DFK Tax Newsletter

Canada Emergency Rent Subsidy

By Mark Servello CPA, CGA, Tax Partner
Kenway Mack Slusarchuk Stewart, Calgary, AB, DFK Affiliate Firm

On November 2, 2020, the federal government introduced legislation which includes measures to implement the new Canada Emergency Rent Subsidy (“CERS”).  CERS replaces the previous federal government rent subsidy program – the Canada Emergency Commercial Rent Assistance (“CECRA”) program.  The CECRA program is now closed.

The intention of CERS is to provide a rent subsidy to support tenants and property owners that continue to face uncertainty and economic challenges because of the COVID-19 pandemic.  Under the CERS program, tenants and property owners will apply directly to the government for the rent subsidy, whereas, under the old CECRA program, the landlord had to apply for the rent assistance on behalf of the tenant.

The eligibility criteria and claim periods for CERS generally align with the Canada Emergency Wage Subsidy (“CEWS”). 

A rent subsidy can be claimed only in respect of a qualifying property.  With some specific exceptions, a qualifying property is real or immovable property located in Canada and used by an eligible entity in the course of its ordinary activities.

In order for an eligible entity to qualify for a rent subsidy in the first place, it has to meet one of the following conditions:  either it had a Business Number on September 27, 2020, or it had a payroll number on March 15, 2020, or it had employees in Canada on March 15, 2020 and used a payroll service provider to make remittances in respect of those employees.

Claims for a rent subsidy under the new CERS program are available retroactively, with the first qualifying period from September 27, 2020 to October 24, 2020.  The last day to file a claim for this period is April 22, 2021.  The next qualifying periods are from October 25, 2020 to November 21, 2020, from November 22, 2020 to December 19, 2020, and from December 20, 2020 to January 16, 2021.  The upcoming qualifying periods that have been announced to date are from January 17, 2021 to February 13, 2021 and from February 14, 2021 to March 13, 2021.  The government has announced its intention is to have CERS available until June 2021.

An application for a rent subsidy must be filed no later than 180 days after the end of the qualifying period.

Below is the link on the government of Canada’s website which contains the details with respect to the application process for CERS.

https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy.html

The rent subsidy is based on eligible expenses paid in respect of the qualifying period with the amount of the rent subsidy being capped at a maximum of 65% of eligible expenses.

Eligible expenses for a tenant are amounts paid or payable to an arm’s length party for rent for the use of, or right to use, a qualifying property in a qualifying period.  Where the amounts are paid or payable under a net lease, eligible expenses include amounts paid or payable to the lessor or a third party for rent, regular instalments of operating costs such as insurance, utilities, common area maintenance, property taxes, and other costs that are customarily charged to the lessee under a net lease.  Amounts that are payable and have not been paid at the time of the CERS application must be paid no later than sixty days after payment of the CERS amount.

Eligible expenses for a property owner are; mortgage interest, insurance, property and similar taxes, including school and municipal taxes, but only in either, the case of a qualifying property owned by an eligible entity that is not used by the eligible entity primarily (more than 50%) to earn rental income, or the case of a qualifying property that is used primarily by the eligible entity to earn rental income from someone not dealing at arm’s length with the eligible entity as long as the property is not used by the non-arm’s length person primarily to earn rental income.

The amount of eligible expenses on which a rent subsidy can be claimed by an eligible entity for a qualifying period is capped at a maximum of $75,000 per location with an overall cap of $300,000.  In cases where the eligible entity is part of an affiliated group, the $300,000 cap will be shared among the affiliated entities.  In addition, the eligible expenses must be paid pursuant to a written agreement entered into before October 9, 2020, or pursuant to the renewal (on substantially similar terms) or assignment of a written agreement entered into before October 9, 2020. The eligible entity must pay the eligible expenses to a party with which the eligible entity deals at arm’s length.

The full 65% rent subsidy percentage is available only for a qualifying period in which an eligible entity’s revenue reduction percentage is greater than or equal to 70%.  Revenue for CERS is calculated using the same methodology as it is for CEWS.  As well, any revenue elections made for CEWS also apply for CERS.

For a qualifying period in which the eligible entity’s revenue reduction percentage is greater than or equal to 50%, but less than 70%, the eligible entity’s rent subsidy percentage is determined by the formula (40% + (A - 50%) * 1.25) – where A is the eligible entity’s revenue reduction percentage.  For example, a reduction in revenue of 60% will result in a rent subsidy percentage of 52.5%.

For a qualifying period in which the eligible entity’s revenue reduction percentage is less than 50%, the eligible entity’s rent subsidy percentage is determined by the formula (0.8 * B) – where B is the eligible entity’s revenue reduction percentage.  As an example, a reduction in revenue of 25% will result in a rent subsidy percentage of 20%.

In addition to the rent subsidy, the government has introduced a measure it calls Lockdown Support.  This is effectively a subsidy top-up percentage which provides an additional rent subsidy of 25% of eligible expenses in situations where a qualifying property is subject to a public health restriction. 

Some of the conditions which must be met for an order or decision to be considered a public health restriction are:

• that some or all of the activities of the eligible entity at, or in connection with, a particular location are required to cease for a period of at least one week, and 
• it must be reasonable to conclude that 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, that location was derived from the activities which were required to cease.

The lockdown top-up percentage has to be pro-rated based on the number of days in a qualifying period throughout which the qualifying property is subject to a public health restriction and there is no lockdown top-up percentage unless the rent subsidy percentage for the qualifying period is greater than 0%. 

As is the case with most government programs, in cases where CRA finds there has been abuse of the CERS program, severe penalties are potentially applicable.