On November 19, 2020, the new federal Canada Emergency Rent Subsidy (“CERS”) was enacted into law by Bill C-9, An Act to amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy) receiving Royal Assent. The CERS takes effect as of September 27, 2020 and continues to June 2021. Note that Bill C-9 only provides details for the first 12 weeks of the program, so details may change after December 19, 2020.
Prime Minister Justin Trudeau announced today that applications will open on Monday, November 23, 2020.
A few highlights about the CERS:
- It is not limited to rent, but can also subsidize the carrying costs of business property: Despite its name, the CERS does not only subsidize commercial rent paid by tenants. It also subsidizes certain carrying costs (mortgage, insurance, property tax) paid by owners of property used in connection with a business, other than property used primarily to earn rental income (which will generally disqualify commercial landlords).
- It is not an extension of the CECRA, which expired at the end of September 2020: The CERS looks nothing like the Canada Emergency Commercial Rent Assistance (“CECRA”) program it replaces - for information on this program, see our articles here and here. Instead, it essentially extends the Canada Emergency Wage Subsidy (“CEWS”) to commercial rent and carrying costs on business property.
- It offers both a base subsidy and top-up subsidy, up to 90% of eligible expenses: The base subsidy (up to 65% of eligible expenses) and top-up subsidy (up to 25% of eligible expenses) are based on the same four-week claim periods as the CEWS.
- Base subsidy - like the CEWS, the base subsidy is available to organizations with any monthly revenue drop and is tied to the amount of that revenue drop. For each four-week claim period, eligible expenses are capped at $75,000 per property and $300,000 total (per associated group), meaning claimants can qualify for up to $48,750 per property and $195,000 total per claim period.
- Top-up subsidy (“Lockdown Support”) - the top-up subsidy/Lockdown Support is available to organizations forced by a public health order to close or restrict operations. For each four-week claim period, eligible expenses are also capped at $75,000 per property but there is no total cap, meaning claimants can qualify for up to $18,750 per property per claim period.
- The subsidies are taxable: The subsidies are administered by the Canada Revenue Agency (“CRA”) and are taxed as government assistance payments.
The CERS adopts essentially the same rules for determining eligibility as the CEWS:
- The applicant must be an “eligible entity” - this includes individuals, taxable corporations, trusts, partnerships, charities, and non-profit organizations.
- The applicant must have had a CRA payroll number (or used a payroll service provider) as of March 15, 2020 or a CRA business number as of September 27, 2020.
Note that “public institutions” are not eligible. More information on eligible entities is available here.
Monthly revenue drop
The CERS adopts the same rules for calculating revenue and monthly revenue drop as the CEWS:
- Revenue is generally calculated as gross revenue earned in Canada from arm’s length sources in the ordinary course, as determined under normal accounting practices, subject to a variety of special rules and elections. More information on calculating revenue is available here.
- Monthly revenue drop is calculated using one of two approaches:
- the general approach is the default approach and compares revenue in the current or prior month to revenue in the same month in the preceding year; and
- the alternative approach must be elected into and compares revenue in the current or prior month to average monthly revenue in January and February 2020.
Note that claimants must use the same approach for all three CERS claim periods, and the same approach already adopted for the CEWS (if applicable).
The table below sets out the method for determining the monthly revenue drop under both the general and alternative approaches:
The base subsidy is calculated as the applicable base subsidy rate x eligible expenses.
The applicable base subsidy rate is tied to the claimant’s monthly revenue drop, as shown below:
Despite the program’s name and terminology (e.g. a qualifying entity is called a “qualifying renter” and a qualifying expense is called a “qualifying rent expense”), the CERS is not limited to commercial rent, but also covers certain carrying costs on business properties (other than properties used primarily to earn rent).
For tenants, eligible expenses include rent on non-residential property, including:
- gross rent;
- rent based on sales, profit, or a similar criterion; and
- amounts under a net lease for base rent, regular instalments for operating expenses (e.g. insurance, utilities, and common area maintenance expenses) and customary ancillary services, and property and similar taxes (e.g. school and municipal taxes).
For owners of business property (other than property used primarily to earn rent), eligible expenses include:
- mortgage interest (subject to certain limits);
- property insurance; and
- property taxes, including school and municipal taxes.
To qualify as “eligible expenses,” the expenses must be paid to an arm’s length party under a written agreement entered into before October 9, 2020. Eligible expenses are also reduced by any revenue received from a sublease or lease of the property. Eligible expenses are capped at $75,000 per property (for the base subsidy and top-up subsidy) and $300,000 total per associated group (for the base subsidy only).
Top-up subsidy / Lockdown Support
Claimants that qualify for the base subsidy (in any amount) AND are forced to close or significantly restrict operations by an “eligible public health restriction” qualify for a further subsidy of 25% of eligible expenses. As noted, the top-up subsidy is capped at $75,000 per property but is not subject to a total cap.
An eligible public health restriction means an order or decision that:
- is made under the laws of Canada or a province/territory (including orders made by a municipality or regional health authority) in response to COVID-19;
- is limited in scope, based on factors such as geographical boundaries, type of business or other activity, or risks associated with a particular location;
- provides for a monetary penalty or other sanction for non-compliance;
- is not the result of violating an order or decision that meets the conditions set out above; and
- restricts activities on the property by completely prohibiting a type of activity on the property, and not just the extent to which it can be performed. For example, for a restaurant, an order prohibiting indoor dining would qualify, while an order limiting patrons per table would not.
In addition, for a claimant to be entitled to the top-up subsidy, the prohibited activity must have generated at least 25% of the claimant’s monthly revenue in the relevant prior reference period. For example, for the claim period from September 27 to October 24, 2020, the prior reference period would either be September or October 2019 (under the general approach) or January and February 2020 (under the alternative approach).
A list of examples of restrictions and closures that may qualify for the top-up subsidy is available here.
Anti-avoidance rule and penalty
The legislation contains an anti-avoidance rule that may apply where a claimant enters into a transaction to reduce calculated revenue or increase eligible expenses in order to increase the subsidy entitlement. Where this rule applies, the claimant must repay the subsidy, plus a 25% penalty.
When to apply
On November 20, 2020, Prime Minister Justin Trudeau announced that applications will open on Monday, November 23, 2020. Applications for each claim period are due within 180 days after the end of the claim period. While the application procedure has not yet been released, it will likely resemble the current CEWS application procedure.