Relief for commercial tenants and property owners: Breaking down the CERS

The Federal Government recently announced the revised version of Canada Emergency Commercial Rent Assistance (CECRA), now known as the Canada Emergency Rent Subsidy (CERS) (see our blog). While the names seem similar, the programs are significantly different.

Under CECRA, only landlords could apply and only rent was an eligible expense. Under the CERS, either tenants or building owners may apply for the subsidy. Owners may be able to apply for expenses such as property taxes, insurance and mortgage interest if they are using the property in their ordinary business or are not directly or indirectly renting to an arm’s length party.

Tenants may only apply for payments made to arm’s length parties. While the term “commercial” has been removed from the program’s name, it remains unavailable to residential buildings, either for tenants or owners.

Broadened scope

Many of the new rules regarding eligibility mirror the Canada Emergency Wage Subsidy (CEWS), which may be familiar to many business owners. Eligible entities include individuals, most corporations and certain partnerships.

Additional conditions require the business either had a CRA business number on September 27, 2020, had a payroll account on March 15, 2020 or purchased the business assets of another person or partnership who had a payroll account on March 15, 2020. A payroll account or employees are not necessarily required; therefore, entities may qualify for the rent subsidy even if they don’t qualify for the wage subsidy.

Like the CEWS, a revenue drop is required to be eligible. There is no minimum revenue drop required; however, the amount of the subsidy will be determined on a sliding scale.

Program extension

The subsidy consists of two parts: the base subsidy up to 65 percent of qualified expenses and the lockdown support top-up toof an additional 25 percent. The top-up is for businesses that were forced to close due to a public health order or had to cease certain activities due to a public health order in relation to COVID-19, for a period of at least had its operations significantly restricted for aone week or longer because of COVID-19. The maximum amount of the claim for each period is $75,000 per location and $300,000 for an affiliated group of entities.

The program is expected to run from September 27, 2020, until December 19, 2020, with a potential extension until June 30, 2021. The claim periods will be the same as the CEWS, beginning with September 27 – October 24, 2020, October 25 – November 21, 2020, and November 22 – December 19, 2020.

The recent fiscal update delivered by the government on November 30, 2020, announced that the program will be extended until March 13, 2021. Each claim period will require an application and the deadline to file is 180 days after the end of each claim period. An attestation by the owner or senior management must accompany each application in the prescribed form.

How subsidies will be calculated

The calculation of the subsidy is dependent on the revenue decline percentage, either year over year or compared to the average of January and February 2020. For example, the first claim would compare the decline in revenue for the months of October 2020 to that of October 2019 or to the average of January and February 2020 if an election is filed. The election to use January and February 2020 is the same as with the CEWS program and must be applied to both programs if utilized.

The revenue calculation is the same as the CEWS and is defined as “the inflow of cash, receivables, or other considerations arising in the course of its ordinary activities in Canada in a particular period. These inflows are generally from the sale of goods, the rendering of services, and the use – by other – of the eligible entity’s resources.” Extraordinary or non-recurring items are excluded, as are amounts on account of capital, amounts from persons or partnerships that are non-arm’s length and amounts received from the CEWS program.

Either the cash or the accrual method of computing revenue is acceptable, however, the same method must be used for both the CERS and CEWS claims. The accrual method is computed in accordance with generally accepted accounting principles. Special rules apply in the case of asset sales or amalgamations.

Once the revenue decline percentage is computed, the amount of the subsidy is determined based on three brackets.

• If the revenue decline is 70 percent or greater, the subsidy equals 65 percent of eligible expenses
• If the revenue decline is between 50 percent and 69 percent, the subsidy equals 40 percent plus 1.25 times amount of the revenue percentage decline which exceeds 50 percent
• If the revenue decline is less than 50 percent, the subsidy is 80 percent of the revenue decline.

If the revenue decline in the immediately preceding period is greater than the current period, you may use the larger percentage from the preceding period.

Defining qualifying properties and expenses

Qualifying properties consist of real or immovable property in Canada, typically land and buildings, which the business either owns or rents and is used in its ordinary business activities. Properties that do not qualify include personal-use property and properties used primarily (i.e. greater than 50 percent) to earn income from arm’s length parties. While the owners of commercial properties who are renting to arm’s length parties may not be eligible for the subsidy, their tenants should be.

Qualified expenses must be paid or payable to an arm’s length party and in respect of a claim period. In other words, the expenses do not need to be paid at the time of the claim; they will be considered paid when they become due. The expenses must be paid or payable pursuant to a written agreement in place before October 9, 2020, a renewal on substantially similar terms, or the assignment of such an agreement. This is to ensure applicants are not attempting to artificially increase the number of their claims. Any income earned from sub-leasing space must be subtracted from qualifying expenses.

The lockdown support provides for a 25-percent top-up in the event of a public health order where one or more locations are temporarily closed or activities are significantly restricted due to COVID-19, for a period of at least a week. The 25 percent is prorated based on the number of days the location was locked down due to COVID-19, divided by 28 days.

Restrictions must order the business to stop or close an activity. Reduced hours of operation, reduced seating capacity or other physical distancing strategies will not qualify.

Businesses, not-for-profit and charities can apply online for the subsidy through the Canada Revenue Agency (CRA) My Business Account, or Represent a Client portals.

The new program seems to be an improvement over its predecessor; however, the rules are still complex. Reach out to your local Business Advisor with any questions or if you would like help preparing a claim.

For further information, please contact John Nygren, CPA, CA, Regional Tax Leader, Calgary at 403.269.8450 or [email protected].