Each Eligible Entity received a portion of the Transferred Assets that constituted substantially all of the assets that were necessary to carry on the Stores business at a location.
• At no time did CanCo carry on the Stores businesses that were carried on by XXXXXXXXXX.

Specifically, you have asked whether XXXXXXXXXX can be considered the “seller” when applying subsection 125.7(4.1) and 125.7(4.2) of the Act for determining the qualifying revenue of each Eligible Entity.

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.

Subject to certain inclusions or exclusions, qualifying revenue of an eligible entity is defined in subsection 125.7(1) of the Act to mean the inflow of cash, receivables, or other consideration arising in the course of its ordinary activities in Canada in a particular period. Special rules are available under subsection 125.7(4.2) of the Act to determine the qualifying revenue of the eligible entity for its prior reference period or current reference period, as the case may be, for a qualifying period, where all of the conditions described in subsection 125.7(4.1) are met.

Subsection 125.7(4.1) of the Act provides that subsection 125.7(4.2) of the Act applies to an eligible entity in respect of a qualifying period if:

a) the eligible entity acquired assets (the acquired assets) of a person or partnership (the seller) during the qualifying period or at any time before that period;

b) immediately prior to the acquisition, the fair market value of the acquired assets constituted:

(i) all or substantially all of the fair market value of the property of the seller used in the course of carrying on business; or

(ii) if the seller and the eligible entity deal with each other at arm’s length, all or substantially all of the property of the seller that can reasonably be regarded as being necessary for the eligible entity to be capable of carrying on a business of the seller, or part of a business of the seller, as a business;

c) the acquired assets were used by the seller in the course of a business carried on by it in Canada;

d) it is reasonable to conclude that none of the main purposes of the acquisition was to increase the amount of the wage subsidy; and

e) the eligible entity elects in respect of the qualifying period and files the election in prescribed form and manner with the Minister or, if the seller is in existence during the qualifying period, the eligible entity and the seller jointly elect in respect of that period and so file with the Minister.

It is always a question of fact whether the conditions in subsection 125.7(4.1) of the Act have been met. Where these conditions are met, pursuant to paragraph 125.7(4.2)(a) of the Act, the eligible entity will include in determining its qualifying revenue for its prior reference period or current reference period, as the case may be, for a qualifying period, the amount of the qualifying revenue of the seller for the prior reference period, or the current reference period, for the qualifying period, that is reasonably attributable to the acquired assets (the assigned revenue). In addition, paragraph 125.7(4.2)(b) of the Act provides that the assigned revenue is to be subtracted from the qualifying revenue of the seller for its prior reference period or current reference period, as the case may be, for the qualifying period. Special rules in paragraph 125.7(4.2)(c) of the Act may apply if a portion of the assigned revenue is from a person or partnership that did not deal at arm's length with the seller.

In our view, the seller referenced in subsections 125.7(4.1) and (4.2) of the Act must be the person or partnership from whom the relevant eligible entity directly acquires the assets. As such, in your given scenario, XXXXXXXXXX cannot be considered the “seller” when applying subsection 125.7(4.1) and 125.7(4.2) of the Act for determining the qualifying revenue of each Eligible Entity.

We trust our comments will be of assistance.

Yours truly,

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