Principal Issues: Is the amount paid for liability insurance included in subparagraph 125.7(1)(b)(ii) of the definition of the “qualifying rent expense” for the purpose of the CERS?
Position: Generally no.
Reasons: A taxpayer’s entitlement to the CERS is calculated in reference to the taxpayer’s qualifying rent expense. Although the definition of qualifying rent expense includes “insurance”, liability insurance should generally be excluded. However, it is still a question of fact as to whether particular insurance should be included when calculating a taxpayer’s entitlement under the CERS.
XXXXXXXXXX 2020-087392 L. Gélinas
January 10, 2022
Dear Madam,
Subject: CERS - liability insurance
This letter is in response to your question regarding the Canada emergency rent subsidy ("CERS") under section 125.7 of the Income Tax Act (the "Act").
Specifically, you asked whether an amount paid as liability insurance is an amount paid as insurance on a qualifying property under subparagraph (b)(ii) of the description of A in the definition of "qualifying rent expense" in subsection 125.7(1).
All legislative references in this letter are to the provisions of the Act.
Our Comments
This technical interpretation provides general comments on provisions contained in the Act and other related legislation, where applicable. It is not intended to confirm the tax treatment of any particular situation involving a particular taxpayer, but rather to assist you in determining that treatment.
The CERS essentially allows eligible entities that have suffered a drop in income to qualify for a subsidy on "qualifying rent expense".
The term "qualifying rent expense" is defined in subsection 125.7(1). Under that definition, the amount of "qualifying rent expense", in respect of a qualifying property of an eligible entity for a qualifying period, means the amount determined by the formula A - B.
Element A of this formula is the lesser of $75,000 and the total of all amounts paid — under a written agreement entered into before October 9, 2020, or pursuant to the renewal (on substantially similar terms) or assignment of a written agreement entered into before October 9, 2020 — in respect of the qualifying period by the eligible entity to a party with which the eligible entity deals at arm’s length.
Paragraph (b) provides for the amounts described in the description of A in the definition "qualifying rent expense" in subsection 125.7(1) in the case of qualifying property owned by the eligible entity. Paragraph (b) further provides that the qualified property must not be used by the eligible entity primarily to earn rental income or, where the qualifying property is used primarily by the eligible entity to earn rental income directly or indirectly from a person or partnership not dealing at arm’s length with the eligible entity, that is not used by that person or partnership primarily to earn rental income. In such case, subparagraph (b)(ii) specifically provides that amounts paid for insurance on the qualifying property are amounts described in the description of A.
“Qualifying property" is defined in subsection 125.7(1) as, in summary terms, real or immovable property in Canada used by the eligible entity in the course of its ordinary activities.
Based on this definition, we are of the view that amounts paid for insurance on qualifying property for the purposes of subparagraph (b)(ii) of the description of A in the definition of "qualifying rent expense" in subsection 125.7(1) refer only to amounts paid as insurance for real or immovable property.
Consequently, while the question of whether an amount paid is paid as insurance on a qualifying property is a question of fact that depends on the terms and conditions of the insurance contract, amounts paid as property insurance and/or liability insurance are not amounts included in the description of A in the definition of "qualifying rent expense" in subsection 125.7(1) pursuant to subparagraph (b)(ii).
We hope that our comments are of assistance.
Best regards,
Isabelle Landry
Acting Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch