14 January 2022 Internal T.I. 2021-0913891I7 - CERS - Sublease

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 document to sublease real property is a written agreement entered into prior to October 9, 2020 when the landlord of the real property did not sign the sublease document before October 9, 2020.

Position: Question of fact.

Reasons: A “written agreement” is not defined in the Act, but under the common law. In general, a written agreement requires mutual assent of the parties to the agreement, clear intent to create a binding and enforceable contract, and all essential terms and conditions. Depending on the circumstances, a sublease that was executed without the required consent of the landlord may still be an effective and binding agreement between the sublessor and the subtenant.

									January 14, 2022

David Gagné-Therrien
Dedicated Telephone Service, Section I			Income Tax Rulings
Canada Revenue Agency						Directorate
David.Gagne-Therrien@cra-arc.gc.ca 			Kah Foo, Koh
									2021-091389

Subject: Canada Emergency Rent Subsidy - Sublease

We are writing in response to your recent inquiry wherein you requested our views on whether a document to sublease real property would be considered a written agreement entered into prior to October 9, 2020, as required under the definition of “qualifying rent expense” (“QRE”) in subsection 125.7(1) of the Income Tax Act (the “Act”) for purposes of the Canada Emergency Rent Subsidy (“CERS”).

In particular, the sublessor and subtenant signed a document prior to October 9, 2020 to sublease the real property at issue. Consent of the landlord was required for the sublessor to sublease the real property. However, the landlord of the real property did not sign the document until October 9, 2020.

Our Comments

The CERS is based on a “qualifying renter’s” QRE in respect of a “qualifying property” for a “qualifying period” as those terms are defined in subsection 125.7(1) of the Act. Specifically, in order for an amount paid to be QRE, among other requirements, that amount must be paid (or payable in certain circumstances) 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 (the “Written Agreement Requirement”).

A particular written agreement that purports to be a sublease may actually be an assignment of a lease, and vice versa. For example, in Sussex Square Apartments, [1999] 2 C.T.C. 2143 99 D.T.C. 443, the court concluded that a “sublease” of the entire term of a lease operates as an assignment, not a sublease, as there is no reversionary interest left in the original tenant.

This distinction between a sublease and an assignment may be important when determining whether an amount paid is QRE. Where amounts were paid under a lease that was assigned, the Written Agreement Requirement in the definition of QRE would be satisfied regardless of when that assignment of the lease occurred, and regardless of whether the assignment was a written agreement, so long as the lease that was assigned is a written agreement entered into prior to October 9, 2020. In contrast, for amounts paid under a sublease, the Written Agreement Requirement would only be satisfied if the sublease is itself a written agreement that was entered into prior to October 9, 2020.

Whether a document would constitute a written agreement is a question of fact depending on the language used and the terms specified in the relevant documents. A determination could only be made after a review of the documents and circumstances of each case. Generally, while there is no requirement that the documents be signed, other conditions must be present: the written documents must show a clear intention to create a binding and enforceable contractual relation, outline all the essential terms and conditions of the agreement, and demonstrate an acceptance in writing by both parties of the terms and conditions.

It is our understanding that in an actual sublease of real property, the only parties to the sublease are the sublessor and the subtenant. Unlike an assignment, the actual landlord of the real property is generally not a party to the sublease. Furthermore, depending on the circumstances, a sublease that was executed without the required consent of the landlord may still be effective and binding between the sublessor and the subtenant (i.e., a written agreement).

In the context of the facts presented in the inquiry, assuming that the sublease is an actual sublease (and not an assignment), the fact that the landlord failed to sign the sublease until October 9, 2020 would not necessarily preclude the sublease from being a written agreement entered into before October 9, 2020.

However, it should be noted that there are other factors that may affect the determination of whether the sublease at issue was a written agreement entered into prior to October 9, 2020. For example, the sublease itself may contain a condition stipulating that the agreement would not take effect until the signature of the landlord was procured. Hence, it is ultimately a question of fact whether the sublease was an assignment of a lease with the landlord, or if the sublease was a sublease, whether the sublease was a written agreement entered into prior to October 9, 2020.

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette CPA, CA
Acting Manager
For Division Director
Business and Employment Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

UNCLASSIFIED