Principal Issues: Is the entity eligible for the CEWS?
Position: Question of fact.
Reasons: It depends if it is a public institution or not. General comments are provided to help determine if the entity is a public institution or not.
XXXXXXXXXX 2020-084764
Mr. Filiatrault, CPA, CAJune 23, 2020
Dear Madam,
Subject: Eligibility for the Canadian Emergency Wage Subsidy
This is in response to your request of April 24, 2010, in which you asked for our opinion as to your entity's eligibility for the Canada Emergency Wage Subsidy (the "CEWS") under new section 125.7 of the Income Tax Act (the "Act"). You indicated that your organization is a not-for-profit organization.
Our Comments
The CRA helps entities to determine if they qualify for the CEWS by various means. It can be the Frequently Asked Questions published on our website, information provided through telephone services or the CRA’s participation in conferences of professional associations. The information thus provided cannot be considered a confirmation by the CRA that an entity qualifies for the CEWS.
Canada’s income tax system is based on self-assessment. It is thus the entity’s responsibility to determine if it qualifies for the CEWS. We understand that making this determination may be difficult for someone unfamiliar with the Act. Therefore, we will provide the following general comments to help you or your tax advisor determine whether your organization is a "qualifying entity" for purposes of CEWS.
The CEWS, computed under subsection 125.7(2) of the Act, is available to any "qualifying entity", as defined in subsection 125.7(1) of the Act. However, the "qualifying entity" must, a priori, be a "specified entity", also defined in subsection 125.7(1) of the Act.
The CEWS, computed under subsection 125.7(2) of the Act, is available to a “qualifying entity”. However, the “qualifying entity”, under subsection 125.7(1) of the Act, must first be an “eligible entity”.
A non-profit organization (a "NPO") can be an "eligible entity" for the purposes of the CEWS, as long as it is not a "public institution". A "public institution", as defined in subsection 125.7(1) of the Act, means:
(a) an organization described in any of paragraphs 149(1)(a) to (d.6) [of the Act];
or
(b) a school, school board, hospital, health authority, public university or college.
Therefore, public institutions would generally include municipalities and local governments, Crown corporations, wholly owned municipal corporations, public universities, public colleges, public schools, health authorities and hospitals.
Due to the large number of enquiries that CRA is receiving in the context of the COVID-19 pandemic, CRA will not confirm in advance if an entity is or is not a public institution for the purpose of the CEWS. In addition, the question of whether an entity is or is not a public institution is based on the facts and necessitates a review of all the relevant documents of the entity. It is not the CRA’s common practice to examine the facts of a given situation other than in the course of the issuance of a notice of assessment or reassessment.
Paragraphs 149(1)(a) and (b) of the Act refer to individuals, and are therefore not relevant in this situation.
Paragraph 149(1)(c) of the Act refers to a municipality in Canada, or a municipal or public body performing a function of government in Canada. The determination of whether an entity meets the criteria of paragraph 149(1)(c) of the Act in a particular year is based on the facts of each case, which can be obtained only by reviewing all of its activities for that year.
The term “municipal body” is not defined in the Act. However, we consider a municipal body to have similar characteristics to a municipality. In this regard, a municipal body is typically considered to be a body established or exercising a power under a municipal act or a similar statute of a province or territory with respect to governing the affairs or purposes of a geographic area and is accountable to those governed by it.
The term “public body” is also not defined in the Act. A public body must have a duty to the public, must have a significant degree of government control, and any profit earned must be for the benefit of the public and not for private benefit. It is typically a body that acquires both its existence and its authority from a statute enacted by a legislature, and whose functions and transactions are for the benefit of, and affect the whole community of, persons to which its authority extends.
In addition to being a municipal or public body, an entity must also be “performing a function of government” in Canada in order to qualify for the exemption from tax provided by paragraph 149(1)(c) of the Act. This would include bodies of a local nature that perform the type of function typically performed by municipalities and provide the type of services that are usually provided by municipalities.
In our view, a “municipal or public body performing a function of government in Canada” was meant to apply to entities that while not legally municipalities, nevertheless possessed attributes of municipalities and provided services similar to those provided by municipalities. Historically, the CRA has required that to be performing a function of government, an entity must have the ability and powers to govern, tax, pass by-laws and provide municipal type services to its members/citizens.
Paragraph 149(1)(d) of the Act refers to a corporation, commission or association all of the shares (except directors’ qualifying shares) or of the capital of which was owned by one or more persons each of which is Her Majesty in right of Canada or Her Majesty in right of a province. Paragraph 149(1)(d.1) of the Act refers to a corporation, commission or association not less than 90% of the shares (except directors’ qualifying shares) or of the capital of which was owned by one or more persons each of which is Her Majesty in right of Canada or Her Majesty in right of a province.
Paragraph 149(1)(d.2) of the Act refers to a corporation where all of the shares (except directors’ qualifying shares) or capital of which are owned by an entity referred to in paragraph 149(1)(d) of the Act as well as a subsidiary of such a corporation. Subparagraph 149(1)(d.3)(i) of the Act refers to a corporation, commission or association where not less than 90% of its shares (except directors’ qualifying shares) or capital are owned by Her Majesty in right of Canada or a province or a person to which paragraph (d) or (d.2) of the Act applies (i.e. corporation 100% owned by Her Majesty in right of Canada or a province, or a 100% owned subsidiary of such a corporation). Subparagraph 149(1)(d.3)(ii) of the Act refers to a corporation, commission or association where not less than 90% of the shares (except directors’ qualifying shares) or the capital of the corporation, commission or association are owned by one or more municipalities in Canada in combination with one or more persons each of which is Her Majesty in Right of Canada or a province, or a person to which paragraphs 149(1)(d) or (d.2) of the Act applies.
Paragraph 149(1)(d.4) of the Act refers to corporations, all of the shares (except directors’ qualifying shares) or capital of which are owned by corporations, commissions or associations that are exempt under any of paragraphs 149(1)(d) to (d.3) or paragraph 149(1)(d.4) of the Act. Paragraph 149(1)(d.5) of the Act refers to a corporation, commission or association where not less than 90% of the capital of which is owned by one or more municipalities in Canada or a municipal or public body performing a function of government in Canada. Paragraph 149(1)(d.6) of the Act refers to a corporation, all of the shares (except directors' qualifying shares) or of the capital of which was owned by one or more entities each of which is a corporation, commission or association to which paragraph 149(1)(d.5) of the Act applies, a corporation to which this paragraph applies, a municipality in Canada, or a municipal or public body performing a function of government in Canada. Municipal corporations that qualify for exemption under paragraphs 149(1)(d.5) and (d.6) of the Act have income and geographical boundary tests that must be satisfied to be exempt from tax.
In addition, subsection 149(1.1) of the Act provides that for the purposes of determining the 100% and 90% ownership tests in paragraphs 149(1)(d) to (d.6) of the Act any right to acquire shares or capital of a corporation should be considered as though the right had been exercised. For example, assume that a province currently owned 100% of the outstanding shares of a corporation but a person who was not Her Majesty in right of Canada, a province, or a Canadian municipality had a right under which they could obtain 20% of the outstanding shares of the corporation from the province. For the purposes of determining whether the 90% or 100% test is met, the non-government person would be considered to own 20% of the shares or capital. As a result, the government would own less than 90% of the corporation’s shares or capital and it would not be one that is described in paragraphs 149(1)(d) to (d.6) of the Act.
Whether a particular entity is one described in paragraphs 149(1)(d) to (d.6) of the Act would be determined with reference to the ownership of the shares or capital of the entity as well as the existence of any right by a person other than Her Majesty in right of Canada, a province or a Canadian municipality to acquire such shares or capital.
In the context of an entity without share capital, the determination of the ownership necessitates a review of all the relevant documents such as articles of incorporation, by-laws and agreements relating to the operation and control of the entity and its assets. We consider that the following factors would be relevant in making such determination:
• the identity of members,
• the structure of the entity,
• who exercises control over the financing, operation and direction of the entity,
• who has the right to elect or change the board of directors or to reverse its decision,
• who can contribute capital and receive a distribution of capital,
• details regarding asset distribution on winding-up or dissolution, and
• whether a person other than her Majesty in right of Canada, a province or a Canadian municipality has any right to acquire any capital of the entity.
We hope that our comments are of assistance.
Best regards,
Michel Lambert, CPA, CA, M.Fisc.
Manager
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch