Federal Government introduces Canada Emergency Rent Subsidy (“CERS”)

by | Nov 23, 2020 | Covid-19 | 0 comments

The government of Canada is continuing their efforts with assisting businesses in Canada during the COVID-19 pandemic.  As part of their continued support, the federal government introduced the Canada Emergency Rent Subsidy (“CERS”), which is a new program aimed 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”) that recently ended.

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.

HP’s Analysis:
CERS appears to solve the many problems of the CECRA program as it appears to be a tenant-friendly form of financial support since landlords do not have to accept a 25% rent reduction in rent as they did under the CECRA for the tenant to qualify for the CERS.  However, as Bill C-9 is currently drafted, tenants are required to actually pay their rent before being able to apply for CERS, which may be very difficult as businesses may not have the cash flow to do this.  In addition, even with the 65% maximum rent subsidy, businesses who have their revenues severely impacted by the COVID-19 pandemic may still face financial difficulties even if they receive the CERS.
 

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). The amount of relief is determined based on a decline in revenues 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:

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.


Eligible expenses
Expenses eligible for CERS for a particular qualifying period related to a qualifying property include the following:

  • Commercial rent;
  • Property taxes;
  • Property insurance; and
  • Interest on commercial mortgages (subject to certain limits)

Any revenues received from subleasing arrangements will be deducted from the total eligible expenses and eligible expenses are also to be limited those paid under agreements in writing entered into before October 9, 2020 and are limited to expenses related to real property located in Canada.

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 ($75,000 x 65%) 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.

Eligible Entities
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.

Revenue Test

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 basis 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.

Lockdown Support

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.

Application Deadline
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.

You must apply for CERS online through either the My Business Account or through Represent a client.  The following is a link to the CRA website where the application can be made:

https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-how-apply.html#h-3

The first application period is September 27th to October 24th, 2020.

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