On November 5, 2020, the federal government released further details on the Canada Emergency Rent Subsidy (CERS) and the Lockdown Support subsidy for commercial tenants. Both programs will provide eligible organizations with commercial rent and mortgage support until June 2021 and will serve as a replacement to the federal government’s Canada Emergency Commercial Rent Assistance (CECRA) program, which offered commercial rent relief to eligible businesses from April 2020 to the end of September 2020. Unlike with the CECRA program, organizations eligible for CERS and the Lockdown Support subsidy will apply for and receive the subsidies directly, without the need of the participation of their landlords.

Initial details on the new rent subsidy programs were provided on October 9, 2020 via press release from the Department of Finance as well as by a news conference held by Prime Minister Justin Trudeau and members of his cabinet. Legislation detailing eligibility requirements for the subsidy programs was introduced on November 2, 2020 as Bill C-9, An Act to Amend the Income Tax Act (Canada Emergency Rent Subsidy and Canada Emergency Wage Subsidy). Bill C-9 was subsequently passed by the House of Commons on November 6, 2020 but, at the time of writing, has not received Royal Assent. Technical backgrounders on both programs were released by the Department of Finance on November 5, 2020 and can be found here and here.

Calculating the base subsidy

CERS will apply retroactively to provide eligible organizations affected by COVID-19 with rent and mortgage support from September 27, 2020 to June 2021. The subsidy rate will vary depending on the eligible organization’s revenue decline and will be calculated as follows:

For an illustration of the sliding scale of the subsidy rate, see Appendix “A” at the end of this memo.

Qualifying periods

Initially, the subsidy will apply to an eligible organization’s qualifying rent expense incurred during any of the following qualifying periods:

• September 27 to October 24, 2020;
• October 25 to November 21, 2020; and
• November 22 to December 19, 2020.

The government may prescribe additional qualifying periods, with revised program parameters, following December 19, 2020 and ending no later than June 30, 2021.

Which organizations qualify for the subsidy?

In order to be eligible for the rent subsidy, organizations must either: (i) have a payroll account as of March 15, 2020 (or have been using a payroll service provider); or (ii) have a business number as of September 27, 2020 and be able to satisfy the Canada Revenue Agency (CRA) that the organization’s claim is a bona fide rent subsidy claim. Additional eligibility requirements may be prescribed in the future.

Organizations eligible for the subsidy include:

• Individuals;
• Taxable corporations and trusts;
• Non-profit organizations;
• Registered charities;
• Partnerships that are up to 50 per cent 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.

Eligible organizations will be required to submit an application to the CRA by no later than 180 days after the end of the applicable qualifying period. At the time of writing, details surrounding the CERS application process have yet to be released, however it is expected that the application process will mirror that used by the CRA for the Canada Emergency Wage Subsidy (that is, by submitting applications through the CRA’s “My Business Account” or “Represent a Client” online portals, or through a web-form application).

Calculating an organization’s drop in revenue

An organization’s revenue for the purposes of determining CERS eligibility is the revenue generated from its ordinary activities in Canada earned from arm’s length sources (subject to exceptions for certain non-arm’s length transactions) as determined in accordance with normal accounting practices. Revenue does not include revenue generated from extraordinary items and amounts on account of capital. Affiliated entities of eligible organizations that do not normally calculate revenue on a consolidated basis may elect to do so for the purposes of determining the eligible organization’s revenue. Charities and non-profit organizations may choose to include revenue received from government sources as part of their revenue calculation.

Organizations are able to calculate their drop in revenue in one of two ways, but the basis of this calculation must remain the same for each of the three qualifying periods listed above. The first approach for determining revenue decline is to compare the organization’s monthly revenue, year-over-year, for the applicable calendar month. The second approach is to compare the organization’s current reference month revenues against the average of its January and February 2020 revenues. Organizations are required to use the same approach in calculating revenue decline for the purposes of determining available support under the Canada Emergency Wage Subsidy program.

Regardless of the approach taken, eligible organizations may choose either of the two months within each qualifying period for the purposes of calculating revenue decline (ex: September 2020 or October 2020 for the first qualifying period listed above). An eligible organization would use the greater of its percentage revenue decline for the current qualifying period and that for the previous qualifying period in order to calculate its rent subsidy.

What is a qualifying rent expense?

The subsidy will apply to a portion of an eligible organization’s “qualifying rent expense” for the applicable qualifying period. An eligible rent expense is an expense that is: (i) paid to an arm’s length entity under written agreements entered into before October 9, 2020 (and any extension of those agreements); and (ii) related to a “qualifying property”, being commercial real estate located in Canada which the qualifying organization uses in the course of its ordinary activities. A qualifying rent expense for each qualifying period is limited to $75,000 per qualifying property and is subject to an overall limit of $300,000 for each eligible organization and any of its affiliated entities.

For commercial tenants, a qualifying rent expense will include rent for the use of, or right to use, the qualifying property, including:

• gross rent;
• percentage rent;
• amounts paid under a net lease, such as base rent, operating expenses, property taxes (including school taxes and municipal taxes) and property insurance; and
• amounts received by an eligible organization’s landlord under the CECRA program that were applied against rent payable in respect of the qualifying period, if those amounts would otherwise be required to be refunded to the eligible organization.

A qualifying rent expense for commercial tenants will not include:

• sales taxes;
• amounts paid as damages;
• amounts paid under a guarantee, security or similar indemnity or covenant;
• payments arising due to default under the agreement by the eligible organization;
• interest and penalties on unpaid amounts;
• fees payable for discrete items or special services; and
• reconciliation adjustment payments.

For eligible organizations that own the qualifying property, a qualifying rent expense will also include mortgage interest (subject to limits), insurance costs and realty taxes, provided that: (i) the eligible organization does not use the qualifying property primarily to earn rental income; or (ii) where the qualifying property is used primarily by the eligible organization to earn rental income from a non-arm’s length entity, the qualifying property is not used by such non-arm’s length entity primarily to earn rental income.

Lockdown Support for organizations impacted by public health orders

Those organizations which have been ordered to temporarily shut down or significantly limit their activities under a public health order will be eligible to receive an additional subsidy equal to 25% of the qualifying rent expense for each applicable qualifying period. Referred to as the “Lockdown Support”, this subsidy will be available retroactively to September 27, 2020 until June 2021 and, in order to qualify, eligible organizations must meet the following criteria: (i) the organization qualifies for the Canada Emergency Rent Subsidy; and (ii) a public health order requires that the organization completely shut down or cease some or all of the activities at a qualifying property for at least one week and it is reasonable to conclude that the ceased activities were responsible for at least approximately 25% of the revenues of the organization at that qualifying property. For the purposes of the Lockdown Support subsidy, a qualifying rent expense is limited to $75,000 per qualifying property, but no overall limit will apply to the organization itself.

If an eligible organization is affected by a public health order for only part of a qualifying period, then the Lockdown Support will be pro-rated for the number of days in the qualifying period during which the relevant qualifying property was affected by the public health order. While not yet detailed at the time of writing, applications for the Lockdown Support will likely form a part of the CERS application process which, as mentioned above, has not yet been detailed.  

Program parameters are subject to change

The above program parameters for CERS and the Lockdown Support will apply until December 19, 2020 with future parameters to be adapted and revised thereafter. In the news conference held on Parliament Hill on October 9, 2020, Finance Minister Chrystia Freeland highlighted the flexibility of the new rent subsidy programs, noting that available support will increase or decrease depending on whether business conditions worsen or improve over the program’s life. At the time of writing, it is unclear if any assurances or landlord remedies will be worked into the program to ensure that the subsidies received by tenants are in fact paid to their respective landlords.

Dentons will continue to monitor the developments resulting from COVID-19 and further details surrounding the Canada Emergency Rent Subsidy and Lockdown Support. If you have any questions or concerns, please contact Vince Fuda or any other member of Dentons’ Commercial Real Estate Law team.

Appendix “A”