Subsection 125.7(1)
Base Percentage
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.20-1] Example of computation of base wage subsidy
Example 20-2A
An eligible employer had $50,000 in qualifying revenue in September 2020 (current reference period). For claim period 7, assuming that the employer follows the year-over-year approach to determine its revenue reduction for the claim period, for the prior reference period (September 2019) qualifying revenue was $400,000, the employer has a drop in revenue of $350,000. Consequently, its revenue reduction percentage will be 87.5% (1- $50,000/$400,000, expressed as a percentage).
In respect of a week in the claim period 7, the employer paid eligible remuneration of $500 to its only eligible employee, who at arm’s length and who is not on leave with pay (see Q20-03).
As the revenue drop percentage was more then 50%, the base percentage is 50% and the employer will be eligible for a maximum weekly benefit of $250 ($500 x 50%) in respect of that employee. This amount will be included in the calculation of the wage subsidy (see Q20-01 and 20-02) of the employer.
Baseline Remuneration
Administrative Policy
16 January 2023 Internal T.I. 2020-0851561I7 F - SSUC/CEWS -– rémunération admissible et rémunérati
After confirming that eligible remuneration for each qualifying period for CEWS purposes includes additional payments, added to the “regular” pay for that period, for vacation and sick leave pay, and security allowances, required to be paid under a collective agreement, the Directorate noted that the same approach applied to determining baseline remuneration.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration | eligible remuneration for each qualifying period includes additions for vacation and sick leave, but excludes taxable benefits | 133 |
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.17-5] General pro-ration of bonuses.
[O]nly eligible remuneration paid by an eligible employer to an eligible employee in respect of a week in a claim period is included for purposes of computing the wage subsidy. …
For example, in the case of an annual bonus paid by an eligible employer to an eligible employee, it would generally be reasonable to consider that the annual bonus was earned throughout the fiscal period to which it relates.
Further, for the purposes of computing baseline remuneration in respect of an eligible employee for a claim period, the bonus amount must be paid during the relevant baseline remuneration period as described in Q18. It would also be reasonable, for purposes of computing baseline remuneration, to calculate the average weekly eligible remuneration by dividing the bonus amount by the number of weeks included in the period to which it relates … .
[Q.17-6] Apportionment of commissions
To determine whether a commission payment is in respect of a specific week, it is necessary to review the complete set of facts pertaining to a particular situation, including the employment contract … [and] practices specific to a particular industry … .
For example, if a car salesperson, who is remunerated by commission when a car is sold as provided in the employment contract, sells two cars in a given week in a claim period, it could be reasonable to consider that those commissions are paid “in respect of the week” in which those two sales occurred.
Eligible Employee
Administrative Policy
15 January 2021 External T.I. 2020-0847781E5 - CEWS - remuneration / SSUC - rémunération
Q.1
Are taxable benefits taken into consideration in determining whether the 14 day remuneration condition is met and, if so, how is a particular portion thereof determined to be in respect of particular days in a qualifying period?
Q.2
Will the payment of a commission, earned in a previous period, impact the 14 day remuneration condition?
Q.3
Is there is a difference between remuneration that has to be taken into consideration for the 14 day remuneration condition and the “eligible remuneration” paid to an employee to calculate the CEWS?
CRA responded:
Q.1
[F]or the purpose of the definition of “eligible employee,” remuneration includes any cash or non-cash taxable benefits. Whether remuneration received by an individual is in respect of a specific day in a qualifying period is a question of fact that can only be determined on a case by case basis. For example, which days a taxable benefit is received or enjoyed by an employee can vary depending on the type of benefits conferred on the employee. This may not necessarily correspond with the pay period during which the taxable benefit is added to the employee’s income for the calculation of payroll deductions.
Q.2
… The 14 day remuneration condition should be examined based on whether remuneration was paid in respect of a qualifying period and not on the remuneration that was actually paid during a qualifying period. We have provided some additional guidance in question 17-6 … .
Q.3
… Although the value of a non-cash taxable benefit is received by the employee because of employment, the value of such benefit is not eligible remuneration paid to an eligible employee for purposes of computing the wage subsidy.
Therefore … remuneration for the purpose of the definition of an “eligible employee” … would not necessarily be the same as “eligible remuneration” paid to an eligible employee for purposes of the calculation of the CEWS … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration | non-cash taxable benefits are not “eligible remuneration” | 67 |
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.3-9] Pro rata recognition of payroll under a cost-sharing agency arrangement
A cost sharing arrangement (CSA) is generally an agreement under which the participants share certain costs, including the salary or wages that are paid to employees. …
[W]here the CSA represents a type of an agency relationship or a mandate for the employers, each of the separate eligible employers may qualify for the wage subsidy in respect of their portion of eligible remuneration paid to each eligible employee by the agent or the mandatary in respect of a week in a claim period, as long as all of the other eligibility criteria have been met … . Only the actual employer(s) can apply for the wage subsidy in respect of a particular employee … .
Example of arrangement for doctors’ sharing of medical support staff
Example 3-9A
A group of five medical professional corporations dealing at arm’s length, enter into a CSA to share certain costs, including the salary or wages that are paid to eight support employees. The agreement, which is an agency relationship, requires that the participants (the five medical professional corporations) use an entity established for this purpose (the agent) to perform certain tasks, such as paying employees, on each of their behalf. The medical professional corporations are each considered the employer on a proportionately agreed upon basis in respect of the employees. The entity established for this purpose has its own payroll program account to make payroll remittances for all eight support employees.
Given that an agency relationship exists, each medical professional corporation could qualify for the wage subsidy in respect of their portion of eligible remuneration paid to each eligible employee by the agent in respect of a week in a claim period, as long as all of the other eligibility criteria have been met (see Q4). Each corporation would need to obtain their own payroll program account to apply for and receive the wage subsidy.
[Q.3-10]. Can a joint venture qualify for the wage subsidy? New: October 6, 2020
[The] case law, which generally describes a joint venture as a limited business undertaking by two or more parties, in which the parties have a joint property interest in the subject matter of the venture and share control and management of the enterprise. …
A joint venture is not an eligible employer for the purposes of the wage subsidy. However, in certain circumstances, an eligible employer may use the qualifying revenue of a joint venture instead of its own qualifying revenue, in order to determine if it experienced the required reduction in revenue in order to qualify for the wage subsidy (see Q11).
Q13-1. In determining who is an eligible employee, what is the meaning of the phrase, “employed in Canada”?
An employee is “employed in Canada” if they are performing the duties of an office or employment in Canada. Generally, a person exercises the functions of their employment at the place where they are physically present. Thus, when that place is situated outside Canada, that person will not generally be considered as being “employed in Canada”. It is not necessary for an individual to be “employed in Canada” throughout the claim period to be an eligible employee.
[Q. 16] Eligibility of non-resident employee
[E]ligible employee status is determined based on where the individual is employed and not where the individual resides. Generally, a non-resident individual employed in Canada during a claim period will qualify as an eligible employee as long as all other conditions to be an eligible employee are met ... .
Canada Emergency Wage Subsidy (CEWS) Calculator under Determine your eligible employees, 21 April 2020 CRA Webpage
Retroactively hiring and paying employees
Employees who have been laid off or furloughed can become eligible retroactively, as long as you rehire them and their retroactive pay and status meet the eligibility criteria for the claim period. You must rehire and pay such employees before you include them in your calculation for the subsidy.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration | 63 |
Eligible Entity
Administrative Policy
23 June 2020 External T.I. 2020-0848441E5 F - SSUC - Entité déterminée et institution publique
In response to a question as to whether an “organization” that was an inter-municipal authority held by four regional Quebec county municipalities was eligible for the Canada emergency wage subsidy, CRA indicated that an “entity may be an ‘eligible entity’ for CEWS purposes, provided that it is not a ‘public institution,’.” CRA did not address whether it was assuming that the organization must be one of the entity types listed in the eligible entity definition to which the public institutions exclusion was stated to apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(c) | regional county municipalities are municipalities | 145 |
Canada Emergency Wage Subsidy (CEWS) Calculator under Who is an eligible employer, 21 April 2020 CRA Webpage
Types of eligible employers
Eligible employers include:
- individuals (including trusts)
- taxable corporations
- persons that are exempt from corporate tax (Part I of the Income Tax Act), other than public institutions:
- non-profit organizations
- agricultural organizations
- boards of trade
- chambers of commerce
- non-profit corporations for scientific research and experimental development
- labour organizations or societies
- benevolent or fraternal benefit societies or orders
- registered charities
- partnerships consisting of eligible employers
Public institutions are not eligible for the subsidy. This includes municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | 32 |
Paragraph (a)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
A non-resident corporation earning Canadian Treaty-exempt income because of no PE may qualify
3-02. Can a non-resident corporation be an eligible employer if its income is excluded in computing its income under the Act because of a tax treaty? New: August 11, 2020
Yes. A non-resident corporation may be an eligible employer even if all of its Canadian-sourced business income is not taxable in Canada on the basis that it is excluded from the computation of its income under the Act because of a tax treaty.
For the purpose of the wage subsidy, an eligible employer includes a corporation (other than a public institution) that is not exempt from tax under Part I of the Act (see Q3). However, there are some exceptions and certain corporations that are exempt from tax can still be eligible … .
Where a corporation resides in a country with which Canada has a tax treaty and carries on a business in Canada but does not have a permanent establishment in Canada, the treaty might provide that such income is not taxable in Canada. That non-resident corporation is not listed in subsection 149(1) of the Act as being exempt from tax under Part I of the Act. The fact that the treaty provides that its income is not taxable in Canada does not prevent it from being an eligible employer.
9 October 2020 External T.I. 2020-0847791E5 - CEWS 81(1)(a) and treaty exempt entities
Is a non-resident corporation that operates an airline that normally flies to and from Canada qualify as an “eligible entity” notwithstanding that a part or all of its income may not be included in computing its income for a taxation year by the operation of an applicable Income Tax Convention between Canada and s. 81(1)(a)? CRA responded:
[A] careful review of other paragraphs under the definition of “eligible entity” and of the overall context and purpose of the provision shows that the exclusion in paragraph (a) was meant to exclude, generally, corporations described under subsection 149(1) while providing under paragraph (d) of that definition that five types of persons that are exempt under subsection 149(1) can qualify as an “eligible entity”.
In our view, a non-resident corporation that operates an airline, a portion of whose Canadian source income is not included in the computation of its income under Part I of the Act as a result of the operation of paragraph 81(1)(a) and a provision under an income tax convention between Canada and another State is not a corporation“ exempt from tax under Part I” under the definition of “eligible entity” in subsection 125.7(1) and therefore would not be prevented from being an “eligible entity” on that basis.
Paragraph (c)
Administrative Policy
3 June 2020 External T.I. 2020-0846831E5 - CEWS - Public institution
In indicating that it could not provide a ruling as to whether a registered charity was a public institution, CRA stated:
[D]ue to the large number of enquiries that our Directorate is receiving in the context of the COVID-19 pandemic, we will not be providing any advance income tax ruling regarding the qualification of a specific entity as a public institution for the purpose of the CEWS.
CRA went on to provide general comments, including:
A registered charity can be an “eligible entity”, as defined in subsection 125.7(1) of the Act for the purpose of the CEWS, as long as the charity is not a “public institution”. ….
[P]ublic institutions would generally include municipalities and local governments, Crown corporations, wholly owned municipal corporations, public universities, public colleges, public schools, health authorities and hospitals.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(c) | public bodies performing a function of government are entities that are functionally like municipalities | 115 |
Paragraph (f)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
Examples of qualifying private schools
3-7. Are all schools and colleges eligible for the wage subsidy?
… [A] person or partnership that operates a private school or private college is a prescribed organization and is an eligible employer for the purposes of the wage subsidy.
Private schools and private colleges include for-profit and not-for-profit institutions such as arts schools, language schools, driving schools, flight schools and culinary schools.
Eligible Remuneration
Administrative Policy
16 January 2023 Internal T.I. 2020-0851561I7 F - SSUC/CEWS -– rémunération admissible et rémunérati
In confirming that eligible remuneration for each qualifying period for CEWS purposes includes additional payments for vacation and sick leave pay, and security allowances, required to be paid under a collective agreement, the Directorate stated:
For CEWS purposes, when the payment is added by the employer, which is a qualifying entity, to the basic salary or wages included in each pay cheque of an eligible employee, we will consider that the qualifying entity has paid the payment to an eligible employee in respect of the same week as the related salary or wages are paid.
However, taxable benefits (here, group insurance plan benefits) were not to be included given that “[o]nly eligible remuneration paid to an eligible employee is included in computing the CEWS.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Baseline Remuneration | baseline remuneration includes additions for vacation and sick leave pay, and security allowances | 54 |
22 December 2022 Internal T.I. 2020-0856411I7 F - SSUC/CEWS -– Rémunération admissible
In confirming that mandatory vacation, statutory holiday and sick leave pay provided for in the various collective agreements in the Quebec construction industry are eligible remuneration for the purposes of s. 125.7(2), when paid to an eligible employee by an eligible entity, the Directorate stated:
Amounts paid by an eligible entity to an eligible employee as sick leave, vacation pay or statutory holidays are generally considered to be part of the employee's regular pay, salary or wages and to be eligible remuneration within the meaning of that term in subsection 125.7(1). …
For CEWS purposes, when the payment is added by the employer, which is an eligible entity, to the basic salary or wages included in each paycheck of an eligible employee, we will consider that the eligible entity has paid the payment to an eligible employee in respect of the same week as the related salary or wages are paid.
20 October 2020 External T.I. 2020-0856781E5 - CEWS - eligible remuneration and outsource staff
Regarding the implications to an outsource staffing company where it has received the CEWS and the client receiving the staffing services has received an offsetting discount for the subsidy received, in effect providing a cost-subsidy to the end customer, CRA stated:
Generally, a staffing company’s staff are employees of the staffing company and not that of its client. Therefore, a payment made by the client to a staffing company would not be considered eligible remuneration paid to an eligible employee of the client. Consequently, the client would not qualify for the wage subsidy in respect of the payment made to the staffing company
… [Y]ou mentioned that the client has received an offsetting discount for the wage subsidy received by the outsource staffing company. For the client, the discount offered by the outsource staffing company should not, in and by itself, reduce the amount of its eligible remuneration for the wage subsidy.
15 January 2021 External T.I. 2020-0847781E5 - CEWS - remuneration / SSUC - rémunération
An “eligible employee” of an eligible entity excludes an individual who is without remuneration by the eligible entity in respect of 14 or more consecutive days in a qualifying period ending before July 5, 2020. CRA considers that “remuneration” for purposes of this 14-day test includes taxable benefits, even though non-cash taxable benefits received by the employee are not eligible remuneration for purposes of computing the wage subsidy.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Employee | non-cash taxable benefits are not “eligible remuneration” for CEWS purposes, but are “remuneration” for “eligible employee” purposes | 347 |
15 July 2020 External T.I. 2020-0847141E5 - CEWS - Payments to Contractors
The operator of a mine (the “Operator”) suspended operations at its mine for COVID-19 reasons, but made gratuitous payments (the “Payments”) to third-party contractors (the “Contractors”) to cover a portion of their payroll costs, in order that the Contractors could maintain their work force pending resumption of operations. Unless the Payments were considered qualifying revenue, the Contractors would qualify for the CEWS.
CRA indicated that the para. (c) reduction would not apply to reduce the eligible remuneration of the Contractors’ employees by the Payments, stating:
In the course of our discussions with you, we also raised the possibility that the salaries and wages paid to the employees of the Contractors may not qualify as “eligible remuneration” by virtue of the application of paragraph (c) of the definition of that term in subsection 125.7(1) in light of the receipt of the Payments by the Contractors. We confirm that we no longer consider this to be an issue. In our view, paragraph (c) of the definition of “eligible remuneration” would not be applicable in this situation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | gratuitous COVID-alleviation payments to a contractual counterparty are excluded from the latter’s qualifying revenues | 262 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(6) | question of fact whether s. 125.7(6) could apply where gratuitous payroll reimbursements were made | 172 |
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.17-2] Dividends not eligible remuneration
For the purpose of the wage subsidy, dividends are not considered eligible remuneration. Accordingly, an eligible employer that pays a dividend instead of salary to an owner-manager that is also an eligible employee in a claim period, will not be eligible for the wage subsidy in respect of that dividend.
[Q.17-4] Inclusion of maternity or parental top-up payments
Amounts paid by an eligible employer to an eligible employee as a maternity or parental top-up amount are generally considered salary, wages, and remuneration and would qualify as eligible remuneration.
To qualify for the wage subsidy, the maternity or parental top-up payments must be paid to the eligible employee by an eligible employer that qualifies for the wage subsidy, in respect of a particular week in the claim period. An employee on maternity leave will not be considered to be on leave with pay for purposes of the wage subsidy (see Q20-03).
[Q.17-7] Payments of wages in lieu of termination notice and salary continuance payments
A payment in lieu of earnings for a period of reasonable notice of termination (wages in lieu of termination notice) that is made under the explicit or implied terms of an individual’s employment is considered salary or wages from employment. However, wages in lieu of termination notice are not considered to have been paid in respect of a week, and therefore are not eligible for the wage subsidy.
Salary continuance payments are generally periodic amounts paid to an employee who is being terminated but who remains on payroll and remains entitled to benefits available only to employees, even if they are no longer required to report to work. Where pension benefits continue to accrue to the individual, an employment relationship continues to exist (as pension benefits only accrue to employees) even though the individual is not required to report to work.
Where the employment relationship continues to exist, salary continuance payments to an eligible employee are salary or wages from employment, that would generally be considered eligible remuneration paid in respect of a week, and would be eligible for the wage subsidy.
[Q.19] Remuneration can be exempt
Eligible remuneration of an eligible employee means amounts for which the eligible employer would generally be required to make payroll deductions to be remitted to the CRA, irrespective of whether the amounts are taxable to the eligible employee. For example, salaries and wages paid to a status Indian whose income is exempt from tax under a specific provision of the Act are considered eligible remuneration and would qualify for the purpose of calculating the wage subsidy.
Canada Emergency Wage Subsidy (CEWS) Calculator under Determine your eligible employees, 21 April 2020 CRA Webpage
What is eligible remuneration
Eligible remuneration includes amounts you paid an employee as salary, wages and other taxable benefits, fees, and commissions. These are amounts employers would be required to make payroll deductions on to be remitted to the CRA.
Severance pay and items such as stock option benefits or the personal use of a corporate vehicle are not part of eligible remuneration.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Employee | 54 |
Articles
Alex Ghani, Stan Shadrin, Boris Volfovsky, "How Does the Canada Emergency Wage Subsidy Apply to Non-Resident Employers?", COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 4
Example of Treaty-exempt U.S. corp employee US employees in Canada for several days a quarter (p. 4)
Consider the case of a US-resident corporation, NR Co, that provides services in Canada … [and] does not have a permanent establishment in Canada … [has] a payroll account in Canada, which it maintains in respect of its US-resident employees who work in Canada on an intermittent basis … [and] had the requisite decline in qualifying revenue … .
Assume that A is an employee of NR Co, is a tax resident of the United States, and works in Canada for three days during the period March 15-April 11, 2020 and in the United States for the remainder of the period. A is paid a salary by NR Co for the entire period. Is NR Co entitled to a CEWS benefit in respect of all of the wages paid to A?
Treaty-exempt non-resident can be an eligible entity (p. 4)
NR Co is an eligible entity because it is a corporation and is not exempt from tax. …
Mostly non-resident payroll might be eligible remuneration if some Canadian withholding (p. 4)
… The salary paid to A in respect of the services performed in Canada will qualify [as eligible remuneration] only if NR Co has not applied for a non-resident employer certification pursuant to paragraph 153(7)(a). … [A]mounts paid at any time by an employer to an employee at a time that the employer is a "qualifying non-resident employer" and the employee is a "qualifying non-resident employee" are excluded [from “eligible remuneration”]. … If NR Co chooses not to file an application pursuant to paragraph 153(7)(a) to be classified as a qualifying non-resident employer, or is not eligible to be considered a qualifying non-resident employer for some other reason (for example, failing to comply with the requirements of the certified non-resident employer program), it would be liable to withhold, but it would be eligible for the CEWS.
Paragraph (c)
Administrative Policy
29 March 2021 Internal T.I. 2020-0865791I7 - CEWS - eligible remuneration
The controlling shareholder and an employee of an eligible entity suspended receiving salary, for the performance of the employee’s duties, in April, May or June, 2020 for the performance of his duties because of COVID-related financial hardship. Where the corporation expenses salary to the shareholder/employee by way of journal entry with a credit (increase) to the due to shareholder loan account, is the salary considered eligible remuneration? What if the shareholder/employee is paid salary by way of a transfer of funds which are immediately returned as a capital contribution to the eligible employer?
CRA responded:
[W]here salary and wages are paid to an eligible employee and returned to the eligible employer with a corresponding increase or credit to a due to shareholder loan account or other shareholder loan account, we consider such salary or wages would not be eligible remuneration … pursuant to paragraph (c) … . Similarly, salary and wages paid but returned to the corporation by the shareholder/employee as a capital contribution or as an amount re-loaned to the corporation would not be considered eligible remuneration … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(2) | remuneration not paid by journal entry | 164 |
| Tax Topics - General Concepts - Payment & Receipt | remuneration not considered to be paid by journal entry | 80 |
3 November 2020 External T.I. 2020-0848881E5 F - SSUC/CEWS - rémunération admissible
Corporation A invoiced a non-arm’s length corporation (Corporation B) on a one-off basis for its payroll costs of employees who performed discrete work for Corporation B. Would such on-charges reduce the “eligible remuneration” of Corporation A for such employees under para. (c) of the definition? After repeating para. (c), CRA stated:
[T]he invoicing of an amount, whether or not marked up, reflecting the cost of salaries and benefits of employees of one entity who performed work for another entity, is not a returned amount falling within paragraph (c) ... .
Executive Compensation Repayment Amount
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.28-7 Example 28-7A] Example showing order rule for repayment of executive compensation repayment amount
- This example concerning a TSX-listed corporation whose executive compensation disclosed on Form 51-102F6 (pursuant to National Instrument 51-102) increased from $4,500,000 in 2019 to $8,000,000 in 2021 and which claimed wage subsidies totaling $4,000,000 in periods 17 to 20, which is required to repay the executive compensation repayment amount of $3,500,000 ($8,000,000 - $4,500,000) in accordance with an ordering rule, whereby later wage subsidy amounts are required to be repaid first, until the total of all excess refunds equal the eligible employer’s executive compensation repayment amount.
Public Health Restriction
Administrative Policy
7 June 2021 Internal T.I. 2020-0873601I7 - CERS – restricted activities of a travel agency
Would a travel agency that was required to close its office due to COVID lockdown measures, so that its employees started working from home, qualify for lockdown support under B of s. 125.7(2.1) and the definition of “rent top-up percentage”?
Regarding the test in para. (f) of the “public health restriction” definition, and the test of whether “restricted activities” at the office had ceased, CRA stated:
[I]n the case of a travel agency, if, prior to the closure, clients made in-person visits to the office to arrange travel bookings and in-person visits ceased upon closure of the office as a result of an order or decision, then those activities could be considered restricted activities and this condition could be satisfied. The fact that employees started working from home and started making travel bookings over-the-phone once the office closed would not preclude this condition from being met.
Regarding the 25% test in para. (g), CRA stated:
[T]here is not enough information to conclude that the requirement set out in paragraph (g) is satisfied. However, if, during the relevant prior reference period, all activities were performed in-person at the travel agency, then it may be reasonable to conclude that at least approximately 25% of its qualifying revenues in the prior reference period, that were earned from the qualifying property, were derived from the restricted activities.
Paragraph (f)
Administrative Policy
7 June 2021 Internal T.I. 2021-0880401I7 - CERS - Lockdown Support Restricted Activities
Regarding whether the “public health restriction” definition would apply where a retail store (“a Store”) in a shopping mall is required by a COVID lockdown to close in-person shopping but made sales online or by phone for curbside pickup or delivery, or where restaurants in the food court (“the Restaurants”) who continued to provide take-out service, the Directorate stated:
[W]here a particular order or decision prohibits customers from physically entering a Store to shop, then “in-person shopping” activities could be considered restricted activities. The fact that customers of a Store are permitted to collect their orders at a designated location within the shopping mall, via curbside pickup or delivery, would not preclude a Store from having restricted activities related to “in-person shopping”.
Similarly, where a particular order or decision requires public seating areas of a shopping mall available to customers of the Restaurants in the food court to close, such that customers of the Restaurants are no longer permitted access to the seating area of the food court, the Restaurants’ “sit-down dining” activities could be considered restricted activities. The fact that take out service may continue would not preclude the Restaurants from having restricted activities related to “sit-down dining”.
Public Institution
Paragraph (a)
Administrative Policy
1 May 2020 External T.I. 2020-0846931E5 - CEWS - public institution
In response to an enquiry as to the definition of “public institution” in the context of Crown corporations referred to in s. 149(1)(d), CRA first paraphrased the rules in ss. 149(1)(d) to (d.6) as well as referring to the deeming rule in s. 149(1.1), and stated:
In the context of a corporation without share capital, the determination of the ownership necessitates a review of all the relevant documents such as articles of incorporation, by-laws and agreements relating to the operation and control of the corporation and its assets. We consider that the following factors would be relevant in making such determination:
• the identity of members,
• the structure of the corporation,
• who exercises control over the financing, operation and direction of the corporation,
• who has the right to elect or change the board of directors or to reverse its decision,
• who can contribute capital and receive a distribution of capital,
• details regarding asset distribution on winding-up or dissolution and
• whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(d.3) | functional approach to determining the ownership of the “capital” of a non-share corporation | 163 |
Qualifying Entity
Paragraph (a)
Administrative Policy
8 November 2022 Internal T.I. 2022-0941391I7 - (Re)determination of section 125.7 applications
After noting that the instructions provided by CRA both on the application for the CEWS or CRHP benefit and the CRA website indicated that a separate application must be filed for each RP account, the Directorate indicated that such separate applications aggregating to an overall deemed overpayment for a qualifying period should be considered to constitute an application for the qualifying period in the prescribed form and manner as required by para. (a) of the “qualifying entity” definition. In this regard, it noted that the s. 248(1) definition of “prescribed” included “the manner of filing a form, authorized by the Minister.”
Furthermore, offsetting of upward or downward adjustments between various RP accounts through redeterminations might be permitted by CRA, provided that (as required by s. 125.7(5)(a)) the overall deemed overpayment did not exceed the amount claimed in the applications filed within the deadline for the qualifying period.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(3.4) | no time limit on making s. 152(3.4) determination/ applications can be made on RP account basis | 198 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Prescribed | filing of multiple applications on an RP account basis could be authorized by the Minister | 102 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(5) - Paragraph 125.7(5)(a) | movements of upward or downward adjustments between various RP accounts by redeterminations subject to s. 125.7(5)(a) limitation | 128 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1.2) | application mutatis mutandis of normal reassessment periods | 148 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(16) | s. 125.7(16) does not allow the extension of the time for amending an application, and does not accord the discretion to amend an election | 105 |
| Tax Topics - Income Tax Act - Section 160.1 - Subsection 160.1(1) | no time limitation on s. 160.1(1) assessment | 42 |
Paragraph (c)
Subparagraph (c)(ii)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
No required link of revenue decline to COVID/Example of application of alternative approach
5. How is the reduction in revenue determined for claim periods 1 to 4?
[T]he employer is under no obligation to prove that the decline in revenue is related to the COVID-19 crisis. …
Example 5D
An eligible employer is determining if it has experienced the required reduction in revenue to qualify in order to claim the wage subsidy for the first claim period, from March 15 to April 11, 2020. Since the eligible employer began operations only on January 14, 2020, it must use the alternative approach to determine its reduction in revenue. Its total qualifying revenues earned in January and February 2020 was $90,000. Its average qualifying revenue for the two months will be $57,447 [0.5x90,000x(60/47]. Its qualifying revenue for March 2020 is $39,600.
Because its qualifying revenue for March 2020 has declined by 31% when compared to the average of its qualifying revenues earned in both January and February 2020, the eligible employer has experienced the required reduction in revenue of at least 15% for the first claim period and will qualify to claim the wage subsidy for that period.
Because it has qualified for the first claim period, the eligible employer is automatically considered to have experienced the required reduction in revenue for the second claim period (April 12 to May 9, 2020).
Paragraph (d)
Subparagraph (d)(ii)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
Verification that payroll remittances were made through payroll service
3-8. Can an eligible employer that hires a third party to facilitate the administration of its payroll, qualify for the wage subsidy?
Eligible employers who … on March 15, 2020 employed one or more individuals and allowed a third party with a business number to make payroll remittances on their behalf, through the third party’s account, will need to register for their own payroll program account. Eligible employers may also need to register for their own business number if they did not previously have one.
Once the payroll program account (and business number if applicable) is opened, the CRA will require information from the third party to verify that remittances were previously made on behalf of the eligible employer. This would include a listing of each employer the third party made remittances on behalf of, and the remittances that can be attributed to each of those employers from January 1, 2020.
Qualifying Property
Administrative Policy
23 November 2021 External T.I. 2021-0881361E5 - CERS - Self-Contained Domestic Establishment
Is a residential property, occupied by a taxpayer unrelated to an eligible entity as a residence but used by an eligible entity in its business, excluded from the definition of qualifying property given that the definition precludes a self-contained domestic establishment (“SCDE”) from being a qualifying property under certain circumstances?
After noting the exclusion from the definition of a “qualifying property” for an SCDE, and in finding that the exclusion applied, CRA stated:
For any given qualifying period, the SCDE Exclusion applies whenever a SCDE was used by the relevant eligible entity or by a person not dealing at arm’s length with the eligible entity (“NAL person”) for any purpose, and is not limited to situations where the SCDE was used as a residence by the eligible entity or NAL person.
27 September 2021 Internal T.I. 2021-0877001I7 - CERS - Rent paid for unoccupied office space
An eligible entity signed a pre-construction lease for new office space several years ago and then moved into this location. It attempted to sublease its previous space but was unsuccessful due to the COVID-19 pandemic. Is such unoccupied office space a qualifying property for a qualifying period for purposes of the Canada Emergency Rent Subsidy (“CERS”)?
CRA first noted that
- the definition of a qualifying property generally required the real property to be used by the eligible entity in the course of its ordinary activities.
- Ensite found that property was used in a business if it was employed and risked in the business such that the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations.
- Glaxo Wellcome found that the word “use” connotes actual utilization for some purpose, not holding for future use.
CRA then stated:
[R]egard must be given to the actual use to which the property is put in the course of the eligible entity’s ordinary activities. Generally, property lying idle or not used for any purpose would not be property that is used in the course of the ordinary activities of an eligible entity. ...
[G]iven that the office space was unoccupied since the eligible entity moved to a new office … the old office space would likely not be considered to be used in the ordinary activities of the eligible entity. This is because it does not appear to be employed and risked in the ordinary activities of the eligible entity, and is merely waiting to be subleased.
17 May 2021 Internal T.I. 2020-0870041I7 - CERS - Meaning of Qualifying Property
Regarding queries as to whether the determination of a property as a qualifying property for Canada emergency rent subsidy (“CERS”) purposes depends on its legal title, and whether a property containing a self-contained domestic establishment (“SCDE”) can be a qualifying property, CRA indicated:
- Regarding the reference in the “qualifying property” definition to “real or immovable property, in the common-law provinces, the term “real property” is “generally considered to mean land and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land.”
- “[I]t is not necessarily the case that a qualifying property of an eligible entity will always conform to its legal title” – for example, the leasehold interest of a commercial tenant may represent only a portion of the legal title of the property.
- The fact of a particular property including a portion subject to the SCDE exclusion would not necessarily “preclude the remaining part of the property from being a qualifying property.”
- For example, if part of a building was used as a personal residence, the remainder of the building that was used as a store could potentially generate qualifying rent expense.
Qualifying Rent Expense
Administrative Policy
14 January 2022 Internal T.I. 2021-0913891I7 - CERS - Sublease
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 did not sign the document until October 9, 2020. Regarding whether this satisfied the “before October 9, 2020” requirement, CRA first noted (citing Sussex Square) that the sublease would instead would be an assignment if it were for all of the sublessor’s remaining term (in which case, such “before” condition would not have to be satisfied), and then stated:
[I]n 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).
... [A]ssuming 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.
…[T]here are other factors that may affect [this] determination … . 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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Effective Date | a sublease may in fact constitute a lease assignment | 196 |
20 January 2022 Internal T.I. 2021-0877511I7 - CERS- Written Agreement
On June 25, 2020, the taxpayer (“TP”) entered into a binding offer (the letter of understanding, or “LOU”) to lease real property from a person (the Landlord) with whom it dealt at arm’s length. The signed LOU was definitive on lease terms (i.e., length, costs, use, etc.) with no option for either party to terminate or opt out of the agreement prior to executing the formal lease and a non-refundable amount was paid on signing. TP occupied the space as of November 1, 2020, but the formal lease document was not fully executed until November 19, 2020 (the “Lease”).
CRA stated, regarding the requirement that there have been a written agreement entered into before October 9. 2020:
[W]hile there is no requirement that the documents be signed … 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.
…[B]ased on the facts as presented, it appears that the LOU has the requisite characteristics to be a written agreement.
Turning to whether the rents were paid “under” the June 25, 2020 written agreement, CRA stated:
In the absence of any explicit language in the LOU and the Lease to the contrary, it is possible for the Lease to be a continuation or extension of the LOU, assuming that the Lease includes the same enforceable and binding rights and obligations, and terms and conditions, as the LOU.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Effective Date | agreement to lease entered into before cut-off date complied if it contained the essential binding terms | 170 |
11 May 2021 Internal T.I. 2020-0869981I7 - CERS - Hairdressers and barbers - qualifying rent
Regarding a query as to whether an amount paid by a barber or hairdresser (“Stylist”) as “chair rent” to the owner of an establishment (“Salon”) may be claimed as a “qualifying rent expense” for Canada emergency rent subsidy (“CERS”), CRA first indicated that the term “chair rent” may “refer to an amount paid for the use of, or right to use, a portion of the Salon,” and then stated:
Where an amount paid by a Stylist (who is an eligible entity) as “chair rent” is rent for the use of, or right to use, an area within the Salon that is real or immovable property such that it is capable of being a qualifying property, it may be a qualifying rent expense for the Stylist, provided all of the conditions in the definition of qualifying rent expense are met. This is a question of fact … .
Similarly, in other situations where an eligible entity pays an amount that is rent for the use of, or the right to use, an area or space that is a portion of a larger area, the amount paid by the eligible entity as rent may be a qualifying rent expense … .
Variable A
Paragraph (a)
Subparagraph (a)(i)
Clause (a)(i)(C)
Subclause (a)(i)(C)(II)
Administrative Policy
23 March 2021 TEI Roundtable, 2021-0879631C6 - CERS - Net Leases, Qualifying Revenue & Deadlines
In responding to questions as to whether utilities paid by a tenant can qualify as qualifying rent expenses and be claimed under the Canada emergency rent subsidy (“CERS”), CRA indicated:
- If a tenant pays utilities in addition to rent under a lease that is not a net lease, those amounts do not qualify.
- However, amounts that are required to be paid under a net lease by the tenant may so qualify if they are for types of operating expenses that are customarily charged to the tenant under a net lease regarding the property’s operation, for example, where the tenants in a shopping centre pay monthly to the landlord the estimated pro rata portion of the natural gas, electricity and water expenses for the mall.
- Furthermore, “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.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(2.1) | table of filing deadlines | 66 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Rent Subsidy Percentage | CERS/CEWS similarity in computing revenue reduction | 170 |
23 February 2021 External T.I. 2020-0873491E5 - CERS - Energy Costs
If a gross lease does not contain a requirement for a tenant to pay for utilities, would any payments made by the tenant to an energy distributor be a qualifying rent expense under the s. 125.7(1) definition?
- CRA indicated that where the lease is “other than a net lease, only the gross rent paid by the tenant may be a qualifying rent expense,” so that “any payments made by the tenant for utilities will not be a qualifying rent expense,” even where the lease “contains a requirement for [the] tenant to pay for utilities.”
If a net lease requires a tenant to make payments for utilities directly to an energy distributor, are those payments qualifying rent expense?
- After noting that this definition can include an amount required to be paid under a net lease to a third party, such as an energy distributor, CRA indicated that “where a lease states only that a tenant is responsible for a certain cost … this would generally not constitute a qualifying rent expense.”
- For example, if the tenant under a net lease of premises in a shopping mall is required under the lease to pay its proportionate share of the HVAC, electricity, water, property taxes and insurance costs for the shopping centre initially borne by the landlord, such tenant payments would qualify. However, “if the net lease stated that the tenants were responsible for their own electricity, the amount paid by Tenant for electricity would not be a qualifying rent expense, whether it is paid to Landlord or to a third party, such as an energy distributor.”
Paragraph (b)
Administrative Policy
16 July 2021 Internal T.I. 2020-0872521I7 - CERS - Qualifying property for rental income
Would the owner of a qualifying property that operates a hotel, or other similar business such as a motel or a bed and breakfast, be considered to use its qualifying property primarily to earn rental income as described in para. (b) of the definition of “qualifying rent expense,” such that it would be prevented from claiming the Canada emergency rent subsidy (“CERS”)?
CRA stated:
Generally, any income earned from the use or occupation of a property or a right to use or occupy property is considered to be rental income. However, where, in addition to basic services that are customarily supplied with rental of real or immovable property, an entity also provides significant additional services that are integral to the success of its ordinary activities, it is the CRA’s longstanding position that the entity would be earning income from the services provided instead of earning rental income from the use or occupation of the property.
Although the term “primarily” is not defined in the Act, “primarily” generally means more than 50% for income tax purposes. … With respect to a building … the use of its square footage is generally an accepted factor that is given significant weight in determining the particular use to which a building is put.
CRA went on to indicate that the application of these tests was a question of fact.
Subparagraph (b)(i)
Administrative Policy
23 December 2022 Internal T.I. 2021-0880421I7 F - SUCL - Dépenses de loyer admissibles
CRA indicated that government assistance related to interest paid on a debt obligation secured by a mortgage on a qualifying property would not reduce the amount of interest paid on the debt obligation for purposes of s. 125.7(1)(b)(i) of the definition “qualifying rent expense” for purposes of the Canada emergency rent subsidy ("CERS") rules, and that the question of for what qualifying period an amount of interest is paid annually on a debt obligation secured by a mortgage or hypothec on a qualifying property is “qualifying rent expense” is a question of fact.
Clause (b)(i)(A)
Administrative Policy
19 April 2022 Internal T.I. 2020-0873571I7 - CERS Interest paid on a debt obligation as qualifying rent expense
Regarding the determination of the “lowest total principal amount” {“LPTA”) in s. (b)(i)(A) of A of “qualifying rent expense,” the Directorate stated:
[T]he entire time period that the particular qualifying property has been owned must be considered. The amount that represents the lowest cumulative principal amount of all debt obligations with an amortization period that are secured by a mortgage or hypothec on the qualifying property at any time after the qualifying property was acquired, is the LTPA Limit.
For example, although generally, given the amortization of mortgages, this aggregate would be the lowest in the qualifying period being tested, if in a prior period, there had been a refinancing that significantly increased the aggregate, the lowest aggregate likely would be in this prior period, with a likely resulting reduction in the eligible amount of interest paid in the qualifying period.
Regarding how the eligible amount of interest should be determined when one of the limitations in s. (b)(i)(A) and (B) of A applies, the Directorate stated:
There may be several methods that may be used to determine the portion of the total interest that is qualifying rent expense, however, the method used should be reasonable in the circumstances and supportable.
It also indicated:
Generally, a debt obligation is considered to arise whenever a binding liability is created and the principal amount of the liability can be quantified. …
Whether a particular debt obligation, such as a line of credit, a demand loan or a forgivable loan, is secured by a mortgage or hypothec on the qualifying property is a question of fact and law … .
[A]lthough interest paid on a debt obligation (such as a line of credit, a demand loan or a forgivable loan) secured by a mortgage or hypothec on a qualifying property may be considered qualifying rent expense, if it has no amortization period, the principal amount of the debt obligation would not be included in the LTPA Limit described in clause (b)(i)(A) … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense - Variable A - Paragraph (b) - Subparagraph (b)(i) - Clause (b)(i)(B) | “cost amount” is the s. 248(1) cost amount in the particular qualifying period | 136 |
Clause (b)(i)(B)
Administrative Policy
19 April 2022 Internal T.I. 2020-0873571I7 - CERS Interest paid on a debt obligation as qualifying rent expense
Is the s. 248(1) “cost amount” definition applicable to s. (b)(i)(B) of A of “qualifying rent expense,” and when should the cost amount be determined? After noting that this limitation (the “Cost Limit”) is determined in accordance with the s. 248(1) definition so that it generally would reference the ACB of non-depreciable property and the pro rata UCC of depreciable property, the Directorate went on to indicate:
As qualifying rent expense is determined in respect of a qualifying property for an eligible entity for a qualifying period, the cost amount of a qualifying property for purposes of the Cost Limit should also be determined in respect of a particular qualifying period. For example, the UCC of a depreciable property for a particular qualifying period would also be its Cost Limit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense - Variable A - Paragraph (b) - Subparagraph (b)(i) - Clause (b)(i)(A) | referenced aggregate amount is the lowest during ownership, and excludes non-amortizing debt | 357 |
Subparagraph (b)(ii)
Administrative Policy
10 January 2022 External T.I. 2020-0873921E5 F - SUCL- Assurance responsabilité civile
After noting that “qualifying property" in s. 125.7(1) generally refers to real or immovable property in Canada used by the eligible entity in the course of its ordinary activities, CRA indicated that the inclusion under s. (b)(ii) of “qualifying rent expense” of “amounts paid for insurance on the qualifying property” referred “only to amounts paid as insurance for real or immovable property” and did not include third-party liability insurance.
Qualifying Revenue
Administrative Policy
12 December 2022 External T.I. 2021-0878941E5 F - SSUC - Revenu admissible
Does the share of profits allocated to a member of a partnership constitute "qualifying revenue"? After noting that “qualifying revenue" generally referenced “the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity,” CRA stated:
[A] member's share of the profits of a partnership, as allocated to the member pursuant to subsection 96(1) and in accordance with the partnership agreement, is not "qualifying revenue" to the member … .
23 January 2022 TEI Roundtable, 2021-0913421C6 - CEWS - Foreign exchange as qualifying revenue
An eligible entity whose normal accounting practice is to convert the inflow of cash, receivables, and other consideration into Canadian currency from a foreign currency, also adjusts various FX-denominated balances on its balance sheet date to reflect their value in Canadian currency on that date. Should such adjustments be included in qualifying revenue? Or should only realized foreign exchange gain or loss 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—be so included?
In responding “no” to the first question, CRA stated:
[Q]ualifying revenue requires, among other things, an inflow of cash, receivables or other consideration. Where an entity re-evaluates or translates certain balance sheet accounts to reflect their value in Canadian currency at a certain time, no inflow of cash, receivables or other consideration has occurred.
Respecting the second question, it stated:
[D]epending on the facts of the situation, a realized foreign exchange gain or loss arising from an entity’s ordinary activities in Canada, that is determined in accordance with the entity’s normal accounting practice, may be considered qualifying revenue for the entity. For example, if an entity realizes a foreign exchange gain on the collection of an account receivable that arose on the sale of goods, the realized gain may be included in the entity’s qualifying revenue.
7 January 2022 External T.I. 2020-0866751E5 F - CEWS and government financial assistance
Eligible entities received annual governmental financial assistance based, in whole or in part, on their labour expenditures. Were these qualifying revenues for CEWS purposes?
After stating that this was a question of fact, CRA indicated (in light of the “normal accounting practices” rule in s. 125.7(4)) that if the normal accounting practice of the entities was to apply the amounts to reduce their payroll (or other) expenses, they would not be qualifying revenues.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(4) | government assistance based partly on payroll levels would not be qualifying revenue if normal accounting practice would be to contra payroll expense | 172 |
15 July 2020 External T.I. 2020-0847141E5 - CEWS - Payments to Contractors
The operator of a mine (the “Operator”) suspended operations at its mine for COVID-19 reasons, but made gratuitous payments (the “Payments”) to third-party contractors (the “Contractors”) to cover a portion of their payroll costs, in order that the Contractors could maintain their work force pending resumption of operations. Each Contractor has experienced the required decrease in its qualifying revenue for the applicable current reference period if the Payments are not taken into account. However, if a Contractor receives an amount under the CEWS in respect of its payroll costs (a “CEWS Amount”), the Operator will reduce future amounts that it pays to the Contractor by a corresponding amount (a “Payment Adjustment”).
Will the Contractors be required to include the Payments in computing their qualifying revenue? After repeating its position in Q.6-2 on its FAQ page as to the scope of the CRA policy for excluding “extraordinary items” from qualifying revenues, CRA stated:
Relevant considerations in the current situation could include whether the Contractor had received payments in the past upon the temporary suspension of operations at the mine, whether the Contractor was entitled to receive compensation upon a suspension of operations at the mine under its contract with the Operator and the degree of control the Contractor had with respect to the Payments and Payment Adjustments.
The determination of whether a Payment is included in qualifying revenue and/or excluded from qualifying revenue on the basis that it is an extraordinary item is a question of fact … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(6) | question of fact whether s. 125.7(6) could apply where gratuitous payroll reimbursements were made | 172 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration | payments from third-party to cover part of eligible entity’s payroll not within para. (c) | 181 |
21 September 2020 External T.I. 2020-0855831E5 - CEWS - qualifying revenue
S. 125.7(4) requires that qualifying revenue of an eligible entity generally “be determined in accordance with its normal accounting practices.” CRA considers that:
“[R]evenue” under normal accounting practices generally requires the satisfaction of certain performance obligations, such as the sale of goods or the performance of services that would typically result in a corresponding inflow of cash, accounts receivables or other consideration.
CRA applied this test to find that the “revenue reported by the entity under the percentage of completion method would generally be considered ‘qualifying revenue’,” whereas mark-to-market valuation adjustments made by to the carrying value of investments by investment and brokerage firms would not give rise to an “inflow of cash, receivables or other consideration” under the above test, so that such (unrealized) gains or /losses would not affect qualifying revenue.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(4) | the percentage of completion method can be used in computing qualifying revenue, but not marking securities to market | 282 |
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
6-1 Qualifying revenue includes interest and dividend income arising in course of ordinary activities
The qualifying revenue of an eligible employer is generally determined in accordance with its normal accounting practices. To the extent that investment revenue, such as interest or dividends from investments in securities, arises in the course of an eligible employer’s ordinary activities in Canada in the particular period, is not an extraordinary item or on account of capital, and is included in revenue under its normal accounting practices, it would generally be included in qualifying revenue.
6-2. Whether government assistance directly related to the COVID-19 is excluded as an extraordinary item
Qualifying revenue of an eligible employer is generally determined in accordance with its normal accounting practices. Qualifying revenue means the inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of the eligible employer in Canada in a particular period. For greater certainty, qualifying revenue does not include extraordinary items.
“Extraordinary items” is not a term defined in the Act. Generally, the CRA would expect extraordinary items to meet all three of the following characteristics:
(a) Not be expected to occur regularly or frequently within several years
- Grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.
(b) Not typical of the normal activities or risks inherent in the normal operations of the entity
- Consideration should be given to the nature of the services or products offered by an entity and the normal environment in which it operates.
(c) Primarily out of the control of owners or management
- Consideration should be given to the extent that inflows are influenced by the decision of owners or management.
... [D]ue to the highly unusual economic impact and response resulting from the COVID-19 crisis, the CRA would generally consider emergency government assistance, including assistance from provinces and municipalities, directly related to COVID-19 to be an extraordinary item. However, the CRA would not consider COVID-19 related government assistance to be extraordinary to the extent that it replaces or is meant to replace normal or recurring government assistance.
Change in revenue sources does not change the application of the qualifying revenue definition
6-2.1. If an eligible employer changes its operations to manufacture essential products during the pandemic, which generates revenues but no profit, is the revenue included in qualifying revenue?
Yes. The qualifying revenue of an eligible employer … would include the revenue arising from the sales of new products. …
[Q.6-2.3] Forgivable portion of a Canada Emergency Business Account (“CEBA”) loan not included in qualifying revenue
The forgivable portion of a CEBA loan meets all the characteristics of an extraordinary item … [and] is not included in qualifying revenue.
Bad debts generally not deducted
6-3. Can an eligible employer deduct its bad debts when determining its qualifying revenue under the accrual method?
When using the accrual method in accordance with its normal accounting practices, an eligible employer should usually not be able to deduct its bad debts (or an allowance for bad debts), when determining its qualifying revenue.
No adjustment to changes in the normalized level of operations
6-6. Can an eligible employer's qualifying revenue for a reference period be adjusted to account for changes in business operations of an eligible employer's business?
No. … For example, an eligible employer would not be able to make adjustments to its qualifying revenue calculations for a prior reference period with unusually low revenue caused by an interruption to its operations due to damage to equipment or premises, an employee lock-out or strike, or a supply chain disruption. Likewise, qualifying revenue calculations cannot be adjusted for a recent expansion of an eligible employer's normal operations … .
Qualifying revenue measured in Canadian dollars where accounting statements in Canadian dollars
6-7. How do foreign exchange rate fluctuations affect the computation of qualifying revenue?
… Where an eligible employer’s normal accounting practice is to convert the inflow of cash, receivables and other consideration to Canadian currency from a foreign currency, then the eligible employer would be expected to use the Canadian currency equivalent of the amounts in the computation of qualifying revenue.
Exception for functional currency reporter
6-8. How will an eligible employer that files its income tax returns using a functional currency compute its qualifying revenue?
.. Where an eligible employer that is a corporation files its income tax return using a functional currency, that currency is the primary currency in which the eligible employer maintains its books and records for financial reporting purposes, and using that currency would likely be part of its normal accounting practice. …Since the qualifying revenue of an eligible employer is determined in accordance with its normal accounting practices, and on that basis, it should be determined in such currency.
9-1. Consolidated revenue can arise in Canada even if ultimate sale does not occur in Canada
In accordance with accounting principles for consolidation, consolidated revenue excludes transactions between members of the group but includes global revenue of the group. The qualifying revenue of an eligible employer does not include the portion of consolidated revenue that does not arise in the course of ordinary activities in Canada. The eligible employer can however include the portion of the consolidated revenue that arises in the course of ordinary activities in Canada whether or not the ultimate sale to third parties occurs in Canada.
Canada Emergency Wage Subsidy (CEWS) Calculator under Who is an eligible employer, 21 April 2020 CRA Webpage
What is an eligible revenue reduction
… Use your normal accounting method when calculating revenue. You can use the cash method or the accrual method, but you must use the same approach throughout.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Entity | 88 |
Paragraph (a)
Subparagraph (a)(ii)
Administrative Policy
15 December 2020 External T.I. 2020-0855601E5 - CEWS - Extraordinary item - charitable campaign
Regarding whether funding received by a registered charity from a municipal government and its inclusion in “qualifying revenue” (absent an election under (a)(ii) of the definition), CRA stated:
“[F]unding received from government sources” includes amounts from federal, provincial/territorial and municipal governments.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue - Paragraph (c) | donations generated from a charity’s special campaign were not “extraordinary items” | 77 |
Paragraph (c)
Administrative Policy
7 July 2021 External T.I. 2020-0848251E5 F - Donation and CEWS qualifying revenue
In finding that unsolicited gifts received by a registered charity (RC) to carry on a new charitable activity were qualifying revenue, CRA stated:
[D]onations received by an RC do not constitute extraordinary items since, inter alia, the receipt of donations by an RC is typical of its usual activities. The fact that they are unsolicited or received to carry on a new charitable activity is not sufficient to conclude that they are extraordinary items.
3 May 2021 Internal T.I. 2020-0852571I7 - CEWS - Pandemic insurance proceeds
Should an eligible entity include business interruption insurance proceeds, received due to a halt in the entity’s operations and meant to replace lost revenue, in its qualifying revenue? Where the insurance proceeds are included in revenue in a prior period, and are based on a gross revenue benchmark less cost of sales, can the eligible entity determine its qualifying revenue for the particular prior reference period based on the insurance proceeds plus a notional amount to represent what its revenue would have been during that period had it been able to operate? The Directorate responded:
[A]n entity would typically acquire business interruption insurance to replace lost revenue when the entity is unable to carry on its ordinary activities. Accordingly … business interruption insurance proceeds would generally be included in qualifying revenue and would generally not be considered an extraordinary item.
Only amounts resulting in an inflow of cash, receivables or other consideration are included in qualifying revenue, therefore, an eligible entity would not be able to gross up their qualifying revenue by a notional amount.
15 December 2020 External T.I. 2020-0855601E5 - CEWS - Extraordinary item - charitable campaign
A registered charity undertook a special campaign in response to the COVID-19 pandemic that resulted in a large increase in its donation revenue. Should such donations be excluded from its “qualifying revenue” as “extraordinary items”? CRA stated:
[T]he solicitation and receipt of donations is part of the Charity’s normal activities in the ordinary course of its operations. Accordingly, we would not consider the Campaign donations to be extraordinary items.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue - Paragraph (a) - Subparagraph (a)(ii) | “funding received from government sources” includes from municipalities | 50 |
6 May 2020 Internal T.I. 2020-0846711I7 - CEWS - Meaning of extraordinary item
Would provincial support payments to childcare centres to assist them during the COVID-19 crisis be qualifying revenue” under s. 125.7(1)? Before concluding that it would “generally consider emergency government assistance, including assistance from provinces and municipalities, directly related to COVID-19 to be an extraordinary item,” but that this would include “COVID-19-related government assistance … to the extent that it replaces or is meant to replace normal or recurring government assistance,” the Directorate stated:
Generally, we would expect extraordinary items to meet all three of the following characteristics:
a) Not be expected to occur regularly or frequently within several years
Grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.
b) Not typical of the normal activities or risks inherent in the normal operations of the entity
Consideration should be given to the nature of the services or products offered by an entity and the normal environment in which it operates.
c) Primarily out of the control of owners or management
Consideration should be given to the extent that inflows are influenced by the decision of owners or management.
Paragraph (d)
Administrative Policy
28 September 2020 External T.I. 2020-0851731E5 - CEWS - 125.7(4)(d) election - NAL chain
CRA indicated that s. 125.7(4)(d) was not available in the situation where all of Canco’s revenues were derived from manufacturing and selling products to Forco A which, in turn, finished the products and sold them to Forco B (which, like Forco A, was a related foreign corporation), for sale to arm’s length customers. The reason is that Forco A was the only NAL entity from whom Canco directly earned qualifying revenues (and, thus, the only entity with which it could elect), and Forco A had no qualifying revenues (as per para. (d) of the “qualifying revenue” definition) because all of its revenues were earned from a NAL entity (Forco B).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(4) - Paragraph 125.7(4)(d) | s. 125.7(4)(d) election is not available for a multi-tiered chain of entities that are not dealing with each other at arm’s length | 329 |
Rent Subsidy Percentage
Administrative Policy
23 March 2021 TEI Roundtable, 2021-0879631C6 - CERS - Net Leases, Qualifying Revenue & Deadlines
Does an eligible entity compute its qualifying revenue using the same approaches and elections for both the CEWS and the CERS for a particular qualifying period? CRA indicated:
- “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, if Corporations A and B have jointly elected that the qualifying revenue of the affiliated group be determined on a consolidated basis under s. 125.7(4)(b) for qualifying period 9 for CEWS purposes (i.e., period 2 for CERS purposes) then, even if Corporation B did not apply for the CEWS for that period, it must determine qualifying revenue on a consolidated basis for that qualifying period in determining its revenue reduction for CERS purposes.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense - Variable A - Paragraph (a) - Subparagraph (a)(i) - Clause (a)(i)(C) - Subclause (a)(i)(C)(II) | requirement for utilities to be paid under the lease can permit payments to 3rd party | 186 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(2.1) | table of filing deadlines | 66 |
Top-Up Percentage
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.20-3] Table of top-up percentages
Top-up percentage examples for claim periods 5 to 9
Top-up revenue reduction percentage Top-up percentage Top-up percentage= 1.25 x (top-up revenue reduction percentage – 50%) 70% and over 25% 1.25 x (70% - 50%) = 25% 65% 18.75% 1.25 x (65% - 50%) = 18.75% 60% 12.5% 1.25 x (60% - 50%) = 12.5% 55% 6.25% 1.25 x (55% - 50%) = 6.25% 50% and under 0.0% 1.25 x (50% - 50%) = 0% The overall wage subsidy percentage would be equal to the top-up percentage plus the base percentage.
Example of application
Example 20-3A
For claim period 7 (August 30 to September 26, 2020), the last three calendar months that ended before the relevant reference period for the claim period (September) would be June, July and August. Assuming that the employer follows the year-over-year approach to determine its revenue reduction for the claim period, the eligible employer had $900,000 as its average monthly qualifying revenue between June 1 and August 31, 2019. The employer’s average monthly qualifying revenue between June 1 and August 31, 2020 was $180,000. Therefore, the employer has a drop in revenue of $720,000. Consequently its top-up revenue reduction percentage is 80% (1- $180,000/$900,000, expressed as a percentage).
The top-up percentage is 25%, being the lesser of 25% and 37.5% [1.25 x (80%-50%)].
In respect of a week in the claim period, the employer has paid eligible remuneration of $600 to its sole eligible employee. As its top-up revenue reduction percentage is over 50%, it would receive a top-up rate equal to 1.25 times the average monthly revenue drop that exceeds 50%, up to a maximum top-up rate of 25%. It would be eligible for a maximum top-up wage subsidy of $150 ($600 x 25%) in respect of that employee. This amount will be included in the calculation of the wage subsidy (see Q20-02).
Subsection 125.7(2)
Administrative Policy
3 May 2021 External T.I. 2020-0850231E5 - CEWS - Amount of Wage Subsidy to be Claimed
Can a qualifying entity apply for a lesser amount than the amount for which it is eligible under s. 125.7(2)? CRA responded:
Variable A of the formula [in s. 125.7(2)] calculates the total of all amounts, each of which is for an eligible employee in respect of a week in a qualifying period. It essentially provides a calculation for any eligible employee, in respect of a week in a qualifying period, subject to the application of a specific paragraph which depends on the qualifying period in question.
Therefore, as the amount is calculated for an eligible employee in respect of a week in the qualifying period, it is our view that the qualifying entity has discretion to claim a lesser amount in its application by excluding any employees from the wage subsidy calculation under subsection 125.7(2) … .
29 March 2021 Internal T.I. 2020-0865791I7 - CEWS - eligible remuneration
The controlling shareholder and an employee of an eligible entity suspended receiving salary, for the performance of the employee’s duties, in April, May or June, 2020 for the performance of his duties because of COVID-related financial hardship. Can the corporation pay the individual’s salary retroactively for periods 1 through 4 and claim the CEWS therefor?
CRA responded:
[S]alary and wages paid to an employee retroactively in respect of a week in qualifying periods 1 to 4 can generally be considered eligible remuneration paid in respect of those weeks for purposes of the CEWS to the extent that the eligible remuneration reflects the actual amount paid in respect of the particular claim period. … However … where salary and wages are only reflected by journal entry as an expense by the employer with a corresponding credit to a due to shareholder loan account, such salary and wages are not considered eligible remuneration paid to an eligible employee for purposes of subsection 125.7(2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration - Paragraph (c) | eligible remuneration that is returned to the eligible employer as a capital contribution or shareholder loan adjustment is excluded for CEWS purposes | 187 |
| Tax Topics - General Concepts - Payment & Receipt | remuneration not considered to be paid by journal entry | 80 |
Element A
Paragraph (b)
Element B
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q. 21] Wage subsidy reduced by 10% temporary wage subsidy as calculated, even where the latter has not yet been fully claimed through available reductions in source deduction remittances
Example 21A
Assume an eligible employer is eligible for both the subsidies. It calculates its 10% temporary wage subsidy as $2,050 on remuneration paid from April 12 to May 9, 2020 (which coincides with the second claim period), using the 10% rate. However, it only deducted $1,050 of federal, provincial, or territorial income tax from its employees for that period.
While the eligible employer can still reduce a future payroll remittance by $1,000 in respect of the balance (even if that remittance is in respect of remuneration paid after May 9, 2020), its CEWS claim for the same period (April 12 to May 9, 2020), is reduced by the entire amount of $2,050.
Reduction to wage subsidy can be avoided by electing to claim temporary wage subsidy at less than 10%
Example 21B
In Example 21A assume the eligible employer elects to apply a percentage less than 10% to determine the 10% temporary wage subsidy such that the subsidy is now only $1,050. It is now able to offset the entire $1,050 of the subsidy against the $1,050 from the federal, provincial, or territorial income tax withheld from its employees for that period. In this situation, its CEWS claim for the same period (April 12, to May 9, 2020), is reduced by only $1,050.
Subsection 125.7(2.01)
Administrative Policy
7 October 2022 APFF Roundtable Q. 3, 2022-0942121C6 F - THRP- PRTA – Versement de dividendes imposables
Reference was made to the impact on the Tourism and Hospitality Recovery Program ("THRP") of the introduction of ss. 125.7(2.01) and 125.7(14.1) with effect for Periods 23 and beyond. Regarding the presented proposition that publicly traded companies or their subsidiaries are not entitled to any grants for the claim period in which dividends were paid to individuals who are holders of common shares, and the presented example of a parent company listed on the Paris stock exchange, with a Canadian subsidiary in Canada and an individual shareholder, which declares a dividend to be paid on March 31, 2022.
After referring to s. 125.7(2.01), CRA stated:
[I]n this example, the Canadian subsidiary will not be entitled to any THRP amount for the 27th qualifying period if it has paid taxable dividends during that qualifying period to individuals who are holders of common shares of its capital stock.
After referring to s. 125.7(14.1), CRA stated:
[T]he payment of taxable dividends by the Canadian subsidiary in the 24th and any subsequent qualifying periods to individuals who are holders of common shares of its capital stock will come within paragraph (b) of the description of A in subsection 125.7(14.1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(14.1) | there is no adverse CEWS impact of a non-resident parent paying dividends to individuals | 111 |
25 July 2022 External T.I. 2021-0922321E5 - Wage Subsidy-Application of 125.7(2.01) and (14.1)
Q.10 Does the wage subsidy denial under s. 125.7(2.01) equal 100% of its amount for a qualifying period even if the dividend amount is less? CRA responded:
Subsection 125.7(2.01) of the Act contains no requirement for the payment of a certain amount of taxable dividends in order for it to apply. Accordingly, for the twenty-third qualifying period and subsequent qualifying periods, a publicly traded company or a subsidiary of such a company will not be entitled to the Wage Subsidy in respect of a qualifying period if any taxable dividend is paid in that qualifying period to an individual who is a holder of common shares of the company.
Q.11 Do public companies have to determine what proportion of dividends are paid to an individual? CRA indicated that para. (b) of A in the s. 125.7(14.1) formula represents the amount of those common share dividends paid by the eligible entity to “holders” who are individuals, so that the eligible entity must determine the amount of dividends paid (in the 24th and subsequent qualifying periods) on its common shares to holders who are individuals.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(14.1) | potential double application of ss. 125.7(2.01) and (14.1) | 286 |
3 August 2022 External T.I. 2021-0922231E5 - 125.7(2.01) - Wage Subsidy - Dividend Payer
Does the payment of a dividend only affect the dividend payer under s. 125.7(2.01), or can, for example, the payment of a dividend by a publicly traded company affect all of its subsidiaries? CRA stated:
[I]t is our view that the word “it” used in subsection 125.7(2.01) of the Act refers solely to the particular eligible entity that is the subject of the provision. … [T]he payment of a dividend by a particular payer can only affect that payer’s entitlement to a subsidy under subsection 125.7(2) of the Act as a result of the application of subsection 125.7(2.01) … .
22 February 2022 External T.I. 2022-0922921E5 - CEWS, THRP, & HHBRP
CRA indicating regarding the interpretation of s. 125.7(2.01):
- “Taxable dividends” include taxable dividends that are deemed dividends.
- “Common share” has its defined meaning in s. 248(1) of “a share the holder of which is not precluded on the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid up on that share plus a fixed premium and a defined rate of dividend.”
- A “publicly traded company” is “a company the shares … of which are listed or traded on a stock exchange or other public market” and “would include [such] a non-resident company.”
- Although the term “company” is “potentially more inclusive than the term corporation” it is considered to refer to a corporation (and would not include a partnership or trust) in the context inter alia of the references in s. 125.7(2.01) to “taxable dividends” and “common shares.”
- A “subsidiary” is “generally understood to be a corporation that is controlled by another corporation either directly or indirectly through one or more intermediary corporations [referencing s. 2(5) of the CBCA]” … and CRA “would consider a subsidiary of a publicly traded company to be a corporation over which the publicly traded corporation exercises de jure control either directly or indirectly.”
Subsection 125.7(2.1)
Administrative Policy
23 March 2021 TEI Roundtable, 2021-0879631C6 - CERS - Net Leases, Qualifying Revenue & Deadlines
What are the deadlines to file an application for the CEWS and the CERS? CRA responded:
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).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense - Variable A - Paragraph (a) - Subparagraph (a)(i) - Clause (a)(i)(C) - Subclause (a)(i)(C)(II) | requirement for utilities to be paid under the lease can permit payments to 3rd party | 186 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Rent Subsidy Percentage | CERS/CEWS similarity in computing revenue reduction | 170 |
Subsection 125.7(3)
Administrative Policy
6 November 2020 Internal T.I. 2020-0865661I7 F - SSUC-moment de l'inclusion au revenu/CEWS-inclusion in income
a) A qualifying entity filed a CEWS application at its May 31, 2020 taxation year end for period 1 (ending April 11, 2020) for $100,000, which was received in June 2020. When was that amount to be included in computing its income?
b) A qualifying entity filed all its applications for periods 1 to 4 on December 15, 2020, which was subsequent to its filing its return on October 31, 2020 for its taxation year ending on June 30, 2020. Is it required to amend that return to include the claim amounts in its June 30, 2020 taxation year – or would CRA permit those amounts to instead be included in the subsequent year?
a) CRA indicated that, under Candarel, “in ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with the provisions of the ITA, established case law principles or ‘rules of law’ and well-accepted business principles,” and then stated that inclusion of those amounts under s. 9 “would be … a method which would yield an accurate picture of the taxpayer’s profit for the taxation year ending on May 31, 2020.” On the other hand, where based on Candarel it was determined that there should be no such s. 9 inclusion, then there would be an inclusion for the same taxation year under s. 12(1)(x) as a result of the application of s. 125.7(3) (deeming the amounts to be government assistance).
b) CRA indicated that similar principles applied in this scenario, so that under s. 9, or under ss. 125.7(3) and 12(1)(x), the CEWS claims amounts would be required to be included in income for the June 30, 2020 taxation year, except that if s. 9 did not apply, s. 125.7(3) would deem assistance for period 4 to fall on July 4, 2020, which would ultimately result in an inclusion under s. 12(1)(x) in the June 30, 2021 taxation year. CRA then stated:
[S]ince the taxpayer has not included the amounts of the CEWS in the calculation of its income at the time its tax return was filed (in October 2020) for its taxation year ending on June 30, 2020, it would be necessary to subsequently file an amended tax return to include the amounts of the CEWS, for periods 1 to 3, in the taxpayer’s income for its taxation year ending on June 30, 2020. CRA will not grant any administrative relief to allow the taxpayer to include the amount of the CEWS in its income for a taxation year other than the one that ends on June 30, 2020.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) | s. 9 rather than 12(1)(x) could apply to CEWS, which would be included for the related period even if not applied for until much later | 192 |
Subsection 125.7(4)
Administrative Policy
7 January 2022 External T.I. 2020-0866751E5 F - CEWS and government financial assistance
Eligible entities received annual governmental financial assistance by virtue of the Industrial Research Assistance Program, and the Tax Credit for the Development of E-Business based, in whole or in part, on their labour expenditures. For accounting purposes, some of the eligible entities add the estimated total financial assistance they expect to receive directly to their revenue, although this estimate may differ from the financial assistance ultimately received. Regarding whether the assistance was "qualifying revenue," CRA stated:
Consequently, to the extent that Financial Assistance of an eligible entity qualifies as qualifying revenue within the meaning of subsection 125.7(1) for a particular period and that qualifying revenue is determined in accordance with the eligible entity's normal accounting practices, Financial Assistance will generally be included in its qualifying revenue for that particular period. However, Financial Assistance is not included in the qualifying revenue (as defined in subsection 125.7(1)) of an eligible entity if the normal accounting practice of the eligible entity is to record Financial Assistance as a reduction in expenses.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | government assistance that under normal accounting practice was applied to reduce recorded expenses would not be qualifying revenue | 76 |
26 October 2020 External T.I. 2020-0856791E5 - CEWS - meaning of inflow
Regarding a question as to the timing of recognition of qualifying revenue, whose definition in s. 125.7)1) referred to the “inflow” of cash, receivables or other consideration arising in the course of the eligible entity’s ordinary activities in Canada, CRA stated:
Subsection 125.7(4) enacts that the qualifying revenue of an eligible entity is generally determined in accordance with its normal accounting practices. Normal accounting practices may vary from taxpayer to taxpayer. … [T]here are situations in respect of which our Directorate will not or cannot issue an advance income tax ruling (“ruling”). In situations involving an opinion on accounting or commercial principles, practices, or guidelines, we will not issue a ruling or a technical interpretation.
21 September 2020 External T.I. 2020-0855831E5 - CEWS - qualifying revenue
(a) When is “qualifying revenue” recognized where the eligible entity recognizes revenue under the “percentage of completion” method, i.e., based on costs incurred with respect to a particular project during the particular period (i.e. calendar month) and adding to that the anticipated profit margin on the particular contract? CRA responded:
“[R]evenue” under normal accounting practices generally requires the satisfaction of certain performance obligations, such as the sale of goods or the performance of services that would typically result in a corresponding inflow of cash, accounts receivables or other consideration.
… [U]nder normal accounting practices, “percentage of completion” is a method that reports revenue of a service contract over a period of time (i.e., performance obligations under the contract have been satisfied on an ongoing basis by the entity). Moreover, the services performed under the contract by an entity typically give rise to an inflow of cash, receivables or other consideration over the term of the service contract. Accordingly … the revenue reported by the entity under the percentage of completion method would generally be considered “qualifying revenue” … .
(b) Can whether investment and brokerage firms who use mark-to-market accounting qualify for CEWS on the basis that the value of their portfolio of investments dropped by more than 30% into March and April, 2020? CRA responded:
[T]he mark-to-market valuation adjustment to the carrying value of the investment does not give rise to an “inflow of cash, receivables or other consideration”. Accordingly … the unrealized gains/losses reflected in an entity’s financial statements arising from mark-to-market adjustments to the carrying value of an investment … are not considered qualifying revenue … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | recognition of qualifying revenue based on an inflow requirement | 141 |
Paragraph 125.7(4)(a)
Administrative Policy
14 February 2022 External T.I. 2020-0851361E5 - CEWS - Consolidated qualifying revenue
Can a group of eligible entities who prepare consolidated financial statements in accordance with their normal accounting practices choose to use the consolidated revenue from those statements to determine their qualifying revenue, even if there is a higher level consolidation? CRA responded:
[W]hen there are multiple levels of consolidated financial statements prepared in accordance with the normal accounting practices of the group, it is our view that when determining qualifying revenue, the broadest level of consolidated financial statements (i.e., the broadest group of eligible entities that normally prepares consolidated financial statements) should be used for determining the qualifying revenue for each member of the group of eligible entities.
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q. 9] Normally, qualifying revenues of each eligible employer determined by the consolidated statements
The qualifying revenue of an eligible employer is generally determined in accordance with its normal accounting practices. Consequently, when a group of eligible employers generally prepares consolidated financial statements, each member of the group will determine its qualifying revenue in accordance with those statements.
Example of election to determine revenues on an unconsolidated basis
However, each member of such a group may determine its qualifying revenue separately and not based on the consolidated statements, so long as every member of the group determines its qualifying revenue on that separate basis.
Example 9A
Corporation A owns all the shares of Corporation B. Both corporations are eligible employers. Corporation A prepares consolidated financial statement for accounting purposes. Assume that that there is no intercompany revenue. [There is a consolidated reduction in qualifying revenue of 10% for the first period, but an unconsolidated reduction of 20% for Corporation B.] In accordance with normal accounting practice Corporations A and B will not be eligible for the wage subsidy as their qualifying revenue, determined on a consolidated basis, has not experienced the required reduction in revenue of at least 15%.
Therefore, Corporation A and Corporation B have decided to determine their qualifying revenue separately. In that case, while Corporation A will not qualify for the wage subsidy, as it has not experienced the required reduction in revenue of at least 15%, Corporation B will qualify for the wage subsidy because its qualifying revenue has dropped by more than 15%.
Non-consolidation election under s. 127.5(4)(a) is not binding on subsequent periods
12-1. Can an eligible employer change their approach used for calculating the qualifying revenue from claim period to claim period?
[F]or the special rules described in Q8-Q11 [e.g., respecting Q.9 where “each member of … a group may determine its qualifying revenue separately and not based on the consolidated statements, so long as every member of the group determines its qualifying revenue on that separate basis”] an eligible employer may choose to apply a different approach in a subsequent claim period, provided that all the requirements for the application of that different rule are met for that subsequent claim period.
Paragraph 125.7(4)(b)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q.10] Example 10A of two affiliated but not commonly controlled corporations making the election
- CRA provides Example 10A of two silos making the s. 127.5(4)(b) election, e.g., two corporations each owned 100% by a spouse, with one having no percentage reduction in qualifying revenue in its first period, and the other experiencing a 50% reduction.
- Accordingly, on a consolidated basis there is a 25% drop in qualifying revenue.
Consolidation election must be made by the broadest affiliated group of eligible entities possible and not a subset
10-2. Can affiliated corporations that are not in the same ownership chain, determine their qualifying revenue on a consolidated basis, even if they cannot prepare consolidated financial statements?
On the assumption that affiliated corporations that are not in the same ownership chain, are otherwise eligible employers, they can jointly elect to determine their revenue on a consolidated basis, as though the relevant accounting principles for consolidation applied to them. This means, for example, that intercompany transactions should be eliminated.
Where there are multiple entities in an affiliated group, if an election is going to be made, all eligible employers in the affiliated group must consolidate for the purpose of calculating qualifying revenue. It is not possible to have only some of those eligible employers in the affiliated group elect to consolidate.
[Q.10-3.] One signed election of the parent will be accepted on behalf of all group members not making the claim
[The] joint election must be signed by each eligible employer in the affiliated group that is applying for the wage subsidy (see note below). On an administrative basis, the CRA will accept a signature by the authorized representative of the overall parent entity of the affiliated group, on behalf of all eligible employers in the affiliated group that are not making a wage subsidy claim. … [A] complete list of these group members must be attached to the joint election. …
… This election … and the list, must be made and retained with the eligible employer's other books and records … .
Articles
Martin Lee, Thanusan Raveendran, "Affiliation Election for CEWS: Private Corporation Applications", COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 3
Example of using interest income decline of controlling individual shareholder to meet revenue test (p. 3)
Opco [wholly-owned by Mr. X] currently has employees, but the revenue of Opco as of May 2020 is identical to May 2019 .. . However, Mr. X has his own separate self-employed business whose revenue has declined from May 2019 to May 2020. Note that even if Mr. X earned only passive income, such income should count as revenue, since the definition of qualifying revenue includes cash and receivables derived from "the use by others of resources of the eligible entity" (that is, interest as payment for the use of capital). …
… Mr. X and Opco are an affiliated group of eligible entities and they can jointly elect under paragraph 125.7(4)(b) to permit Opco to use the consolidated revenues of the group to determine its own revenue decline test. …
Mr. X does not need a payroll number since an election is permitted among affiliated eligible entities rather than affiliated qualifying entities.
Must consider qualifying revenue of all affiliated eligible entities (p. 4)
[T]he affiliation election must take into consideration all affiliated eligible entities; an applicant cannot pick and choose which affiliated parties to consolidate with. … . [For example] Mr. X fails to identify that Mrs. X, his spouse, is also an affiliated eligible entity.
David Carolin, Manu Kakkar, "The Canada Emergency Wage Subsidy: Affiliated Group Issues", COVID-19 and Canadian Tax for the Owner-Manager/Canadian Tax Focus (Canadian Tax Foundation), July 2020, p. 1
Example of application of s. 125.7(4)(b) election to an affiliated multinational group (p. 2)
Example: Affiliated Group with International Structure
The Canadian entity has sister companies in multiple international jurisdictions. All of the corporations in this structure would meet the definition of an affiliated group of persons. Does this mean that each company in the entire international structure is part of the affiliated group for the purposes of this rule, even if some of them have no connection with the Canadian entities, and the Canadian entity is insignificant compared with the entire international structure?
…[O]n the basis of a literal interpretation of the affiliated entity rule … all companies everywhere in the world would have to participate in the joint election. The CEWS claimant would need to take account of the qualifying revenue of all of the corporations worldwide in order to determine whether the decrease-in-revenue threshold is met. As well, it would need signatures on the joint election from authorized representatives of all of the corporations. …
Example of application of s. 125.7(4)(b) election to an affiliated group with a recent addition (p. 2)
Example: Affiliated Group That Is Different from Prior Year
[F]our entities meet the definition of an affiliated group in March 2020, but one of the entities was newly incorporated in 2020 … .[W]ould the affiliated group be composed of the four entities, which would then calculate revenue on a consolidated basis and compare it to the consolidated revenue of the three entities that existed during the comparative period? Or would the newly incorporated entity be excluded from this calculation?
Paragraph 125.7(4)(c)
Administrative Policy
15 February 2022 Internal T.I. 2020-0870731I7 - CEWS-qualifying rev in respect of a joint venture
Two brothers each wholly-own a corporation (Holdco 1 and Holdco 2) which, in turn, own equally all of the shares of Opco. Holdco 1 and Holdco 2 are equal participants (as to both revenues and expenses) in a joint venture. Opco earns all its revenues from providing services to the joint venture. Holdco 1, Holdco 2 and Opco each have their own payroll accounts used to pay their respective employees. Holdco 1 and Holdco 2 have both experienced a revenue decline, but neither has applied for the CEWS.
In finding that Opco could not use the rule in s. 125.7(4)(c), but generally could use that in s. 125.7(4) (d), in determining its qualifying revenue for a particular qualifying period, CRA stated:
[S]ince Opco does not deal at arm’s length with Holdco 1 and Holdco 2 (the participants of the joint venture), Opco would exclude from its qualifying revenue all amounts derived from the joint venture, pursuant to paragraph (d) of the definition of “qualifying revenue” … . As a result, Opco would not have any qualifying revenue and the [all or substantially all] test in paragraph 125.7(4)(c) … would not be met. Therefore, Opco would not be able to use paragraph 125.7(4)(c) to determine its qualifying revenue. If however, Opco were dealing at arm’s length with Holdco 1 and Holdco 2 (the participants of the joint venture), and all or substantially all of its qualifying revenue for a qualifying period is in respect of the joint venture, Opco would be able to use paragraph 125.7(4)(c) to determine its qualifying revenue.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(4) - Paragraph 125.7(4)(d) | election available to servicesco that derived all its revenues from two JV participants who were related to it | 170 |
Paragraph 125.7(4)(d)
Administrative Policy
15 February 2022 Internal T.I. 2020-0870731I7 - CEWS-qualifying rev in respect of a joint venture
Two related corporations (Holdco 1 and Holdco 2) were equal participants in a joint venture and Opco (owned by them on a 50/50 basis) earned all its revenues from providing services to the joint venture. Holdco 1 and Holdco 2 had both experienced a revenue decline, but neither had applied for the CEWS.
CRA indicated that, based on para. (d) of the qualifying revenue, Opco did not derive any qualifying revenue from the joint venture (i.e., from Holdco 1 and Holdco 2), so that s. 125.7(4)(c) was not available. However, its non-arm’s length relationship with Holdco 1 and Holdco 2 would not preclude it from effectively accessing their qualifying revenue declines through a joint election under s. 125.7(4)(d). CRA stated:
… [I]t appears that the requirements to use the rule in paragraph 125.7(4)(d) could be met since all of Opco’s revenue would be considered to be derived from persons with which Opco does not deal at arm’s length (the participants of the joint venture, Holdco 1 and Holdco 2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(4) - Paragraph 125.7(4)(c) | para. (d) of qualifying revenue definition effectively indicates that s. 125.7(4)(c) is not available for revenue derived from JV participants who are NAL | 255 |
28 September 2020 External T.I. 2020-0851731E5 - CEWS - 125.7(4)(d) election - NAL chain
Canco, an “eligible entity,” manufactures and sells all the Product to Forco A, which uses the Product in its manufacturing process to make the “Finished Goods” for sale to Forco B (a related foreign corporation, like Forco A) which, in turn, sells all of the Finished Goods to arm’s length customers.
Can the s. 125.7(4)(d) election be made in this situation of a multi-tiered structure or chain of entities not dealing with each other at arm’s length? After adverting to the general rule in para. (d) of the related definition that “qualifying revenue excludes amounts derived from persons or partnerships not dealing at arm’s length with the eligible entity,” CRA went on to discuss the exception to this exclusion in s. 125.7(4)(d) for where all or substantially all of an eligible entity’s qualifying revenue is from one or more particular persons or partnerships with which it does not deal at arm’s length (“NAL entity”), and a joint election is made:
Th[is] election … may be made only by an eligible entity and those NAL entities with whom it directly earns qualifying revenues. Accordingly … were Canco and Forco A to make the election … in determining Canco’s decline in qualifying revenue based on Forco A’s decline in qualifying revenue, Forco A would not have any qualifying revenue because it earns all of its revenue from persons or partnerships not dealing at arm’s length with it (Forco B). [Thus] … the election in paragraph 125.7(4)(d) would not work. In our view, the election in paragraph 125.7(4)(d) may not be made by a multi-tiered structure or chain of entities that are not dealing with each other at arm’s length.
An election under another special rule under subsection 125.7(4) … may, however, be available … to allow an alternate method of calculating qualifying revenue for an eligible entity, such as the election for affiliated eligible entities in paragraph 125.7(4)(b).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue - Paragraph (d) | FA1 earning qualifying revenue from arm's length customers through FA2 had no qualifying revenue | 114 |
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
Examples of application of the special elective rule to use the qualifying revenues of NAL persons to determine reduction in qualifying revenues
8. Are there special rules for calculating the qualifying revenue of an eligible employer that derives its revenue from one or more non-arm's length persons or partnerships?
Example re provision to non-arm's length domestic corporation
Example 8A
Corporation A, an eligible employer, provides management services, including payroll services, to Corporation B. All of Corporation A's revenues are from Corporation B with which it does not deal at arm's length. Corporation B's revenues are from arm's-length customers.
Under the special rule, in order to determine whether Corporation A can qualify for the wage subsidy, Corporation A's qualifying revenue for the current reference period is determined by reference to the required reduction in qualifying revenue for Corporation B for that reference period.
Example re provision to 2 non-arm's length domestic corporations
Example 8B
All or substantially all of the revenues of Corporation X, (an eligible employer), are from two corporations (Corporation Y and Corporation Z) with which it does not deal at arm's length.
Corporation X's total revenue for March 2020 was $1,450 of which $400 was attributable to Corporation Y and $1,000 was attributable to Corporation Z. $50 was from an arm's-length taxpayer.
Corporation Y's qualifying revenue for March 2020 was $1,000 and for March 2019 was $1,500.
Corporation Z's qualifying revenue for March 2020 was $1,300 and for March 2019 was $2,000.
Calculation of Corporation X's qualifying revenue for the current reference period:
Qualifying revenue (QR) calculation in relation to Corporation Y:
$100 x $400 (QR attributable to Corporation Y)/$1,400 (Corporation X's total QR from non-arm's-length persons or partnerships) x $1,000(Corporation Y QR for current reference period)/$1,500 (Corporation Y QR for prior reference period) = 19
QR calculation in relation to Corporation Z:
$100 x $1,000 (QR attributable to Corporation Z)/$1,400 (Corporation X's total QR from non-arm's-length persons or partnerships) x $1,300(Corporation Z's QR for current reference period)/$2,000 (Corporation Z's QR for prior reference period) = 46
The weighted average qualifying revenue for Corporation X for the current reference period is $65 ($19+$46). Since the prior reference period's qualifying revenue is deemed to be $100, Corporation X has experienced the required reduction in revenue of at least 15% for the claim period. Corporation Y and Corporation Z must jointly elect with Corporation X in order to use this special rule.
Example of s. 125.7(4)(d) election with non-resident corporation
Example 8C
All or substantially all of the revenues of Canco, (an eligible employer), are from sales to a non-resident corporation (Forco), who then sells to arm’s length customers. Canco and Forco do not deal at arm’s length. All of Canco’s ordinary activities take place in Canada. All of Forco’s sales and other activities take place outside of Canada.
Canco’s total revenue for March 2020 was $900. All of this revenue was attributable to Forco.
Forco’s total revenue for March 2020 was $1,500 and for March 2019 was $2,000.
Calculation of Canco’s qualifying revenue for the current reference period:
Qualifying revenue (QR) calculation in relation to Forco:
$100 x $900 (QR attributable to Forco)/$900 (Canco total QR from non-arm’s-length persons or partnerships) x $1,500 (Forco QR for current reference period)/$2,000 (Forco QR for prior reference period) = 75
Since the prior reference period’s qualifying revenue is deemed to be $100, Canco has experienced the required reduction in revenue of at least 15% for the claim period. Forco must jointly elect with Canco in order to use this special rule
[Q.8-01] ...
- Non-resident's qualifying revenue could be measured in the applicable foreign currency consistent with the non-resident’s normal accounting practice
[Q.8-1]. Meaning of “substantially all”
Generally, the phrase “all or substantially all” means at least 90%. … However, the “all or substantially all” test could, depending on the circumstances and context, be satisfied even if the 90% level is not strictly achieved.
Paragraph 125.7(4)(e)
Administrative Policy
23 January 2023 External T.I. 2020-0865161E5 F - SSUC/CEWS – Sous-alinéa 125.7(4)e)(i) et personne
Regarding the time at which an amount is regarded as received by an eligible entity which has made an election under s. 125.7(4)(e)(i) to use the cash method in determining its qualifying revenues for CEWS purposes, where the amount is received by a third party before being paid to the eligible entity, CRA stated:
IT-433R … states [in subpara. 3(a)] that the meaning of the term "received" is broad enough to consider a taxpayer to have received an amount at the time that inter alia it was received by a person authorized to receive it on behalf of the taxpayer. …
[A] person entitled to receive an amount on behalf of a taxpayer for CEWS purposes may include a person who is entitled to receive the amount for a taxpayer by inter alia an agreement or by statute.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | a cash-basis taxpayer can receive an amount when it is received through a third party | 147 |
Subparagraph 125.7(4)(e)(ii)
Administrative Policy
2020 IFA-YIN Seminar on COVID-19 Guidelines, Q.15
S. 125.7(4)(e)(ii) allows an eligible entity to elect to use accrual accounting “in accordance with generally accepted accounting principles”. The ancillary documents indicate this targets a cash-basis taxpayer; what about one who uses accrual accounting, but deviates from GAAP in some other respect – for example, a taxpayer which does not net discounts against revenues, instead reporting them as an expense, or nets bad debts against revenues.
CRA indicated that when using the accrual method in accordance with its normal accounting practices, an eligible employer should usually not be able to deduct its bad debts (or an allowance for bad debts), when determining its qualifying revenue.
It is CRA’s understanding that discounts are generally netted against revenue under common accounting practices in Canada. However, whether a particular eligible entity deducts discounts when determining its qualifying revenue will depend on the normal accounting practices of the entity.
The election to use the accrual method is not intended to allow an eligible entity to change how it records its discounts under its normal accounting practices.
Subsection 125.7(4.1)
Administrative Policy
12 April 2021 External T.I. 2020-0863701E5 - CEWS - Asset Sale Followed by Amalgamation
In January 2018, ParentCo acquired all the shares of TargetCo, which also was a taxable Canadian corporation and which, until the spin-off described below, carried on a single business (the “TargetCo Business”) in Canada. On December 31, 2019, the TargetCo Business was spun-off to a “Newco” subsidiary of ParentCo using conventional mechanics for a s. 55(3)(a) spin-off, and on January 1, 2020, ParentCo and Newco amalgamated as described in s. 87(1) to form Amalco.
CRA confirmed that the continuity rules in ss. 125.7(4.1) and (4.2) can be applied in conjunction with the continuity rule in s. 87(2)(g.6) so that, in respect of a particular qualifying period of Amalco, "pursuant to subsection 125.7(4.2) Amalco would be able to include in calculating its qualifying revenue for its prior reference period, the amount of the qualifying revenue of TargetCo for the prior reference period that is reasonably attributable to the TargetCo Business Assets,” given that, by assumption, the main purpose test in s. 87(2)(g.6) and the requirements of s. 125.7(4.1) in respect of a particular qualifying period were satisfied, namely:
1. Amalco (as a continuation of Newco) acquired assets of TargetCo before the qualifying period;
2. immediately prior to the acquisition of assets, the FMV of the acquired assets constituted all or substantially all of the FMV of the property of TargetCo used in the course of carrying on the TargetCo Business
3. the acquired assets were used by TargetCo in the course of a business carried on by TargetCo in Canada;
4. it is reasonable to conclude that none of the main purposes of the acquisition was to increase the amount of the deemed overpayment under subsection 125.7(2); and
5. Amalco (as a continuation of Newco) and TargetCo will jointly elect in respect of the qualifying period and file such election with the Minister.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(g.6) | application of ss. 87(2)(g.6) and s. 125.7(4.1) continuity rules where target business is spun off to Newco subsidiary of purchaser followed by their amalgamation | 198 |
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
[Q. 8-3] Example of s. 125.7(4.2) not being available where only a business division is acquired
Example 8-3B
A corporation, Toys Inc., operates its business through two divisions. The first division manufactures and sells toys (Toy division) and the second division manufactures and sells office furniture (Furniture division). On May 1, 2020, ABC Inc. acquired all of the assets of the Toy division from Toys Inc. ABC Inc. saw a major decrease in revenue since May 2020.
For claim period 3 (the period that begins on May 10, 2020 and ends on June 6, 2020), ABC Inc. would like to elect to include the assigned revenue of the Toy division in respect of the month of May 2019 in calculating its qualifying revenue for the prior reference period (May 2019).
However, if the fair market value (FMV) of the assets of the Toy division do not constitute all or substantially all of the FMV of the property of Toys Inc. used in the course of carrying on its business, ABC Inc. cannot elect to include the assigned revenue in calculating its qualifying revenue for its prior reference period.
Paragraph 125.7(4.1)(b)
Subparagraph 125.7(4.1)(b)(i)
Administrative Policy
8 June 2021 External T.I. 2020-0864051E5 - CEWS - Asset transfer rules
An eligible entity (ACo) acquired from a non-arm’s length corporation (BCo) all machinery, infrastructure, contracts, goodwill, real property, and inventory relating to a division operated by Bco (the Division Assets). Property retained by BCo included life insurance policies, a building, intercompany loans and investments in related parties (the “Other Assets”) that were not used to operate the Division. Would the Other Assets be considered in ascertaining whether the Division Assets met the all or substantially all test in s. 125.7(4.1)(b)(i)?
After noting that, under Ensite, “[i]f the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business,” CRA stated:
[W]here the Other Assets were employed and risked in BCo’s business such that their withdrawal would have a decidedly destabilizing effect on BCo’s operations, such assets must be considered when ascertaining whether, immediately prior to the acquisition by ACo, the fair market value of the Division Assets constituted all or substantially all of the fair market value of the property of BCo used in the course of carrying on business under subparagraph 125.7(4.1)(b)(i).
Subsection 125.7(4.2)
Administrative Policy
28 January 2021 External T.I. 2020-0870981E5 - CEWS - Asset sales rules 125.7(4.1)
On October 11, 2020, (recently-incorporated) NewCo purchased all the assets of a third party (OldCo), with the result that it became the employer of OldCo’s employees. OldCo and NewCo jointly elected under s. 125.7(4.1)(e) respecting the assets, and met all other conditions to qualify for the CEWS.
In determining NewCo’s qualifying revenue for October 2019, is the qualifying revenue attributable to the assets for that prior reference period pro-rated, based on the number of days in the current reference period that NewCo (21 days) and OldCo (10 days) used the acquired assets in carrying on business, for purposes of computing the revenue reduction percentage? In responding negatively, CRA stated:
Where these [s. 125.7(4.1)] conditions are met, the acquirer will include in calculating its qualifying revenue for its prior reference period or current reference period, as the case may be, the amount of the qualifying revenue of the seller for that period that is reasonably attributable to the acquired assets (the assigned revenue). In addition, the assigned revenue is to be subtracted from the qualifying revenue of the seller for its prior reference period or current reference period ... .
In our view, the assigned revenue described in paragraph 125.7(4.2)(a) of the Act refers to the qualifying revenue of the seller for the entire prior reference period that is reasonably attributable to the acquired assets. Furthermore, neither subsections 125.7(4.1) nor 125.7(4.2) of the Act provide for the proration of, or otherwise adjust, the qualifying revenue for a prior reference period as you suggest. However, we note that paragraph 125.7(4.2)(a) of the Act also refers to the qualifying revenue of the seller that is reasonably attributable to the acquired assets for the current reference period. In our view, in determining qualifying revenue for the current reference period under this provision, the acquirer would include the assigned revenue of the seller. Moreover, pursuant to paragraph 125.7(4.2)(b) of the Act, this assigned revenue would be subtracted from the seller’s qualifying revenue for the current reference period.
As to whether the two companies could claim the CEWS for the wages paid for the qualifying period 8 (September 27 to October 24), CRA stated:
[T]he CEWS is calculated for a qualifying period pursuant to subsection 125.7(2) of the Act by reference to the eligible remuneration paid to eligible employees by an eligible employer in respect of a week in the qualifying period. In our view, both the seller and acquirer in your given scenario can consider their respective eligibility for the CEWS for the qualifying period.
Subsection 125.7(5)
Paragraph 125.7(5)(a)
Cases
Lemay Co Inc. v. Attorney General of Canada, 2024 CF 995
On audit, CRA determined that the taxpayer (Lemay) had made Canada Emergency Wage Subsidy (CEWS) claims for periods 6, 7 and 13 to 15 that were excessive to the extent of $311,204 but had underclaimed for periods 8 to 12. After CRA proposed to assess only the underclaim periods, Lemay made a request that CRA exercise its discretion pursuant to s. 125.7(16) to allow increased CEWS claims for periods 8 to 12 of $1,715,341. CRA refused that request and confirmed its intention to assess the other periods. Lemay then made a further submission that CRA could accept its additional refund claims by virtue of ss. 164(1)(b) and 152(3.4). CRA responded on September 11, 2023 that it lacked such authority and that, in particular, s. 125.7(5)(a) limited the amount of the CEWS subsidy to the amount initially claimed by the taxpayer (but indicated that it wanted to consider further whether s. 125.7(16) was available). Lemay brought an application for judicial review of the September 11, 2023 decision, and the Attorney General brought this motion to strike the application on the basis that the interpretation advanced had no chance of success and was premature (as relief was available under s. 125.7(16).) In rejecting such claim that there was no chance of success, Régimbald J stated (at paras. 28, 30, TaxInterpretations translation):
[I]t is not clear, in light of sections 125.7(5), 152(3.4) and 164(1)(b), considered together and which are the subject of the application for judicial review, that the ITA does not allow the Minister to accept an amended prescribed form as requested by the plaintiff. …
In the absence of a complete and convincing argument demonstrating that sections 152(3.4), 164(1)(b) and 125.7(5) of the ITA, considered together, defeat the interpretation proposed by Lemay based on the Minister having the discretion to accept the filing of an amended prescribed form, the defendant has therefore not discharged its burden of demonstrating that it is clear and obvious that the interpretation proposed by Lemay has no reasonable chance of acceptance ….
Before dismissing the defendant’s motion to strike, Régimbald J also rejected the defendant’s argument of prematureness, noting that CRA had rejected Lemay’s request for relief under s. 125.7(16).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(16) | argued potential relief under s. 125.7(16) respecting potential relief for underclaimed CEWS did not preclude a motion to argue that such relief was available under ss. 164(1)(b) and 152(3.4) | 276 |
Administrative Policy
8 November 2022 Internal T.I. 2022-0941391I7 - (Re)determination of section 125.7 applications
After noting that the instructions provided by CRA both on the application for the CEWS or CRHP benefit and the CRA website indicated that a separate application must be filed for each RP account, the Directorate indicated that such separate applications aggregating to an overall deemed overpayment for a qualifying period should be considered to constitute an application for the qualifying period in the prescribed form and manner as required by para. (a) of the “qualifying entity” definition.
Furthermore, offsetting of upward or downward adjustments between various RP accounts through redeterminations might be permitted by CRA, provided that (as required by s. 125.7(5)(a)) the overall deemed overpayment did not exceed the amount claimed in the applications filed within the deadline for the qualifying period.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(3.4) | no time limit on making s. 152(3.4) determination/ applications can be made on RP account basis | 198 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Entity - Paragraph (a) | application for the benefit could be made on an RP by RP account basis | 150 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Prescribed | filing of multiple applications on an RP account basis could be authorized by the Minister | 102 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1.2) | application mutatis mutandis of normal reassessment periods | 148 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(16) | s. 125.7(16) does not allow the extension of the time for amending an application, and does not accord the discretion to amend an election | 105 |
| Tax Topics - Income Tax Act - Section 160.1 - Subsection 160.1(1) | no time limitation on s. 160.1(1) assessment | 42 |
Subsection 125.7(6)
Administrative Policy
15 July 2020 External T.I. 2020-0847141E5 - CEWS - Payments to Contractors
The operator of a mine (the “Operator”) suspended operations at its mine for COVID-19 reasons, but made gratuitous payments (the “Payments”) to third-party contractors (the “Contractors”) to cover a portion of their payroll costs, in order that the Contractors could maintain their work force pending resumption of operations. Unless the Payments were considered qualifying revenue, the Contractors would qualify for the CEWS – but if they receive it, the Operator will reduce future amounts paid by a corresponding amount. Will the anti-avoidance rule in s. 125.7(6) apply if a Payment Adjustment is made? CRA responded:
One of the requirements for the application of the Anti-Avoidance Rule in respect of an eligible entity is that the applicable transaction, event, series or action listed in paragraph 125.7(6)(a) must have the effect of reducing the qualifying revenue of the eligible entity.
Further details would be needed with respect to the Payment Adjustment in order to determine whether it would have an impact on the qualifying revenue of a Contractor.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | gratuitous COVID-alleviation payments to a contractual counterparty are excluded from the latter’s qualifying revenues | 262 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration | payments from third-party to cover part of eligible entity’s payroll not within para. (c) | 181 |
Canada Emergency Wage Subsidy (CEWS) Calculator under How to apply, 21 April 2020 CRA Webpage
Incorrect or fraudulent claims
… If you artificially reduce your revenue for the purpose of claiming the wage subsidy you will be required to repay any subsidy amounts you received plus a penalty equal to 25% of the total value.
Subsection 125.7(7)
Administrative Policy
7 December 2022 External T.I. 2020-0846891E5 F - SSUC - Revenu admissible
After quoting from the definition of “qualifying revenue,” CRA stated:
[A] limited partner's share of the profits of a limited partnership, as allocated to the limited partner pursuant to subsection 96(1) and in accordance with the limited partnership agreement, is not "qualifying revenue" to the limited partner … .
Subsection 125.7(9)
Paragraph 125.7(9)(a)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
s. 125.7(9) rule can be applied successively
5. How is the reduction in revenue determined?
… Once an eligible employer has determined that it has experienced the required reduction in revenue for a particular claim period, it is automatically considered to have experienced the required reduction in revenue for the immediately following claim period (deeming rule). As a result, the employer does not have to make this determination again for that next claim period … .
… In a situation where the eligible employer, subsequently determines that it actually experienced the required reduction in revenue, without applying the deeming rule, for the second claim period - April 12 to May 9, 2020, the eligible employer will be considered to have experienced the required reduction in revenue for that third claim period because of the deeming rule that can now be applied to the third period … .
Paragraph 125.7(9)(b)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
Example of application of “greater of rule” for claim periods 5 to 9
5-02. Can an eligible employer qualify for the wage subsidy if it does not have a revenue reduction in a claim period?
For claim periods 5 to 9, if an eligible employer has not experienced a reduction in revenue for a particular claim period, it may still qualify to claim the wage subsidy in the particular claim period if the deeming rule (see Q5-03) applies, or if it is eligible for top-up portion of subsidy (see Q20-03).
Example 5-02A
An eligible employer follows the general year-over-year approach and has a reduction of qualifying revenue of 25% for claim period 4. The changes in qualifying revenue that the employer has seen in subsequent claim periods, when comparing the qualifying revenue in the current reference period with that in the prior reference period, are as follows:
Claim period 5: a reduction in qualifying revenue of 15% (July 2020 over July 2019). Since the prior claim period actual reduction (25%) is greater than the current claim period reduction (15%), the deeming rule applies and the reduction in revenue is considered to be 25% for claim period 5.
Claim period 6: an increase in qualifying revenue of 10% (August 2020 over August 2019). Since the prior claim period actual reduction (15%) is greater than the current claim period reduction (0%), the deeming rule applies and the reduction in revenue is considered to be 15% for the claim period 6.
Claim period 7: an increase in qualifying revenue of 5% (September 2020 over September 2019). Regular rule applies and the employer is not eligible for the wage subsidy for claim period 7 (since the prior claim period and the current claim period have seen an increase of revenue, the deeming rule does not apply).
Claim period 8: a reduction in qualifying revenue of 12% (October 2020 over October 2019). Regular rules applies and since the employer has a reduction in revenue for claim period 8, it will qualify for the wage subsidy for this period (since the prior claim period had an increase in qualifying revenue, the deeming rule does not apply)
Subsection 125.7(14.1)
Administrative Policy
7 October 2022 APFF Roundtable Q. 3, 2022-0942121C6 F - THRP- PRTA – Versement de dividendes imposables
Regarding the presented proposition that publicly traded companies or their subsidiaries are not entitled to any CEWS grants for the claim period in which dividends were paid to individuals who are holders of common shares, and the presented example of a parent company listed on the Paris stock exchange, with a Canadian subsidiary in Canada and an individual shareholder, which declares a dividend to be paid on March 31, 2022, CRA effectively indicated that the payment of a dividend at the parent level was irrelevant, and there would only be an adverse CEWS impact under the rules in ss. 125.7(2.01) and (14.1) if the Canadian subsidiary itself paid a dividend to an individual.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(2.01) | parent could pay a dividend in, say, Period 27, without adverse CEWS impact on Canadian sub | 205 |
25 July 2022 External T.I. 2021-0922321E5 - Wage Subsidy-Application of 125.7(2.01) and (14.1)
Q.12 In what situations does s. 125.7(14.1) apply, given that s. 125.7(2.01) seems to apply in the same circumstances?
CRA responded:
Taxable dividends paid in certain qualifying periods by a certain type of eligible entity on its common shares held by individuals are relevant for each of subsection 125.7(2.01) of the Act and subsection 125.7(14.1) of the Act.
If subsection 125.7(2.01) of the Act applies in a particular qualifying period, the eligible entity is not eligible for a Wage Subsidy in respect of that qualifying period. On the other hand, subsection 125.7(14.1) of the Act imposes a requirement on a certain type of eligible entity to repay all or a portion of the Wage Subsidy received for the twenty-fourth qualifying period and any subsequent qualifying period. In such a case, taxable dividends paid in the twenty-fourth qualifying period and any subsequent qualifying period by a particular eligible entity that is a publicly traded company or a subsidiary of such a company to individuals who hold its common shares will affect the amount of the Wage Subsidy that must be repaid if the amount of such taxable dividends is greater than the eligible entity’s ECRA. The same taxable dividends may be relevant for the purposes of both subsection 125.7(2.01) of the Act and subsection 125.7(14.1) of the Act.
For example, consider an eligible entity that was not entitled to a Wage Subsidy because of the application of subsection 125.7(2.01) of the Act in the twenty-fourth qualifying period because it paid $100,000 of taxable dividends on its common shares held by individuals. These same dividends will also be included in the calculation of the total amount of taxable dividends paid for purposes of Paragraph B.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(2.01) | need to track common dividend payments to “holders” who are individuals | 189 |
Subsection 125.7(16)
Cases
Lemay Co Inc. v. Attorney General of Canada, 2024 CF 995
On audit, CRA determined that Lemay had made Canada Emergency Wage Subsidy (CEWS) claims for periods 6, 7 and 13 to 15 that were excessive to the extent of $311,204 but had underclaimed for periods 8 to 12. CRA proposed to assess the $311,204 but refused Lemay’s request that it exercise its discretion pursuant to s. 125.7(16) to allow increased CEWS claims for periods 8 to 12 of $1,715,341. Later, CRA rejected a further Lemay submission that CRA could accept its additional refund claims by virtue of ss. 164(1)(b) and 152(3.4) – on the basis inter alia that s. 125.7(5)(a) limited the amount of the CEWS subsidy to the amount initially claimed by the taxpayer. Lemay brought an application for judicial review of this decision, and the A.G. brought this motion to strike the application on the basis that the interpretation advanced had no chance of success and was premature (as relief was available under s. 125.7(16).) In rejecting the claim that there was no chance of success, Régimbald J stated (at paras. 28, 30, TaxInterpretations translation):
[I]t is not clear, in light of sections 125.7(5), 152(3.4) and 164(1)(b), considered together and which are the subject of the application for judicial review, that the ITA does not allow the Minister to accept an amended prescribed form as requested by the plaintiff. …
[T]he defendant has therefore not discharged its burden of demonstrating that it is clear and obvious that the interpretation proposed by Lemay has no reasonable chance of acceptance ….
Before dismissing the defendant’s motion to strike, Régimbald J also rejected the defendant’s argument of prematureness, noting that CRA had rejected Lemay’s request for relief under s. 125.7(16).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(5) - Paragraph 125.7(5)(a) | taxpayer had a reasonable argument that s. 125.7(5)(a) did not preclude it from making an amended increased CEWS claim | 353 |
Administrative Policy
8 November 2022 Internal T.I. 2022-0941391I7 - (Re)determination of section 125.7 applications
The Directorate noted that pursuant to s. 152(1.2), the normal reassessment period rules in s. 152(4) also essentially were applicable to redeterminations made to s. 152(3.4). Furthermore, s. 125.7(16) did not allow the Minister to extend those periods for making such a redetermination in relation to a taxpayer’s request to amend an s. 125.7 application for a qualifying period.
The Directorate also indicated that s. 125.7(16) applies to initially filed applications and does not apply to requests to amend applications, so that it does not accord the Minister with the discretion to allow an eligible entity to amend or revoke a previously made election under s. 125.7.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(3.4) | no time limit on making s. 152(3.4) determination/ applications can be made on RP account basis | 198 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Entity - Paragraph (a) | application for the benefit could be made on an RP by RP account basis | 150 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Prescribed | filing of multiple applications on an RP account basis could be authorized by the Minister | 102 |
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(5) - Paragraph 125.7(5)(a) | movements of upward or downward adjustments between various RP accounts by redeterminations subject to s. 125.7(5)(a) limitation | 128 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1.2) | application mutatis mutandis of normal reassessment periods | 148 |
| Tax Topics - Income Tax Act - Section 160.1 - Subsection 160.1(1) | no time limitation on s. 160.1(1) assessment | 42 |