20 September 2021 Internal T.I. 2021-0883531I7 - CERS - Unexploited Rental Space

Principal Issues: Is a rental space that was intended to be used as a XXXXXXXXXX but is currently unexploited due to the Covid-19 pandemic capable of being “qualifying property”?

Position: Question of fact.

Reasons: To be “qualifying property”, a real or immovable property must be used in the course of the taxpayer's ordinary activities. It is a question of fact as to whether an unexploited rental space is capable of being used in such a manner. However, in the specific context of the given scenario, it may be reasonably concluded that the unexploited rental space was not used, or is not being used, in the course of the taxpayer's ordinary activities.

Mrs. Brigitte Richer				HEADQUARTERS
Policy and Legislation Section			Income Tax Rulings
Collections and Verifications Branch		Directorate
Canada Revenue Agency				Kah Foo, Koh
Brigitte.Richer@cra-arc.gc.ca 			2021-088353

CERS – Unexploited Rental Space

We are writing in response to your recent inquiry, wherein you requested our views on whether an eligible entity can apply for the Canada Emergency Rent Subsidy (“CERS”) under section 125.7 of the Income Tax Act (the “Act”), in respect of expenses paid on real property leased by the eligible entity (the “Leased Space”).

In particular, the Leased Space was intended to be used as a XXXXXXXXXX by the eligible entity, and is located next to the eligible entity’s existing XXXXXXXXXX business. Due to the COVID-19 pandemic, no actions have been taken by the eligible entity to exploit the Leased Space for the purposes of operating the proposed XXXXXXXXXX. Other than securing the Leased Space, it is our understanding that the only activity undertaken by the eligible entity in respect of the proposed XXXXXXXXXX was to incorporate another entity in XXXXXXXXXX to run the XXXXXXXXXX.

Our Comments

In order to apply for the CERS pursuant to subsection 125.7(2.1) of the Act, an “eligible entity” that is also a “qualifying renter” must have “qualifying rent expense” in respect of a “qualifying property” in respect of a qualifying period. Definitions for purposes of the CERS, including the aforementioned terms, are in subsection 125.7(1) of the Act.

A qualifying property, of an eligible entity for a qualifying period is defined in subsection 125.7(1) of the Act to mean a real or immovable property in Canada used by the eligible entity in the course of its ordinary activities, subject to certain specific exclusions related to self-contained domestic establishments. In general, the activities that constitute an eligible entity’s ordinary activities is a question of fact that requires a review of all the relevant facts and circumstances.

The issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court of Canada (“SCC”) in Ensite Limited v. Her Majesty the Queen, [1986] 2 CTC 459, 86 DTC 6521. The SCC held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business to fulfil a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business. The determination of whether a property was employed and risked in a business is a question of fact.

Moreover, the Tax Court of Canada indicated in Glaxo Wellcome Inc. v The Queen, [1999] 4 C.T.C. 371 98 D.T.C. 6638, that the word “use” connotes actual utilization for some purpose, not holding for future use and that property that was “intended to be used” or “waiting to be used” was not in fact being “used”.

With respect to your inquiry, it does not appear that the Leased Space is being risked in the eligible entity’s XXXXXXXXXX business such that the withdrawal of the Leased Property would destabilize the XXXXXXXXXX operations of the eligible entity. In addition, the facts indicate that the Leased Space is waiting to be used as a XXXXXXXXXX. Therefore, while the determination of whether the Leased Space was used in the course of the eligible entity’s ordinary activities is a question of fact, in the current fact situation, it is our opinion that the Leased Spaced is not being used in the course of the eligible entity’s ordinary activities.

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette, CPA, CA
Acting Manager
For Division Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch