[co-author: Kristina Dimitrov - Articling Student]

After almost a month of eager anticipation, the federal government has released draft legislation to institute the new Canada Emergency Rent Subsidy (CERS), replacing the now-expired Canada Emergency Commercial Rent Assistance (CECRA). The legislation, which is awaiting third reading in Parliament will, if implemented, mark a radical shift from CECRA, for the following reasons:

• First and foremost, CERS, despite the name, would not be just a rent subsidy for businesses that lease real estate, but also a subsidy for certain mortgage interest, insurance costs and property tax expenses for businesses that own the real property used in their business' ordinary activities (provided that such businesses are not primarily using such real property to earn rental income).
• Secondly, CERS would not be limited to small businesses, as CECRA was, but could be applied for by enterprises of any size, subject to the eligibility criteria.
• Thirdly, CERS would be made available directly to affected businesses, without need for such businesses to apply through and rely on their landlords, a key complaint against CECRA.
• Fourthly, CERS would operate like the Canada Emergency Wage Subsidy (CEWS), as an amendment to the Income Tax Act, whereby the subsidy amount would be considered an overpayment of tax by the entity , such that the entity's tax payable would be reduced or a tax refund would be generated.
• Finally, CERS would actually be two subsidies: a base subsidy with a cumulative subsidy cap of $195,000 that must be shared among affiliated entities; and a lockdown support top-up subsidy with a cap of $18,750 per qualifying property but with no overall upper limit.

These are just some of the dramatic changes that Bill C-9, An Act to Amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy), tabled on Monday November 2, seeks to implement—changes which the Canadian business community has been awaiting since the federal government first announced these changes on October 9, 2020 (see Federal Government Announces Canada Emergency Rent Subsidy). Bill C-9 will also amend key provisions of the Canada Emergency Wage Subsidy (CEWS), including extending the duration of CEWS. For further information on CEWS, please see our COVID-19 Resource Centre.

The key concepts of the draft legislation are discussed in more detail below. As always, the Bennett Jones Commercial Real Estate, Tax and Governmental Affairs & Public Policy groups, including the authors of this posting, are available to assist you as you look to identify and implement business strategies in response to the COVID-19 pandemic.

Qualifying Period and Duration

CERS will be available during fixed monthly periods (called qualifying periods) which begin on September 27, 2020. Eligible entities will be required to file an application no later than 180 days following the end of the applicable qualifying period (the application deadline for the first qualifying period ending on October 24, 2020, is April 22, 2021). At present, these qualifying periods will end on December 19, 2020, but the legislation contemplates an extension (to be prescribed by regulation) of the qualifying periods until a time ending no later than June 30, 2021. See details below regarding the application process in the section titled "How to Apply and Reimbursement".

Qualifying Property

CERS is available only in respect of qualifying property, being any real property used by the eligible entity in the course of its ordinary activities other than real property that is a self-contained domestic establishment (i.e., a residence). Specifically, any self-contained domestic establishment, or part thereof, land subjacent to (i.e., below) such domestic establishment, or land immediately contiguous to such domestic establishment if such contiguous land can reasonably be regarded as contributing to the use and enjoyment of the self-contained domestic establishment as a residence, is excluded from the definition of qualifying property. Businesses operated from a residence, or in the same building or connected to a residence, should carefully consider these eligibility restrictions.

Qualifying Renters

It is important to note that, just like the name CERS, the term "qualifying renter", as used in the draft legislation, is a misnomer. A qualifying renter could be either a tenant, or an owner, of real property. See further discussion on this point below in the section titled "Qualifying Rent Expense".

As mentioned above, CERS borrows heavily from CEWS. Specifically, CERS and CEWS both use a two-stage qualification test, whereby a business must be both an "eligible entity" (CEWS and CERS) and also a "qualifying entity" (CEWS) / "qualifying renter" (CERS) in order to participate in the program.

