Principal Issues: When does a taxpayer have to include the CEWS in the calculation of its income?
Position: See comments below.
Reasons: See comments below.
Question from the APFF
Subsection 125.7(3) of the ITA states the following regarding the moment when an amount related to the CEWS is deemed to be received by a qualifying entity :
“For the purposes of this Act other than this section, and for greater certainty, the amount that a qualifying entity is deemed under subsection (2) to have overpaid is assistance received by it from a government immediately before the end of the qualifying period to which it relates” (emphasis added).
Question 25 of the FAQ on the CEWS, available on CRA’s Website, also addresses this matter. The following questions are about the moment when an amount related to the CEWS must be included in the calculation of the income of a qualifying entity.
a) A qualifying entity filed an application for the CEWS at the end of May 2020 for the qualifying period that begins on March 15, 2020 and ends on April 11, 2020 (period 1) for an amount of $100,000. This amount was received by the applicant during the month of June 2020. The entity’s taxation year-end is May 31. In this example, can CRA specify when the amount of the CEWS of $100,000 received in June 2020 must be included in the calculation of the income of the qualifying entity, and under which section of the ITA?
b) A qualifying entity for the CEWS files all its applications for period 1 to 4 at the same time, on December 15, 2020. Here are the facts related to those applications and the filing of its tax return for its taxation year ending on June 30, 2020.
- The amount of the four applications for the CEWS for periods 1 to 4 are $50,000 each, for a total of $200,000;
- The four applications for the CEWS are treated as filed and the amount of $200,000 is received in January 2021.
- The entity files its tax return for the taxation year ending on June 30, 2020 on October 31, 2020.
- Because the entity has not filed its applications for the CEWS on October 31, 2020, no amount in this regard is added in the calculation of its income for the taxation year ending on June 30, 2020.
The qualifying entity for the CEWS wonders:
i) In which taxation year each of the amounts of the CEWS for period 1 to 4 have to be added in the calculation of its income?
ii) If certain amounts of the CEWS have to be added in the entity’s income for its taxation year ending on June 30, 2020:
a. What are the CRA’s suggestions to amend the calculation of the entity’s income, giving the fact that at the time its tax return is filed, no application for the CEWS has been filed by the entity?
b. In such a case, could CRA accept, by administrative relief or other means, in order to reduce the cost of tax compliance, that the entity adds the amount of the CEWS in the taxation year in which the applications are filed?
CRA’s answer to question a)
Subsection 9(1) of the Income Tax Act (“the ITA”) states that a taxpayer’s income for a taxation year from a business or a property is the taxpayer’s profit from that business or property for the year. However, the ITA does not provide a definition of “profit”.
In the case law Canderel Ltd v. Canada, the Supreme Court of Canada summarized the principles relevant to the computation of profit under section 9 of the ITA. It stated, among others, the following principles:
- The determination of profit is a question of law.
- In seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer’s profit for the given year.
- In ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with the provisions of the ITA, established case law principles or "rules of law" and well-accepted business principles.
- On reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year, which is consistent with the ITA, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture.
Although the determination of profit is a question of law, CRA is of the view that the inclusion of the amount of the CEWS in the calculation of the taxpayer’s income under subsection 9(1) of the ITA would be, in the example provided in the question, a method which would yield an accurate picture of the taxpayer’s profit for the taxation year ending on May 31, 2020. Such an inclusion in the taxpayer’s income would not be contrary to the principles emerging from Canderel.
On the other hand, in the case where, after having considered the principles established in Canderel, it would be determined that the amount of the CEWS should not be included directly in the taxpayer’s income under subsection 9(1) of the ITA for its taxation year ending on May 31, 2020, CRA is of the view that paragraph 12(1)(x) of the ITA will eventually apply, as a result of the application of subsection 125.7(3) of the ITA, and the amount of the CEWS will have to be included in the taxpayer’s income for its taxation year ending on May 31, 2020.
Indeed, subsection 125.7(3) of the ITA enacts that for the purposes of the ITA, other than section 125.7, the amount that a qualifying entity is deemed under subsection 125.7(2) of the ITA to have overpaid is assistance received by it from a government immediately before the end of the qualifying period to which it relates.
In the example provided in question a), the application is for the qualifying period that ends on April 11, 2020. Therefore, the amount of the CEWS is deemed, under subsection 125.7(3) of the ITA, to be received immediately before the end of April 11, 2020 as an assistance from a government, hence its inclusion in the taxpayer’s income for its taxation year ending on May 31, 2020.
CRA’s answer to question b)
The principles set out in the answer to question a) also apply to the situation described in question b).
If, after having considered the principles established in Canderel, it is determined that the amount of the CEWS for periods 1 to 4 should not be included directly in the calculation of the taxpayer’s income under subsection 9(1) of the ITA for its taxation year ending on June 30, 2020, CRA is of the view that paragraph 12(1)(x) of the ITA will eventually apply, as a result of the application of subsection 125.7(3) of the ITA, and the amount of the CEWS received in January 2021, for the applications filed in December 2020 for periods 1, 2 and 3, will have to be included in the taxpayer’s income for its taxation year ending on June 30, 2020.
Due to the deeming rule under subsection 125.7(3) of the ITA, the amounts of the CEWS for periods 1 to 3 are deemed to be received, respectively, on April 11, May 9 and June 6, 2020. As for the amount of the CEWS related to period 4 that ends on July 4, 2020, it is deemed to be received on July 4, 2020.
Therefore, if the amount of the CEWS for period 4 is not included directly in the calculation of the taxpayer’s income under subsection 9(1) of the ITA for its taxation year ending on June 30, 2020, paragraph 12(1)(x) of the ITA will eventually apply and the amount of the CEWS for period 4 will be included in the taxpayer’s income for its taxation year ending on June 30, 2021.
In the example provided in question b), since the taxpayer has not included the amounts of the CEWS in the calculation of its income at the time its tax return was filed (in October 2020) for its taxation year ending on June 30, 2020, it would be necessary to subsequently file an amended tax return to include the amounts of the CEWS, for periods 1 to 3, in the taxpayer’s income for its taxation year ending on June 30, 2020. CRA will not grant any administrative relief to allow the taxpayer to include the amount of the CEWS in its income for a taxation year other than the one that ends on June 30, 2020.
We hope that these responses are of assistance.
Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch