Bill C-9 Enacted – New Rent Subsidy and Amended Wage Subsidy

| 21 minutes

On November 5, 2020, the government of Canada (the “Government”) tabled Bill C-9, An Act to Amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy), in the House of Commons. Bill C-9 received Royal Assent on November 19, 2020 and is now law. Bill C-9 amends the Income Tax Act (Canada) (the “ITA”) to (i) implement previously announced changes to the existing Canada Emergency Wage Subsidy (“CEWS”) program, and (ii) establish the new Canada Emergency Rent Subsidy (“CERS”) program. 

As described more particularly below, the CERS is intended to provide support to qualifying renters and property owners retroactive to September 27, 2020. It will be administered by the Canada Revenue Agency (“CRA”), and will provide direct rent and mortgage support on a sliding scale, covering up to a maximum of 65% of eligible expenses, with an additional 25% “lockdown support” top-up potentially available where public health restrictions apply.

Bill C-9 can be found here, and the news release and backgrounders relating to the legislation can be found here, here, here and here.

Our Firm’s past commentary on the CEWS can be found here, here, here, here, here and here.

Unless otherwise stated, all statutory references are to the provisions of the ITA.

Overview

As described more particularly below, Bill C-9:

  • establishes the new CERS program; and

  • effects the following changes to the CEWS:

  • formally extends the CEWS to June 2021;

  • provides that the maximum 40% base and 25% top-up subsidy CEWS rates applicable to Period 8 (i.e., September 27, 2020 to October 24, 2020) will also apply to Periods 9 and 10 (i.e., October 25, 2020 to November 21, 2020 and November 22, 2020 to December 19, 2020);

  • for Period 8 and onwards (i.e., September 27, 2020 and onwards), amends the revenue-decline test used for determining the top-up subsidy amount to match the revenue decline test used for determining the base subsidy amount (subject to a safe harbor rule for Periods 8 to 10 (i.e., until December 19, 2020));

  • narrows the definition of “eligible employee” to provide that the employee must be employed by the eligible entity “primarily in Canada throughout the qualifying period” (or the portion of the qualifying period throughout which the individual was employed by the eligible entity);

  • introduces an elective alternative method for determining baseline remuneration in respect of Periods 5 to 10 (i.e., July 5, 2020 to December 19, 2020) for an eligible employee on leave throughout the period beginning July 1, 2019 and ending on March 15, 2020 and who received benefits pursuant to subsection 12(3) of the Employment Insurance Act or section 2 of the Act respecting parental insurance (Quebec) (i.e., maternity leave, parental leave, caregiver leave or long-term sick leave);

  • broadens the asset acquisition continuity rules in subsections 125.7(4.1) and (4.2);

  • allows eligible entities to amend or revoke CEWS elections;

  • extends the CEWS application deadline from January 31, 2021 to the later of (i) January 31, 2021, and (ii) 180 days after the end of the particular qualifying period; and

  • effects minor amendments to provide that the special rules in paragraphs 125.7(4)(c) and (d) in respect of revenue computation for joint ventures and certain service providers continue to apply beyond Period 4 (i.e., beyond July 4, 2020).

In addition, although not part of Bill C-9, the Government reiterated its previously-announced intention to align CEWS amounts in respect of furloughed employees (i.e., employees who are on leave with pay throughout a particular week during a qualifying period) with the benefits provided through Employment Insurance (“EI”) for Periods 9 and 10 (i.e., October 25, 2020 to November 21, 2020 and November 22, 2020 to December 19, 2020). Prior to Period 9, eligible employers could receive the CEWS, in respect of a furloughed employee, of up to $847 per week per eligible employee, in addition to 100% of employer-paid contributions for EI, the Canada Pension Plan (“CPP”), the Quebec Pension Plan (“QPP”) and the Quebec Parental Insurance Plan (“QPIP”). 

Pursuant to the Government’s announced change, for Periods 9 and 10, the CEWS amount for an eligible employer in respect of an arm’s length furloughed employee would be the lesser of:

  • the amount of eligible remuneration paid to the employee in respect of the week; and

  • the greater of:

  • $500, and

  • 55% of baseline remuneration for the employee, up to a maximum subsidy amount of $573.

Employer-paid contributions in respect of EI, the CPP, the QPP, and the QPIP in respect of such furloughed employees would continue to be subsidized by the CEWS. The foregoing change to the CEWS in respect of furloughed employees is to be effected by way of regulation. At the time of writing, an order in council has been made in respect of the regulation.

The CERS

On October 9, 2020, the Government announced the new CERS program aimed at providing direct relief to businesses and certain other organizations affected by the COVID-19 pandemic. The CERS is intended to serve as a successor to the Canada Emergency Commercial Rent Assistance (“CECRA”) program which was administered by Canada Mortgage and Housing Corporation. Whereas CECRA required landlords and tenants to enter into rent reduction agreements to receive forgivable, interest-free, government loans, the CERS is designed as a tax subsidy and does not require the participation of landlords.

The CERS operates, in many respects, analogous to the CEWS and is available retroactive to September 27, 2020 until June 2021, with qualifying periods that align with the CEWS. 

As described more particularly below, the CERS consists of two components: (i) a “base rent subsidy” which provides support on a sliding scale up to 65%, and (ii) a “top-up subsidy” (i.e., lockdown support subsidy). For the first three CERS qualifying periods (i.e., September 27, 2020 to October 24, 2020; October 25, 2020 to November 21, 2020; and November 22, 2020 to December 19, 2020):

  • eligible expenses are subject to an overall cap of $300,000 (which must be shared among affiliated entities) per qualifying period for the base rent subsidy, and are capped at $75,000 per qualifying property per qualifying period for purposes of both the base rent subsidy and the top-up subsidy;

  • accordingly:

    • the maximum monthly CERS benefit per property pursuant to the base rent subsidy is $48,750 (65% of $75,000);

    • the maximum aggregate monthly CERS benefit for affiliated entities pursuant to the base rent subsidy is $195,000 (65% of $300,000); and

    • if the top-up subsidy applies, eligible entities can qualify for a further monthly subsidy of up to $18,750 (25% of $75,000) per property.

Notably, while the legislation uses defined terms such as “qualifying rent expense”, “qualifying renter”, “rent subsidy percentage” and “rent top-up percentage”, the CERS is not limited to renters and property owners may also qualify.

Who is eligible to receive the CERS?

The CERS is available to a “qualifying renter” as defined in subsection 125.7(1). A “qualifying renter” is an “eligible entity” that files an application (which the individual who has principal responsibility for the financial activities of the eligible entity must attest is complete and accurate in all material respects) with the CRA, in the prescribed form and manner, no later than 180 days after the end of the particular qualifying period and, in general terms:

  • had (or is deemed to have had) on March 15, 2020, a business number and payroll account (or, had one or more Canadian employees, the payroll for which was administered by a payroll service provider that had a business number and payroll account which the provider used to make payroll remittances in respect of the entity’s employees);

  • had, on September 27, 2020, a business number and provides records and other information in support of its application in satisfactory form to the CRA (i.e., that the eligible entity has a bona fide CERS claim); or

  • meets conditions that may be prescribed in the future.

“Eligible entity” has the same meaning as it does for purposes of the CEWS, and includes:

  • a corporation or trust, other than a corporation or trust that is exempt from tax under Part I of the ITA or a “public institution” (as described below);

  • an individual (other than a trust);

  • a registered charity, other than a public institution;

  • a person, other than a public institution, that is exempt from tax under Part I of the ITA because of the application of paragraph 149(1)(e), (j), (k) or (l) (i.e., certain agricultural organizations, boards of trade and chambers of commerce, labour organizations and fraternal benefit societies, and certain non-profit organizations);

  • partnerships that are up to 50% owned by non-eligible members (e.g., public institutions); and

  • certain other prescribed organizations, such as indigenous government owned corporations exempt under paragraph 149(1)(d.5) and their subsidiaries, and non-public educational and training institutions.

The term “public institution” is defined to mean an organization described in any of paragraphs 149(1)(a) to (d.6) (e.g., certain government entities, municipalities, municipal or public bodies performing a function of government, and various subsidiary entities), as well as an organization that is a school, school board, hospital, health authority or public university or college.

As noted above, an eligible entity does not need to rent property to be a “qualifying renter”; property owners may also qualify.

The CERS Calculation – the Formula

Pursuant to subsection 125.7(2.1), the CERS for a particular qualifying period is computed as “A + B”, where “A” represents the amount of the base rent subsidy and “B” represents the amount of the top-up subsidy.

Simplified:

  • A is determined by the formula “C x D”, where

    • C is the eligible entity’s “rent subsidy percentage” (as described below) for the particular qualifying period, and

    • D is the lesser of:

      • the total of all amounts each of which is a “qualifying rent expense” (as described below) for a “qualifying property” (as described below) during the particular qualifying period; and

      • $300,000 x E, where E is 100%, unless the eligible entity is affiliated at any time during the qualifying period with one or more eligible entities claiming the CERS for the same period. If the eligible entity is so affiliated, E is either (i) the percentage assigned to the eligible entity under an agreement amongst the affiliated entities (described further below), or (ii) if no percentage is assigned, nil.

    • B is the total of the amounts obtained by multiplying the “rent top-up percentage” (as described below) of the eligible entity for a particular qualifying property by the eligible entity’s qualifying rent expense for such property during the particular qualifying period.

What expenses qualify for the CERS? – meaning of “qualifying property” and “qualifying rent expense”

The base rent subsidy and top-up subsidy are calculated by reference to an eligible entity’s “qualifying rent expense” for a particular “qualifying property”, in each case as defined in subsection 125.7(1). 

“Qualifying property” is generally defined to mean real property located in Canada used by the eligible entity in the course of its ordinary activities. It does not include a property that is a self-contained domestic establishment (or certain land adjacent thereto) that is used by the eligible entity (or a person who does not deal at arm’s length with the eligible entity for purposes of the ITA).

“Qualifying rent expense” in respect of a qualifying property for a qualifying period is defined to mean the amount determined by the formula, “A – B”, where simplified:

  • A is the total of all amounts, up to a maximum of $75,000, paid to an arm’s length party in the particular qualifying period pursuant to a written agreement entered into before October 9, 2020 (or pursuant to the assignment, or renewal on substantially similar terms, of such an agreement) which represents:

    • “rent for the use of, or right to use, the qualifying property” (as described below); or

    • in the case of qualifying property owned by an eligible entity that either (i) is not used by the eligible entity primarily to earn rental income, or (ii) where the qualifying property is used primarily by the eligible entity to earn rental income from a non-arm’s length person or partnership, the qualifying property is not used by that non-arm’s length person or partnership primarily to earn rental income:

  • interest on a mortgage to the extent that the mortgage does not exceed the lesser of: (i) the lowest total principal amount secured by one or more mortgages on the property at any time after it was acquired by the eligible entity (excluding any temporary period in the course of a refinancing transaction between the time when an existing mortgage is discharged and a new mortgage is registered); and (ii) the cost amount of the qualifying property;

  • insurance costs; and

  • property and similar taxes (including school and municipal taxes).

  • B is the total of all amounts received or receivable by the eligible entity from an arm’s length party in the particular qualifying period in respect of rent for the use of, or right to use, the qualifying property.

For these purposes, “rent for the use of, or right to use, the qualifying property” generally includes: (i) gross rent, (ii) rent based on a percentage of profit or sales, (iii) base rent, (iv) regular instalments of operating expenses customarily charged to the lessee under a net lease, (v) property and similar taxes (including school and municipal taxes), (vi) regular instalments of other amounts payable for services ancillary to the lease and ordinarily supplied in connection with a lease, and (vii) amounts received by the lessor under the CECRA program that were applied against rent payable in respect of the qualifying period (if such amounts would otherwise be required to be refunded to the eligible entity). It does not include: (i) sales taxes paid in respect of the foregoing expenses, (ii) amounts paid as damages, (iii) amounts paid under a guarantee or similar indemnity, (iv) payments arising due to a default under the agreement, (v) interest and penalties on unpaid amounts, (vi) fees payable for special services or discrete items, and (vi) reconciliation adjustment payments.

As currently enacted, the qualifying rent expense is limited to amounts paid, not payable. This has raised cash flow concerns for tenants and property owners who may be unable to make rent and interest payments prior to receiving the CERS. Deputy Prime Minister and Finance Minister Chrystia Freeland, appearing before the Senate Committee on National Finance on November 12, 2020, stated that the Government plans to expand the CERS to include rent payable and that the CRA will administratively consider rent payable to be an eligible expense when the CERS program is launched. In this regard, on November 20, 2020, the Government released draft legislation that, if enacted, would come into force effective at the beginning of the first qualifying period of the CERS program (i.e., September 27, 2020). 

Pursuant to the draft legislation, proposed subsection 125.7(12) would deem, for purposes of the definition of “qualifying rent expense”, an amount to have been paid by an eligible entity on the date such amount first became due under an agreement, and not at a later date, if the individual providing the requisite attestation in respect of the eligible entity’s CERS application attests that the entity intends to pay the amount due under the agreement no later than 60 days after the CRA makes the first CERS payment in respect of such amount. If the amount due is not actually paid within 60 days following the CERS payment, then proposed subsection 125.7(13) would operate to reverse the effect of the deeming provision in proposed subsection 125.7(12).

“Rent Subsidy Percentage” and “Rent Top-up Percentage”

The “rent subsidy percentage” (as defined in subsection 125.7(1)) for a qualifying period depends upon the “revenue reduction percentage” (i.e., revenue decline) experienced by the eligible entity in respect of the particular qualifying period. The rent subsidy percentage for Periods 8 to 10 is computed on a sliding scale as follows:

Revenue Reduction Percentage

Base Rent Subsidy

70% or more

65%

Greater than or equal to 50%, but less than 70%

40% + (revenue reduction percentage – 50%) x 1.25

(i.e., 40% + (60% revenue drop – 50%) x 1.25 = 52.5% subsidy rate)

Less than 50%

Revenue reduction percentage x 0.8

(i.e., 25% revenue drop x 0.8 = 20% subsidy rate)

The “rent subsidy percentage” for Periods 11 and onwards (i.e., December 19, 2020 and onwards) will be determined by regulation, the details of which have not yet been released.

Revenue and the “revenue reduction percentage” for purposes of the CERS are calculated in the same manner as under the CEWS. The existing definition of “revenue reduction percentage” in subsection 125.7(1) for purposes of the CEWS now also applies for purposes of the CERS and is calculated using the formula “1 – A/B” where:

  • A is the eligible entity’s qualifying revenue for the current reference period; and

  • B is the eligible entity’s qualifying revenue for the prior reference period (referred to below as the “general approach”) (or, if the prior reference period is January and February 2020, the amount determined by the formula in subparagraph (c)(ii) of the definition of “qualifying entity” which, essentially, is the average of January and February 2020 revenues adjusted for the number of days the eligible entity was carrying on business in that period (referred to below as the “alternative approach”)) or a period prescribed by regulation in respect of the employer for the qualifying period.

The following table outlines the relevant reference period under the general approach and the alternative approach for determining the revenue reduction percentage in respect of such qualifying period:

Qualifying Period

General Approach

Alternative Approach

Period 8 (September 27, 2020 to October 24, 2020)

October 2020 over October 2019 or September 2020 over September 2019

October 2020 or September 2020 over average of January and February 2020

Period 9 (October 25, 2020 to November 21, 2020)

November 2020 over November 2019 or October 2020 over October 2019

November 2020 or October 2020 over average of January and February 2020

Period 10 (November 22, 2020 to December 19, 2020)

December 2020 over December 2019 or November 2020 over November 2019

December 2020 or November 2020 over average of January and February 2020

Notably, the same approach (i.e., general approach or alternative approach) must be used consistently for all three periods, and an entity may not use a different approach for purposes of the CERS than it does for purposes of the CEWS.

The “rent top-up percentage” (as defined in subsection 125.7(1)) of an eligible entity for a qualifying property during a qualifying period is equal to “A x B / C”, where, simplified:

  • A is 25% (or a percentage that may be prescribed in the future);

  • B is the number of days in the particular qualifying period that the qualifying property is subject to a “public health restriction” (as defined in subsection 125.7(1)); and

  • C is the number of days in the particular qualifying period.

A “public health restriction” (as defined in subsection 125.7(1)), in respect of a qualifying property of an eligible entity for a qualifying period, is an order or decision that meets the following conditions:

  • it is made under Canadian federal or provincial law in response to the COVID-19 pandemic and is limited in scope based on one or more factors (such as geographical boundaries, type of business or other activity, or risks associated with a particular location);

  • non-compliance with which would be an offence or result in a government fine or other sanction;

  • such public health restriction cannot have resulted from a violation by the eligible entity of an order or decision that meets the above two requirements;

  • as a result of the order or decision, some or all of the activities of the eligible entity at (or in connection to) the qualifying property are required to cease based on the type of activity, rather than limits placed on the time during which an activity may be performed or the extent to which it may be performed;

  • at least approximately 25% of the qualifying revenues of the eligible entity for the prior reference period that were earned from (or in connection with) the qualifying property were derived from the restricted activities; and

  • the restricted activities are required to cease for at least one week.

Sharing of $300,000 Expense Limit Amongst Affiliated Entities

Pursuant to the description of variable D in the calculation of the CERS set out in subsection 125.7(2.1), if two or more entities that are affiliated for purposes of the ITA wish to claim the CERS, they must enter into an agreement to allocate the $300,000 limit. This agreement is to be filed with the CRA in the prescribed form for the particular qualifying period by each entity with their CERS application for the particular qualifying period.

Per subsection 125.7(11), if two eligible entities are affiliated for purposes of the ITA with the same eligible entity, they are deemed to be affiliated with one another for purposes of variable E in the calculation of the CERS in subsection 125.7(2.1).

Anti-avoidance Rule

The anti-avoidance rule in subsection 125.7(6) has been amended to apply to subsection 125.7(2.1), the effect of which is to disqualify an eligible entity from entitlement to receive the CERS if:

  • the eligible entity and a non-arm’s length party enter into a transaction or series of transactions that has the effect of increasing the qualifying rent expense of the eligible entity for the qualifying period; and

  • it is reasonable to conclude that one of the main purposes of the transaction or series of transactions is to increase the amount of the CERS in respect of that qualifying period.

If the anti-avoidance rule applies, the eligible entity will be required to repay the amount paid to it under the CERS for that qualifying period, and will also be liable to a penalty under subsection 163(2.901) equal to 25% of the disallowed CERS.

 

How is the CERS paid?

Like the CEWS, the CERS operates as a deemed “overpayment” of an eligible entity’s liability for tax under Part I of the ITA. 

The amount of any deemed overpayment in respect of the CERS for a particular qualifying period is expressly limited to the amount claimed by the eligible entity in its application for that qualifying period.

Subsection 125.7(3) provides that despite its character as an overpayment of tax, the amount received by a eligible entity under the CERS will be considered government assistance received immediately before the end of the qualifying period to which it relates for all purposes of the ITA other than section 125.7. Government assistance is generally included in a taxpayer’s income for tax purposes under paragraph 12(1)(x).

Amendments to CEWS

Bill C-9 also effects the following changes to the CEWS. Unless otherwise noted, the amendments are retroactive to Period 1.

CEWS Extension

The CEWS has been extended to June 2021.

Base and Top-up Subsidy Rates

The maximum 40% base and 25% top-up subsidy rates applicable to Period 8 (i.e., September 27, 2020 to October 24, 2020) also apply to Periods 9 and 10 (i.e., October 25, 2020 to November 21, 2020 and November 22, 2020 to December 19, 2020).

But for Bill C-9, the maximum base rate for Period 9 would have been 20%.

Harmonization of Revenue Decline Test for Top-up Subsidy and Base Subsidy

Prior to Bill C-9, the base subsidy and top-up subsidy were subject to different revenue decline tests. Bill C-9 amends the definition of “top-up revenue reduction percentage” in subsection 125.7(1) for Period 8 and onwards so that the same test applies for both purposes (subject to a safe harbor rule for Periods 8 to 10). That is, instead of using the prior three-month revenue-decline test for the CEWS top-up subsidy, both the base and top-up subsidies are to be determined by the change in monthly revenues year-over-year (or, for employers using the alternative approach, the average of its January and February 2020 revenues), for either the current or previous month. Bill C-9 also contains a safe harbor rule for Periods 8 to 10, which provides that if the eligible entity would have been better off under the three-month revenue-decline test, then that test will continue to apply for purposes of the top-up subsidy. 

Eligible Employees

The definition of “eligible employee” in subsection 125.7(1) is amended to provide that the individual must be “employed by the eligible entity primarily in Canada throughout the qualifying period” (or the portion of the qualifying period throughout which the individual is employed by the eligible entity), rather than merely “employed in Canada by the eligible entity in the qualifying period”. This narrowing amendment is retroactive to April 11, 2020; however, a safe harbor rule applies in respect of CEWS applications made prior to November 19, 2020 (i.e., the date of Royal Assent of Bill C-9).

Baseline Remuneration

Baseline remuneration for an eligible employee who was on leave throughout the period beginning on July 1, 2019 and ending on March 15, 2020 and received benefits under subsection 12(3) of the Employment Insurance Act or section 2 of the Act respecting parental insurance (i.e., maternity leave, parental leave, caregiver leave or long-term sick leave) during that time, may now be calculated, at the employer’s election, with reference to the 90-day period ending immediately before the beginning of the employee’s leave period. This special baseline remuneration period is available for Periods 5 to 10 (i.e., July 5, 2020 to December 19, 2020).

Asset Acquisitions

Bill C-9 amends the conditions set out in subsection 125.7(4.1) for the purposes of determining whether the revenue continuity rule in subsection 125.7(4.2) applies in respect of certain asset purchases. Prior to Bill C-9, the fair market value of the acquired assets needed to constitute all or substantially all of the fair market value of the property of the seller used in the course of carrying on business. This condition could be problematic where, for example, the seller carried on multiple businesses through a single legal entity or where only part of the business was being acquired. Bill C-9 expands the relieving rule to provide that this condition will also be satisfied if the fair market value of the acquired assets constitutes all or substantially all of the property of the seller that can reasonably be regarded as being necessary for the acquiring eligible entity to be capable of carrying on a business of the seller, or part of a business of the seller, as a business, provided that the seller and the acquiring eligible entity deal with each other at arm’s length. The new test is similar to the test under section 167 of the Excise Tax Act (Canada).

Bill C-9 also amends subsection 125.7(4.2). For the purposes of the alternative prior reference period (i.e., the average of qualifying revenue for January and February 2020), the acquiring eligible entity is deemed to have commenced carrying on the business in which the acquired assets are used at the earlier of: (i) the date on which the acquiring eligible entity commenced carrying on that business, and (ii) the date on which the seller commenced carrying on the business in which the acquired assets were used.

Application Period

Prior to Bill C-9, employers were required to file their CEWS applications, in prescribed form and manner, no later than January 31, 2021. Bill C-9 extends the deadline in respect of a CEWS application for a particular qualifying period to the later of January 31, 2021 and 180 days after the end of the qualifying period.

Elections

New subsection 125.7(10) allows eligible entities to amend or revoke an election made under section 125.7 on or before the date that the application is due for the first qualifying period for which the election is made.

Joint Ventures and Service Providers

Minor amendments are also made to paragraphs 125.7(4)(c) and (d) (i.e., the special revenue computation rules for joint ventures and certain service providers) so that these elective provisions are available in respect of all qualifying periods, and not just Periods 1 through 4.

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For additional assistance, please contact any member of our National Tax, Labour & Employment or Real Property & Planning teams.

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