CEWS and CERS share the same definition of "eligible entity", so the analysis under the first branch of the test is the same. An eligible entity means individuals, taxable corporations (including public and private corporations), certain partnerships, non-profit organizations and registered charities, and certain Indigenous corporations and partnerships. Notably, CERS is not generally available to public bodies, including municipalities, Crown corporations, public universities, colleges, schools and hospitals, but please see Canada Emergency Wage Subsidy: Extension to August 29, 2020, and Expanded Eligibility Requirements for a discussion about eligible entities prescribed by regulation. Entities which do not fall squarely within the listed entities are encouraged to consult with their legal and tax advisors to determine next steps, including seeking clarity through future regulations. CEWS and CERS differ in the second branch of the test, with CEWS applying to "qualifying entities" and CERS applying to "qualifying renters". Businesses will be relieved to know that (given the overlap in the tests) if they were a qualifying entity under CEWS, they will also be a "qualifying renter" under CERS, since the same criteria apply to each, with the exception that the qualifying revenue decrease is not required under this branch of the CERS test (the revenue decrease is still required and becomes relevant later in calculating the subsidy entitlement).

In brief, a qualifying renter under CERS is an eligible entity that meets three conditions:

1. It must file an application no later than 180 days after the end of the applicable qualifying period;
2. The individual who has principal responsibility for the financial activities of the eligible entity must attest that the application is complete and accurate; and
3. The eligible entity must meet one of the following requirements: (a) it had, on March 15, 2020, a business number in respect of which it is registered to make payroll remittances, or it employed one or more individuals in Canada and its payroll was administered by a payroll services provider that used its payroll remittance business number to make such remittances; or (b) it had a business number on September 27, 2020, and provides records and other information satisfactory to the Minister in support of its application. With respect to this last requirement, it has not yet been described what information will be considered "satisfactory". The legislation also permits additional criteria to be prescribed at a later date.

Qualifying Rent Expense

As noted above, qualifying rent expense is not limited to rent payments and can be comprised of both: (a) rent for leased real property (including basic and additional rent, subject to certain exclusions); and (b) mortgage interest, insurance costs and property taxes (collectively MIP) for owned real property. Both rent and MIP are only eligible if they are paid pursuant to an agreement (or renewal thereof) entered into (or assigned) before October 9, 2020 (the date on which CERS was initially announced). Importantly, MIP is not a qualifying rent expense if the eligible entity is using the applicable property (either directly or indirectly through a non-arm's length entity) primarily to earn rental income, which exclusion would disqualify most commercial landlords from eligibility for CERS. Businesses intending to claim MIP should pay close attention to the calculation rules for the mortgage interest expense.

In addition, any qualifying rent expense is reduced by all amounts received (or receivable) on account of rent by the eligible entity, directly or indirectly, from an arm's length party. This would result in a reduction of the subsidy amount for eligible entities who lease or sublease all or part of the property in respect of which they are claiming the subsidy. The total qualifying rent expense is capped at the lesser of $75,000 and the total of all amounts actually paid per qualifying period.

Subsidy #1: The Base Subsidy

CERS is comprised of two components: (1) a base subsidy of up to 65 percent on qualifying rent expenses, where the actual subsidy percentage is determined on a sliding scale based on the decrease in revenue suffered by the eligible entity; and (2) an additional 25-percent subsidy (sometimes referred to as the lockdown support top-up) on qualifying rent expenses, where the eligible entity has suffered any revenue decrease (i.e., greater than zero), and the eligible entity is subject to a public health restriction. Please see further discussion on the lockdown support top-up below in the section titled "Subsidy #2: The Lockdown Support Top-up Subsidy". In respect of the base subsidy, there is an aggregate cap of $300,000 for all qualifying rent expenses for all qualifying properties per qualifying period among all affiliated entities who are claiming CERS. Affiliates are permitted to enter into agreements among themselves to apportion the base subsidy between them, but collectively may not claim the base subsidy on more than $300,000 of qualifying rent expense. Businesses should pay special attention to the broad definition of "affiliate" within the Income Tax Act, and are encouraged to review their organizational structures with their legal and tax advisors to determine eligibility and the appropriate allocation between entities.

The amount of the base subsidy depends on the "revenue reduction percentage" of an eligible entity, which also requires a determination of "qualifying revenue". Businesses will be relieved to know that these two definitions are also common between CEWS and CERS, so businesses already engaged in the CEWS application process should find this calculation easier to address. Businesses that are not familiar with CEWS should note the following:

• For the purposes of calculating the reduction in qualifying revenue, revenue is defined as the revenue (cash, receivables, or other consideration) from the eligible entity's ordinary business activities carried on in Canada, provided such amounts are derived from arm's-length persons or partnerships. Extraordinary items are excluded.
• The legislation includes specific elective rules governing the computation of revenue where substantially all (generally 90 percent or more) of an eligible entity's revenue is derived from non-arm's length transactions. Such provisions are expected to apply, for example, where an eligible entity sells all of its production to a related company that in turn earns arm's length revenue but does not itself have employees.
• Qualifying revenue is to be determined in accordance with the eligible entity's normal accounting practices, subject to certain rules adopted for flexibility. For example, while revenue is generally determined on an accrual basis, an eligible entity may elect to use the cash method. Eligible entities that normally prepare consolidated financial statements are able to compute revenue on a consolidated basis (where an election is made) or a separate basis, provided every member of the group is consistent.
• Notably, the reduction in revenue test is computed on an entity-by-entity basis. Thus, where an eligible entity carries on more than one business, CERS may not be available where the reduction thresholds are not met for the entity as a whole, even where one particular business line does so qualify. Entities which may be in this position are encouraged to review their organizational structures with their legal and tax advisors to determine eligibility.
• Specific rules apply to the revenue computation for charities and non-profit organizations, which are allowed to include or exclude government funding in their revenues for the purpose of applying the revenue reduction test.
• Please see Canada Emergency Wage Subsidy: Extension to August 29, 2020, and Expanded Eligibility Requirements for a discussion about additional revenue calculation criteria relating to amalgamations, wind-ups, and trust eligibility.
• Please see Canada Emergency Wage Subsidy: New Asset Acquisition Rules for a discussion about the asset acquisition continuity rule used in calculating qualifying revenue.

Once a revenue reduction percentage is determined, the applicable rent subsidy percentage is determined by applying the formula set out in the draft legislation. For reference, we note the applicable high and low subsidy percentages in the chart below, as well as, for reference, the maximum subsidy amount based on a $300,000 qualifying rent expense:

Note that these figures apply until December 19, 2020. Beyond December 19, 2020, the base subsidy percentage is not yet prescribed.

Subsidy #2: The Lockdown Support Top-up Subsidy

In addition to the base subsidy, eligible entities may be able to claim the second component of CERS: a lockdown support top-up subsidy of an additional 25 percent on qualifying rent expenses at qualifying properties, where the eligible entity has a revenue reduction percentage of greater than zero (see notes on calculation above), and the applicable properties are subject to a public health restriction. If both of these tests are met, the additional 25-percent subsidy applies automatically to the applicable qualifying rent expenses for each applicable property.

Interestingly, this amount is not limited to the same aggregate cap of $300,000 that applies to the base subsidy, and the government backgrounders (released November 5, 2020) confirm that the 25-percent lockdown support top-up subsidy is not subject to an overall cap—meaning it could apply to an unlimited number of qualifying properties for an eligible entity where the tests are met. For example, if an eligible entity rented/owned 30 qualifying properties, each with qualifying rent expenses of at least $75,000 per qualifying period, it could be entitled to a lockdown support top-up subsidy of $562,500 per qualifying period, in addition to any base subsidy to which it was entitled.

A public health restriction means an order or decision:

• made under provincial or federal law;
• made in response to the COVID-19 pandemic;
• which is limited in scope by geography, type of business/activity, or risks associated with a particular location;
• where non-compliance is an offence or can result in an administrative monetary penalty or other sanction from the provincial or federal government;
• which is not an order or decision imposed because the eligible entity violated another applicable order or decision;
• whereby some or all of the types of activities of the eligible entity at, or in connection with, the qualifying property (that it is reasonable to expect the eligible entity would, absent the order or decision, otherwise have engaged in) are required to cease (note that a mere restriction on the extent that an activity may be performed is not sufficient for this purpose);
• whereby it is reasonable to conclude that at least approximately 25 percent 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
• whereby the restricted activities are required to cease for a period of at least one week.

Each business should give careful consideration to the applicable laws and business activities in order to determine eligibility for the lockdown support top-up.

Anti-Avoidance Measures and Penalties

Pursuant to the draft legislation, the same anti-avoidance measures and penalties that apply to CEWS will also apply to CERS (with necessary modifications to capture artificially inflated qualifying rent expenses as well as artificially deflated revenues).

Specifically, the legislation contains a targeted anti-avoidance rule which will deny CERS to an otherwise eligible entity where: a) the eligible entity, or a non-arm's length person or partnership, enters into a transaction or participates in an event (or a series of transactions or events) or takes an action (or fails to take an action) that has the effect of reducing the qualifying revenues or increasing the qualifying rent expenses for the applicable qualifying period; and b) it is reasonable to conclude that one of the main purposes of the transaction, event, series or action is to cause the eligible entity to qualify for CERS. The breadth of this rule—referring to actions or failure to take actions—is perhaps necessary given the scope of the relief provided, but, prior to applying for CERS, we recommend that eligible entities review, with their legal and tax counsel, any out-of-the ordinary transactions or events which could potentially be caught by the rule.

Further, any eligible entity subject to the above provision is liable to an additional penalty of 25 percent of the value of the CERS amount claimed.

Interactions with Other Programs

CECRA expired on September 30, 2020. Other than the four-day overlap in eligibility period between CECRA and CERS (September 27 to 30, inclusive), the programs stand separate from each other and have distinct eligibility criteria.

How to Apply and Reimbursement

Eligible entities will be required to file an application no later than 180 days following the end of the applicable qualifying period (meaning an application deadline of April 22, 2021, for the first qualifying period ending October 24, 2020). Details on how to apply have not yet been released, but it is anticipated that the application process will be similar to the CEWS application, through the Canada Revenue Agency's My Business Account portal as well as a web-based application.

CERS will be distributed through a deeming rule in the Income Tax Act, which deems an eligible entity to have made an overpayment of tax in the applicable qualifying period. The deemed overpayment is then "refunded" to the entity upon assessment by the Canada Revenue Agency (CRA). While the CRA has generally processed payments under CEWS within 10 business days, the CRA it has not yet commented on whether a similar timeline will apply to payments under CERS.

Eligible entities are strongly advised to maintain written evidence as to their qualification for CERS, although such documentation is not expected to be required to be submitted to the CRA at the time of making an application. It should also be noted that it is expected that the CRA will be permitted to publish the name of any person or partnership that makes an application for CERS.

Businesses considering the CERS should also be aware that the amount of any CERS received is, for tax purposes, treated as government assistance and, as such, may be a taxable to them.

Conclusion

The presentation of Bill C-9, An Act to Amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy) marks an important step towards fulfilling the promises made by the federal government on October 9, and the fulfillment of a rent subsidy promise for large businesses that has been declared by the federal government since the early days of the pandemic. Compared to CECRA, CERS will increase the number of eligible businesses, the type of eligible expenses, and the amount of eligible subsidy for businesses who have been negatively affected by the COVID-19 pandemic. While touted as an "easy to understand program", the legislation is complex and all such businesses should carefully consider their eligibility for the program based on the draft legislation.