On November 2, the federal government introduced Bill C-9, An act to amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy) which outlines the framework for the new Canada Emergency Rent Subsidy (CERS). CERS is a new program to provide direct support to Canadian businesses, non-profits and charities affected by the COVID-19 pandemic and replaces the Canada Emergency Commercial Rent Assistance Program (CECRA). The program will also include a Lockdown Support feature that will provide supplementary financial support for organizations that are subject to a lockdown and must close or significantly limit operations pursuant to a federal or provincial public health order.
CERS is intended to provide direct, easy-to-access benefits to qualifying tenants and property owners to support payment of eligible expenses without requiring the participation of landlords, which was the primary criticism of CECRA. Relief is paid in the form of a subsidy rather than a forgivable loan and tenants will not be required to enter into rent relief agreements with their landlords to qualify for the program. The new subsidy will be available retroactively from September 27, 2020 until June 2021, although Bill C-9 only lays out details for the first 12 weeks of the program until December 19, 2020. After that date, the government may make modifications to the program.
Amount of subsidy
Under the CERS program, eligible entities that have suffered a drop in revenues will be entitled to receive a subsidy for a percentage of their eligible expenses for each of three qualifying periods (approximately one month)1. The amount of relief is determined on a sliding scale with the maximum subsidy of 65% for a revenue decline of 70% or more. The allowable subsidy for revenue decreases of less than 70% are determined in accordance with the following formulas:
Base subsidy rate
70% and over
50% to 69%
40% + (revenue drop - 50%) x 1.25
1% to 49%
Revenue drop x 0.8
The applicable subsidy rate will be the greater of the eligible entity’s percentage revenue decline for the current qualifying period and that for the previous qualifying period.
Expenses eligible for CERS relief include commercial rent, property taxes, property insurance, and interest on commercial mortgages (subject to certain limits) for qualifying real property located in Canada, less any subleasing revenues. Eligible expenses are also to be limited to those paid under agreements in writing entered into before October 9, 2020 (as those agreements may be renewed). The following expenses are not eligible expenses:
- the HST/GST component of costs that are otherwise an eligible expense;
- expenses that relate to residential property used by the taxpayer (e.g., their house or cottage);
- payments made between non-arm's-length entities; and
- mortgage interest expenses in respect of a property primarily used to earn, directly or indirectly, rental income from arm’s-length entities.
The expenses that may be claimed for each qualifying period are capped at $75,000 per property and are subject to an overall cap of $300,000 in the aggregate which must be shared among affiliated entities for all of their properties. A tenant that has experienced a drop in revenues of greater than 70% will therefore be entitled to a maximum subsidy payment of $48,750 per property per qualifying period and that tenant and its affiliates will be entitled to a maximum payment of $195,000 per qualifying period for all of their properties.
The persons eligible to receive CERS benefits include individuals, taxable corporations and trusts, non-profit organizations and registered charities. Public institutions are generally not eligible for the subsidy. Eligible entities also include the following groups:
- partnerships that are up to 50% owned by non-eligible members;
- Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible entities;
- registered Canadian amateur athletic associations;
- registered journalism organizations; and
- non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.
In addition, an eligible entity must meet one of the following criteria:
- have a payroll account as of March 15, 2020 or have been using a payroll service provider;
- have a business number as of September 27, 2020 (and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim); or
- meet other conditions that may be prescribed in the future.
An entity can choose to calculate its revenue decline either by comparing its monthly revenues for the applicable calendar month on a year over year basis2 or, alternatively, by comparing its current reference month revenues with the average of its revenues for January and February of 2020. However, applicants must use the same approach for each of the three qualifying periods, and the approach chosen will apply to both the Canada Emergency Wage Subsidy and the Canada Emergency Rent Subsidy.
An entity's revenue for the purposes of the rent subsidy is its revenue from its ordinary activities in Canada earned from arm's-length sources, determined using its normal accounting practices. Revenues from extraordinary items and amounts on account of capital are excluded. Special rules apply for the computation of revenue from certain non-arm's-length transactions. Affiliated groups that do not normally compute revenue on a consolidated basis may elect to do so.
In addition to the relief available under CERS, eligible entities that are forced to close, or to cease some or all of their business activities at a qualifying property for at least one week, are entitled to a top-up payment equal to 25% of eligible expenses incurred in a qualifying period. In other words, the public health order must limit a type of activity in its entirety and not simply the extent to which, or time period during which, an activity may be carried on. If the public health restrictions only apply for part of a qualifying period, the amount of the Lockdown Support payment is pro-rated for the number of days in the period during which the relevant property was affected.
To qualify for the Lockdown Support for a qualifying location, the entity must also qualify for the base Canada Emergency Rent Subsidy and the public health order must require that the entity completely shut down the location or cease some or all of the activities at the location and it is reasonable to conclude that the ceased activities were responsible for at least approximately 25% of the revenues of the entity at that location in the pre-pandemic reference period.
For the purpose of the new Lockdown Support, eligible expenses are capped at $75,000 per location for each qualifying period, but the overall $300,000 cap does not apply.
Applications for CERS, including the Lockdown Support, must be made on or before the date that is 180 days after the end of the qualifying period for which a subsidy is being requested.
At first blush, CERS appears to address many of the criticisms of the CECRA program and to provide a more accessible, tenant-friendly form of financial support than was available under CECRA. The CECRA program placed the onus on landlords to accept a 25% reduction in rent, to enter into rent reduction agreements with their eligible tenants and a loan agreement with the program administrator and to assemble documents to support an application for benefits. Under CERS, tenants will be able to apply and receive funds directly without requiring the co-operation of their landlords or needing to negotiate rent reduction agreements. Unlike CECRA, there are no maximum rent thresholds that disqualify larger tenants from eligibility and it appears that tenants who have expenses that exceed the CERS cap amounts will still be able to obtain subsidies for eligible expenses within the specified limits. Tenants who suffered significant losses of revenue but did not meet specific revenue loss thresholds were not eligible for CECRA but will be eligible for benefits under CERS based on the revenue reduction they have suffered.
However, CERS is not without its own set of challenges. As originally drafted, Bill C-9 requires tenants to pay rent before being able to apply for CERS benefits which may be very difficult for tenants who do not have the cash flow to do so. Furthermore, eligible applicants will only receive a subsidy that covers a portion of their eligible expenses. Tenants whose businesses and revenues have been severely impacted by the COVID-19 pandemic may still face financial difficulties and need to seek additional rent relief from their landlords outside of the parameters of the program.
1 The government has identified the qualifying periods for the first 12 weeks of the CERS program as being: September 27 to October 24, 2020; October 25 to November 21, 2020; and November 22 to December 19, 2020. See https://www.canada.ca/en/department-finance/news/2020/11/canada-emergency-rent-subsidy.html
2 Since each qualifying period straddles two months, the government has indicated that CERS applicants will be permitted to use either of the applicable calendar months falling within that qualifying period as the reference month for the purposes of determining its revenue decline. See: https://www.canada.ca/en/department-finance/news/2020/11/canada-emergency-rent-subsidy.html
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2021 by Torys LLP.
All rights reserved.