Principal Issues: 1) Whether government assistance related to interest paid on a debt obligation secured by a mortgage or hypothec on a qualifying property reduces the amount of interest paid on the debt obligation otherwise referred to in subparagraph 125.7(1)(b)(i) of the definition « qualifying rent expense ».
2) In respect of what qualifying period an amount of interest paid annually on a debt obligation secured by a mortgage or hypothec on a qualifying property is « qualifying rent expense » within the meaning of this definition in subsection 125.7(1)?
Position: 1) No. 2) None.
Reasons: 1) Wording of the Act. 2) Question of fact that can only be resolved after a review of all relevant facts and documents surrounding a given situation.
December 23, 2022
Headquarters Headquarters Income Tax Rulings Directorate Income Tax Rulings Directorate Dedicated Telephone Service
Attention: Danny Gagnon danny.gagnon@cra-arc.gc.ca 2021-088042
Subject: CERS - eligible rental expenses
This letter is in response to your questions regarding the Canada emergency rent subsidy ("CERS") provided under section 125.7 of the Income Tax Act (the "Act").
All legislative references in this letter are to the provisions of the Act.
Specifically, you asked whether government assistance in respect of interest paid on a debt obligation secured by a mortgage on a qualifying property reduces the amount of interest paid on that obligation otherwise described in subparagraph 125.7(1)(b)(i) of the definition of "qualifying rent expense".
You further asked for what qualifying period would an amount of interest paid annually on a debt obligation secured by a mortgage on a qualifying property qualify as "qualifying rent expense" within the meaning of that definition in subsection 125.7(1).
Our Comments
Essentially, the CERS allows qualifying entities that have suffered a drop in revenue to qualify for a subsidy on their "qualifying rent expenses".
The concept of "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 an eligibility period, is the amount determined by the formula A - B.
Variable 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 respect of a qualifying property owned by the eligible entity. Paragraph (b) further provides that such qualifying property must not be used by the eligible entity primarily to earn rental income or, where such qualifying property is used by the eligible entity primarily to earn rental income directly or indirectly from a person or partnership not dealing at arm's length with the eligible entity, is not used by that person or partnership primarily to earn rental income. In this situation, subparagraph (b)(i) of the description of A in the definition "qualifying rent expense" in subsection 125.7(1) refers to interest on a debt obligation secured by a mortgage on a qualifying property to the extent that the debt obligation does not exceed the lesser of certain amounts.
Regarding your first question, nothing in the Act as currently drafted reduces an amount of interest paid on a security otherwise described in subparagraph (b)(i) of the description of A in the definition of "qualifying rent expense" solely because that amount was the subject of government assistance.
That said, the question of whether an amount of interest on a security is paid by an eligible entity is a question of fact that can only be resolved after an examination of all the relevant facts and documents surrounding a particular situation. However, it is our general view that an amount of interest on a security is paid by an eligible entity for CERS purposes only if the amount is actually paid by the eligible entity. If it is determined in a particular situation that an eligible entity has not paid the amount of interest on a debt obligation secured by a mortgage on a qualifying property, that amount of interest in such a situation will not be included in the amount of "qualifying rent expense" within the meaning of that definition in subsection 125.7(1).
Regarding your second question, it should be noted that in order to qualify as "qualifying rent expenses" within the meaning of that definition in subsection 125.7(1), the amounts must, inter alia, be paid, or deemed to have been paid pursuant to subsection 125.7(12), in respect of a qualifying period.
The question of determining in respect of which qualifying period an amount of interest is paid for the purposes of the definition of "qualifying rent expense" in subsection 125.7(1) is a question of fact that can only be resolved after a review of all the relevant facts and documents surrounding a particular situation.
Where the amount of interest on a debt security secured by a mortgage on a qualifying property is paid annually ("Annual Interest Amount"), this issue requires a review of the legal documents for each particular situation to determine whether it is reasonable to spread an amount paid annually over several qualifying periods.
In addition, eligibility for CERS in respect of a particular qualifying period may be restricted depending on the date on which the Annual Interest Amount first becomes due, the date on which it is actually paid and the date on which the eligible entity has applied for CERS for the given qualifying period.
We hope that our comments are of assistance.
Best regards,
Isabelle Landry
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch