Tax Insights: New Canada Emergency Rent Subsidy and revised Canada Emergency Wage Subsidy provide more relief to businesses and other organizations

Issue 2020-37

In brief

On November 19, 2020, the federal government enacted legislation¹ to implement the Canada Emergency Rent Subsidy (CERS) and Lockdown Support programs; the legislation also modifies the Canada Emergency Wage Subsidy (CEWS) program and extends the CEWS to June 30, 2021.

The CERS will subsidize eligible rent and mortgage interest expenses of businesses, charities and not-for-profit organizations that have experienced a reduction in revenue during the COVID-19 pandemic, and will be available from September 27, 2020 to June 30, 2021. The maximum subsidy rate available under the CERS for September 27, 2020 to December 19, 2020 is 65%, plus an additional 25% (the lockdown support) for businesses or organizations forced to temporarily shut down due to public health orders. Many of the criteria used to determine eligibility and calculate the CERS mirror those used for the CEWS program. The CERS will also use the same 4-week claim periods as the CEWS.

The legislation contains details of the CERS and Lockdown Support programs, as well as the revised CEWS program that will apply from September 27, 2020 to December 19, 2020 (i.e. claim periods 8 to 10 for the CEWS). Details that will apply after December 19, 2020 for both programs will be released later and are expected to be set by regulation and/or additional legislation.

In detail

Canada Emergency Rent Subsidy (CERS) program

Overview

The CERS program provides direct support to eligible entities that have experienced a decline in revenue during the COVID-19 pandemic, by subsidizing rent, interest on mortgages and other eligible property expenses. The program replaces the Canada Emergency Commercial Rent Assistance (CECRA) program, which ended on September 30, 2020.

Similar to the CEWS, the amount available under the CERS depends on the revenue drop percentage experienced by the entity and uses the same reference periods for the “drop-in-revenues” test (see Table 2 in the Appendix). Details have been provided for:

• period 8 – September 27 to October 24, 2020
• period 9 – October 25 to November 21, 2020
• period 10 – November 22 to December 19, 2020

Eligibility for the CERS

The CERS is generally available to any entity that rents its premises, or owns the premises but has debt secured by a mortgage or mortgages on the property. The CERS may be claimed by a “qualifying renter” for a “qualifying property” when the qualifying renter has experienced a reduction in “qualifying revenue.”

A “qualifying renter” must:

• be an “eligible entity” (i.e. a corporation, trust, individual, registered charity, non-profit, or a partnership where each member is an eligible entity); the definition of “eligible entity” is shared by both the CEWS and the CERS
• file an application within 180 days of the end of each claim period, and
• have had a business number as of September 27, 2020² or a payroll account as of March 15, 2020

Similar to the CEWS, the individual with “principal responsibility for the financial activities” of the entity must attest to the completeness and accuracy of each application.

A “qualifying property” is a real or immovable property (excluding any property or portion thereof used for residential purposes) that is used by the entity in the course of its ordinary activities.

The definition of “qualifying revenue” is also shared by both the CERS and the CEWS. Accordingly, any elections which an entity makes with respect to its qualifying revenue calculation (i.e. to compute revenue on a consolidated basis) must be used for both the CERS and the CEWS.

The revenue drop percentage is calculated as the decline in qualifying revenue, either year-over-year (general approach) or compared to January and February 2020 (alternative approach) (see Table 2 in the Appendix); once the entity chooses its approach, it must use the same approach for periods 8 to 10, and the same approach must be used for both the base CEWS and the CERS. An entity with a non-zero revenue decline is eligible for the CERS, but the subsidy rate for a given claim period depends on the revenue drop percentage, as discussed below. As with the CEWS, there is no legislative requirement to show that the revenue decline is caused by the COVID-19 pandemic.

Calculating the base CERS and lockdown support amounts

A qualifying renter’s rent subsidy for a qualifying period consists of:

• base CERS amount 一 an eligible entity’s “qualifying rent expense” (capped at $75,000 per location with an overall cap of $300,000³ that must be shared among affiliated entities) multiplied by its “rent subsidy percentage,” and
• lockdown support amount 一 the sum of the amounts, calculated for each location, of an eligible entity’s “qualifying rent expense” (capped at $75,000 per location, but with no overall cap) multiplied by its “rent top-up percentage” (between 0% and 25%)

An eligible entity’s “qualifying rent expense” for:

• a rented property generally includes rent paid and any expenses required to be paid by the tenant under a net lease, but excludes sales taxes and penalties and interest on overdue payments and other defaults; the lease agreement (or renewal) must have been entered into before October 9, 2020
• an owned property generally includes:
  • interest payments on debt secured by a mortgage on the property (with a principal amount not exceeding the cost amount of the property)
  • amounts paid for insurance on the property, and
  • property, school, municipal and other similar taxes on the property

(However, no qualifying rent expense can be claimed in respect of an owned property that is used primarily to earn rental income.⁴)

Shortly after the CERS legislation was enacted on November 19, the Department of Finance proposed an amendment⁵ that, if enacted, would allow an eligible entity to claim amounts payable as qualifying rent expense, provided that:

• the amount is due under the terms of the relevant agreement
• the individual with “principal responsibility for the financial activities” of the entity attests that the amount will be paid within 60 days of receiving the CERS payment for that period, and
• the amount is actually paid within the 60-day time limit

For both rented and owned properties, qualifying rent expense is reduced by any rental income received from arm’s length third parties (i.e. sublease income).

Calculating the “rent subsidy percentage” for the base CERS amount

For claim periods 8 to 10, a qualifying renter’s “rent subsidy percentage” for a qualifying period is, if the revenue drop percentage is:

• ≥ 70%, 65%
• ≥ 50% but < 70%, the sum of (i) 40%, and (ii) 1.25 multiplied by the amount that the revenue drop percentage exceeds 50%
• < 50%, 0.8 multiplied by the revenue drop percentage

Locations that qualify for the lockdown support amount

An eligible entity is entitled to a rent top-up percentage of up to 25% (for periods 8 to 10), in respect of a location that has been subject to a “public health restriction” at any time during a qualifying period. The rent top-up percentage is prorated based on the number of days in the period during which the location was subject to the public health restriction.

A public health restriction is generally a mandatory order made under the laws of Canada, a province or territory that:

• is enforceable by administrative monetary penalties or criminal penalties
• is made in response to the COVID-19 pandemic
• has limits on its scope based on factors such as defined geographical boundaries, type of business or other activity, or risks associated with a particular location, and
• causes some or all of the activities of the eligible entity at, or in connection with, the qualifying property to completely cease for at least one week

To qualify for the lockdown support, the eligible entity must qualify for the base CERS and, because of a public health restriction, have been forced to:

• completely shut down its location, or
• cease some or all of the activities at its location and it is reasonable to conclude that the ceased activities, in the appropriate pre-pandemic prior reference period, were responsible for at least approximately 25% of the revenues of the entity at that location

Accordingly, the total maximum rent subsidy percentage is 90% for periods 8 to 10, when an entity has suffered a revenue drop of 70% or more and has been subject to a public health restriction for the entire period.

See Table 1 in the Appendix for a summary of the maximum CERS and lockdown support subsidy rates for periods 8 to 10.

Canada Emergency Wage Subsidy (CEWS) changes for periods 8 to 10

The new legislation extends the end of the CEWS program from December 19, 2020 to June 30, 2021, and modifies the program as follows:

• Maximum base CEWS rate for active employees 一 the 40% rate for period 8 will be maintained for periods 9 and 10 (the rate for period 9 was originally 20%); as a result, the maximum CEWS rate for periods 8 to 10 for active employees will be 65% (40% base CEWS rate, plus 25% top-up CEWS rate).
• Calculation of the top-up CEWS rate for active employees 一 the calculation for periods 8 to 10 will no longer be based on the average revenue drop for the preceding three months (which had applied for periods 5 to 7); instead, the top-up CEWS rate will be calculated based on the greater of the current or previous month’s revenue drop (which is how the base CEWS rate is calculated). A safe harbour rule will apply, so that an employer will be entitled to the top-up CEWS rate that they would have received under the previous three-month revenue drop calculation, if that rate is higher than the rate calculated under the new method.
• Benefits for furloughed employees 一 the maximum CEWS amount for a furloughed employee for periods 9 and 10 will be $500 in most cases, or $573 when the employee has baseline remuneration that exceeds $1,042 per week; this maximum is intended to align the CEWS benefit with comparable Employment Insurance benefits.
• Special baseline remuneration period for employees returning from leave 一 an employer may elect, for an employee that was on a continuous maternity, parental, caregiver or long-term sick leave that began before July 1, 2019 and ended after March 15, 2020, to use the 90-day period ending immediately before the beginning of the employee’s leave as the baseline remuneration period for that employee. This is intended to alleviate the situation when an employee on long-term leave might have zero remuneration during the existing alternative baseline periods of (i) January 1, 2020 to March 15, 2020 and (ii) July 1, 2019 to December 31, 2019.

See the Appendix for a summary of the maximum CEWS rates for active employees (Table 1) and the reference periods for the drop-in-revenues test (Table 2) for periods 8 to 10.

The takeaway

The CERS and Lockdown Support programs will benefit many businesses and organizations that have been negatively impacted by the COVID-19 pandemic and are having difficulty paying their rent or making their mortgage payments. The CERS program is a major improvement over the CECRA program, which was difficult to access because the landlord and tenant were required to agree on the rent deferral and the tenant was required to meet a 70% revenue reduction threshold. The general harmonization of the CERS with the CEWS will make compliance easier for retailers and other businesses claiming both subsidies.

The changes to the CEWS program generally benefit businesses by maintaining the total maximum CEWS rate at 65% for periods 9 and 10, and making the top-up CEWS more responsive to sudden changes in revenue, which also effectively reduces the complexity of the revenue drop percentage calculation. However, for periods 9 and 10, the maximum CEWS subsidy available for a furloughed employee has been effectively reduced, in most cases, from $847 to $500 per week.

<sup>1. Bill C-9, An Act to amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy)
2. When an entity relies on this criterion, the Minister may demand records and other information to support the application. The Department of Finance has commented that the entity must satisfy the Canada Revenue Agency that it is making a “bona fide rent subsidy claim.”
3. An affiliated group of eligible entities must file an agreement to allocate the $300,000 limit amongst the group, otherwise the limit is nil for each member of the affiliated group.
4. An exception exists for properties rented to non-arm’s length parties that do not use the property primarily to earn rental income. 
5. The Minister of Finance indicated that she expects the Canada Revenue Agency to apply this treatment administratively until the amendment is enacted.</sup>

Appendix