3 October 2024 Internal T.I. 2024-1012461I7 - CEWS - qualifying revenue

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 the amounts reimbursed or advanced by Owner to XXXXXXXXXX in respect of payroll expenses related to the Hotel/Executive Staff are qualifying revenue for the purpose of the CEWS.

Position: No.

Reasons: QR 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 the ordinary activities of the eligible entity — generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity — in Canada in the particular period”, subject to certain exclusions or exceptions. It appears that the only QR of XXXXXXXXXX derived from Owner, based on the facts as provided to us, is the Management Fee. The inflow of cash in the form of a reimbursement or advance of funds in respect of Owner’s payroll expenses incurred by XXXXXXXXXX on behalf of Owner is not in our view QR of XXXXXXXXXX as it is not an inflow of cash from the sale of goods, rendering of services, or use by others of the resources of XXXXXXXXXX.

Ms. Kerri Hanley					HEADQUARTERS
Technical Support and Policy Section			Income Tax Rulings Directorate
International and Large Business Directorate			Steven Pannozzi, MTAX
XXXXXXXXXX					2024-101246

October 3, 2024

Dear Ms. Hanley:

Re: Canada Emergency Wage Subsidy – Qualifying Revenue

This is in reply to your email dated March 27, 2024 in which you requested our views on whether amounts reimbursed or advanced to a taxpayer in a particular situation meet the definition of “qualifying revenue” in subsection 125.7(1) of the Income Tax Act (the Act) for the purposes of the Canada Emergency Wage Subsidy (the CEWS).

More specifically, you provide that a taxpayer, referred to as the “eligible entity”, entered into a Hotel Management Agreement with its principal for the purpose of managing the operations of the business as agent of the principal. The eligible entity earns, and the principal pays, a Management Fee in exchange for the services of the eligible entity provided under the Hotel Management Agreement. Additionally, the principal reimbursed (or advanced) funds to the eligible entity for payroll expenses of the principal incurred (or to be incurred) by the eligible entity in the course of carrying out its duties as agent under the Hotel Management Agreement.

The eligible entity recorded the reimbursement or advance in respect of payroll expenses in its books and records, for accounting purposes, as revenue. Such amounts were also included by the eligible entity in the determination of its qualifying revenue for purposes of the CEWS.

In your view, when the eligible entity received an amount in respect of payroll expenses incurred (or to be incurred) on behalf of its principal, there was an inflow of cash. However, that inflow constituted a reimbursement (or a liability if the amount is received as an advance), rather than an inflow from the sale of goods, the rendering of services, or the use by others of resources of the eligible entity. Thus, in your view, such amounts should neither be included in the revenue of the eligible entity for accounting purposes, nor the qualifying revenue of the eligible entity for purposes of the CEWS.

Our Comments

As provided by subsection 125.7(1) of the Act, qualifying revenue of an eligible entity for a prior reference period or a current reference period, means the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity — generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity — in Canada in the particular period, subject to certain exceptions and exclusions.

As noted in the definition, in determining whether an eligible entity has qualifying revenue, two tests must be satisfied: there must be an inflow of cash, receivables, or other consideration (the “Inflow Test”), and the inflow must arise in the course of the ordinary activities of the eligible entity generally from the sale of goods, the rendering of services, and the use by others of resources of the eligible entity (the “Activities Test”). Whether the Inflow Test and the Activities Test are met is a question of fact that depends on the facts and circumstances of each particular situation.

The determination of whether an agency relationship exists is a mixed question of fact and law. However, based on the facts that were provided, it appears that the Hotel Management Agreement establishes an agency relationship between the eligible entity and the payor. Where an eligible entity that is in an agency relationship receives a reimbursement or advance by its principal in respect of expenses incurred or to be incurred by the eligible entity on behalf of its principal, while the Inflows Test appears to be met, such amounts would not meet the Activities Test. Rather, in such a scenario, we concur with your position that it is solely the Management Fee paid to the eligible entity which is an inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of the eligible entity from the rendering of services. Thus, it is our view that the Management Fee would be qualifying revenue of the eligible entity, provided no other exceptions or exclusions apply, while the reimbursement of expenses incurred on behalf of its principal would not.

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo, CPA, CA
Manager
Business Income and Capital Transactions
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch