TaxMatters@EY – September 2020

On June 29, 2020 the federal government announced an extension to the Canada Emergency Commercial Rent Assistance (CECRA) program, a joint effort between the federal and provincial governments, to help ease the financial stress for commercial property owners and tenants to cover eligible small business rents through July 2020. On July 31, Finance announced that the CECRA was extended for one month to help eligible small businesses pay rent for August.

The program’s extension for July and August, coupled with separate announcements by the provinces that restrict landlords’ rights to evict non-paying tenants, was apparently designed to prod commercial landlords who opted not to apply for the CECRA to revisit that decision.

Here we discuss the CECRA program generally, as well as some of the risks identified by landlords which have resulted in the program’s slow adoption, as well as provincial initiatives to provide temporary commercial eviction protection for small businesses.

The window of opportunity to access the program is closing soon. The deadline to apply for the program was August 31; however if you have been previously approved and need to reapply for July and August, you have until September 14, 2020 to do so.¹

Challenges for tenants

Since mid-March, commercial real estate tenants and “non-essential” brick-and-mortar retail stores and restaurants across Canada have been greatly impacted by forced closures. These forced closures, coupled with the economic slowdown, have left many commercial tenants with cash flow issues that, in some cases, threaten their short-term viability. As rent often constitutes one of their most significant monthly expenses, many tenants sought relief from their obligation to make rental payments, in whole or in part, in the form of rent deferral arrangements.

Challenges for landlords

Of course, a landlord’s financial condition is closely linked to that of their tenants. Accordingly, a tenant’s failure to make rental payments can, in turn, challenge a landlord’s ability to meet their own financial obligations. Indeed, many commercial landlords have mortgage payments and other debt obligations that leverage either their rental properties or the rents received from such properties (whether, for example, those debts are incurred to improve or maintain existing properties, develop new properties or to develop or fund other businesses).

Additionally, the many expenses associated with operating a commercial property continue without relief. These may include property taxes, payments to various associations (e.g., fees in respect of Business Improvement Area association of commercial property owners), insurance, GST/HST, and the landlord’s own labour and overhead costs. Further, certain commercial landlords have obligations to their investors which may limit their freedom to enter into a rent deferral agreement. Meanwhile, some commercial property owners rely on rents received as their only source of income.

The CECRA

In response to these concerns, on April 24, 2020 the federal government announced its intention to partner with the provinces and territories to establish the CECRA program, which grants rent relief to small business tenants that have been impacted by the pandemic.

Under the CECRA program, the Canada Mortgage and Housing Corporation (CHMC) provides forgivable loans to eligible commercial property owners worth up to 50% of their tenants’ monthly gross rent.

To qualify, a property owner and each of its participating tenants must enter into an agreement to reduce the tenant’s obligation in respect of rent (a rent reduction agreement). Specifically, the property owner must forgive at least 75% of the original rent owed for each of the months of April, May, June and, if requested, July and August 2020. Additionally, the property owner must agree not to evict the tenant while the rent reduction agreement is in place.

The deadline to apply for CECRA was August 31, 2020. Property owners could apply in respect of any period as long as their submission was made before August 31 of this year. Existing applicants need to reapply for July and August and have until September 14, 2020 to do so.

If an application is approved, loan funds will be deposited directly into the property owner’s bank account within approximately two weeks. Further, the loans will be forgiven on December 31, 2020 without formal notification of forgiveness, as long as the property owner complies with all the terms and conditions of the loan. The property owner will be required to pay back the loan if it defaults on it, files for bankruptcy, restructures, reorganizes or is dissolved.

Eligibility requirements for impacted small business tenants

To qualify for the CECRA, small business tenants, including nonprofit and charitable organizations, must:

• Not pay more than $50,000 in monthly gross rent per location under a valid and enforceable lease agreement
• Generate no more than $20 million in gross annual revenues² on a consolidated basis (at the ultimate parent company level)
• Have temporarily ceased business operations or have experienced a drop of revenue of a minimum of 70% as compared against pre-COVID revenues

To calculate the reduction in revenues, small business tenants must compare their revenues in April, May and June 2020 to the revenues earned in the corresponding period in 2019. However, if the business was not operational in 2019, their revenues in April, May and June 2020 can be compared to the average of their revenues earned in January and February 2020.

Finance has announced that those who qualified under existing parameters will be able to apply for the additional two months based on having a 70% revenue decline for April, May and June, without having to determine whether they continue to have a 70% revenue decline in July or August. To qualify, a tenant’s revenues must be earned from ordinary activities in Canada calculated using its normal accounting methods; revenues from extraordinary items should not be included in the calculation.

Additionally, eligible small business tenants who are in sublease arrangements are eligible for the CECRA if their subleases meet the above criteria.

Eligibility requirements for property owners

To qualify for the CECRA, a commercial property owner must:

• Be the owner or landlord of a commercial real property that is occupied by one or more tenants who meet the criteria for eligibility as described above.
• Have entered into a rent reduction agreement with the affected tenant.
• Have declared rental income on its tax return for the 2018 and/or 2019 tax years or attest that the property commenced generating commercial revenue in 2020. Where the real property is newly constructed, recently purchased, or no rental income has been declared for 2018 and/or 2019, the property owner may still be eligible for the CECRA, provided that all other program requirements are met, including the requirement to have a valid and enforceable lease agreement with the impacted tenant on or before April 1, 2020.

How to apply

The following must be submitted to CMHC, along with certain factual information about the leased premises, as part of an application for a CECRA loan:

• A legally binding rent reduction agreement entered into between the property owner and the commercial tenant which conforms with the CECRA program’s terms and conditions
• An attestation by the property owner confirming all information relating to the attestation and the application is correct and confirming its eligibility under the program
• An attestation by the tenant or subtenant confirming their eligibility under the program
• A forgivable loan agreement, the terms of which must be agreed to by the property owner

Landlords’ concerns regarding rent deferral agreements and rent reduction agreements

When entering into a rent deferral arrangement, landlords should always be mindful of the effects of incorporating rent forbearance clauses or adjusting their existing payment schedule under their lease. Consideration should be given to whether such a rent deferral agreement may impact the landlord’s rights typically enjoyed on insolvency of a tenant, or whether choosing not to exercise a landlord’s right of repossession otherwise impacts the enforceability of all or parts of the lease agreement or any amendments.

Additionally, entering into a rent deferral arrangement may have unintended GST/HST implications. The Excise Tax Act generally provides that GST/HST on commercial rent is payable by the tenant on the earlier of the day the rent is payable and the day it is paid. Therefore, the landlord must remit the GST/HST when rent is payable under the lease, even if the amount is not paid until a later date. Accordingly, landlords should ensure that any rent deferral agreement to which they become a party specifies that rent is not due until a later date (along with any GST/HST). Until June 30, 2020, landlords will have benefited from GST/HST deferrals. However, after June 30, landlords will be required to remit GST/HST in respect of the commercial rent.

Further, landlords should be aware that the CECRA restricts their right to evict tenants who are also subject to the program. While it’s a well-intentioned inclusion in the program criteria, restricting a commercial property owner’s ability to evict tenants can have adverse consequences. For example, just as a vehicle on the verge of being repossessed may not be maintained as well as the family minivan, a tenant whose viability is in jeopardy may not prioritize the maintenance of rental premises to the same degree as they otherwise would where the consequences for failing to do so are dampened. A commercial property owner may not be able to seize and sell the goods of the tenant left on the premises for rent arrears or repossess during the applicable months where they might otherwise under normal circumstances.

Landlord may not be able to evict in any event

Initially, fewer applications were received for the CECRA program than were anticipated. Many commercial property owners cited their inability to evict tenants as their primary reason for not applying for the CECRA. In response, and apparently to compel commercial property owners to apply for the CECRA, many of the provinces and territories generally indicated that they would impose statutory limitations on a landlord’s ability to evict their commercial tenants in any event.

Statutory moratoriums on commercial rent evictions

British Columbia
On June 1, 2020, the Government of British Columbia announced that landlords who are eligible for the CECRA but who choose not to apply will be barred from evicting a tenant who is unable to pay rent. Pursuant to Ministerial Order M179, commercial landlords who were eligible for the CECRA are prevented from taking any of the following actions:

• Exercising any contractual or other right of re-entry to the tenant’s leased property
• Giving the tenant notice of re-entry or notice of termination of the tenant’s lease
• Distraining the tenant’s property for rent due
• Taking any steps to rent out the tenant’s leased property on the tenant’s behalf

Ministerial Order No. M179 is effective from May 29, 2020 and expires on the earlier of the expiry (or termination) of the state of emergency in the province or the last date for which the CECRA will provide assistance.

Ontario
On June 8, 2020, the Government of Ontario announced its intention to temporarily halt evictions of commercial tenants. Following this announcement, the Protecting Small Business Act, 2020 was introduced, which amends and limits the remedies normally available under Ontario’s Commercial Tenancies Act. It received Royal Assent June 17, 2020.

Protecting Small Business Act, 2020 should only apply where a commercial landlord was eligible to receive assistance under the CECRA. No such landlord would be able to exercise a right of re-entry during the period between June 18, 2020 and ending the earlier of September 1, 2020 and the day named by proclamation of the Lieutenant Governor.

Further, if a CECRA-eligible landlord has, between May 1, 2020 and June 18, 2020, repossessed a commercial tenant’s rental property, they must restore the tenant’s possession (unless the tenant declines) or, if the landlord is unable to restore the tenant’s possession, compensate the tenant for damages sustained because of the landlord’s inability to restore possession.

Saskatchewan
On June 5, 2020, the Government of Saskatchewan announced its intention to provide temporary commercial eviction protection for small business tenants during the COVID-19 emergency. The commercial eviction protection was enacted by way of a ministerial order which provides that, where a tenant and a landlord have a lease agreement to which the CECRA applies, the landlord must not, in response to a tenant’s failure to pay rent due, take any of the following actions:

• Exercise any contractual or other right of re-entry to the tenant’s leased property
• Give the tenant notice of re-entry or notice of termination of the tenant’s lease
• Distrain the tenant’s property for rent due
• Take any steps to rent out the tenant’s leased property on the tenant’s behalf

This eviction moratorium begins on June 4, 2020 and ends on the date of the last renewal of the declaration of emergency in the province or the date after the last date for which the CECRA provides assistance, whichever is earlier.

Alberta
On June 5, 2020, the Alberta Government announced that it was also considering a moratorium on commercial evictions in cases where landlords chose not to participate in the CECRA. Following this announcement, Bill 23, Commercial Tenancies Protection Act was introduced. Interestingly, unlike the prohibitions of evictions announced by the above provinces, it is possible that Alberta’s prohibition may apply to both CECRA-eligible landlords and their small business tenants, as well as other larger tenants that have been negatively affected by the economic fallout of COVID-19. This is because Bill 23 provides that the types of landlords to which this eviction moratorium will apply will be prescribed by regulation, and as of the date of writing those regulations have yet to be released. This prohibition on eviction would apply from March 17, 2020 to August 31, 2020.

Québec
The Québec Government also announced measures to protect commercial tenants that are struggling to pay rent. Amendments to Bill 61, An Act to restart Québec’s economy and to mitigate the consequences of the public health emergency declared on 13 March 2020 because of the COVID-19 pandemic, were announced which would prohibit the termination of a commercial lease or seizure of the goods contained therein where there has been a failure to pay rent that became due between March 13, 2020 and August 1, 2020 (or any other date specified by the government before that date). Similar to Alberta, this prohibition on eviction may apply to landlords that were ineligible for the CECRA.

Conclusion

With landlords and tenants both facing a crunch, legislators created the CECRA in attempt to address cashflow issues. There are only a few more days left for existing applicants to apply for August. While the expansion of the program generated additional interest, we will need to wait until the final numbers are in before we can assess its overall success.

Frequently referred to by financial planning columnists, you can find our mobile-friendly 2020 personal tax calculator at ey.com/ca/taxcalculator.

This tool lets you compare the combined federal and provincial 2020 personal income tax bill in each province and territory. A second calculator allows you to compare the 2019 combined federal and provincial personal income tax bill.

You'll also find our helpful 2020 and comparative 2019 personal income tax planning tools:

• An RRSP savings calculator showing the tax saving from your contribution
• Personal tax rates and credits, by province and territory, for all income levels

In addition, our site offers you valuable 2020 and comparative 2019 corporate income tax planning tools:

• Combined federal–provincial corporate income tax rates for small business rate income, manufacturing and processing income, and general rate income
• Provincial corporate income tax rates for small-business rate income, manufacturing and processing income, and general rate income
• Corporate income tax rates for investment income earned by Canadian-controlled private corporations and other corporations

You'll find these useful resources and several others — including our latest perspectives, thought leadership, Tax Alerts, up-to-date 2020 budget information, our monthly TaxMatters@EY and much more — at ey.com/ca/tax.

Winnie Szeto, Toronto

In this case, the Federal Court of Appeal (FCA) overturned the lower court’s decision and found that a director’s liability under subsection 227.1(1) of the Income Tax Act¹ (the Act) arises at the time of a corporation’s failure to remit source deductions.

Facts

Mr. X was a director and shareholder of ACo. ACo failed to remit source deductions to the Minister of National Revenue between February and August 2008.

On May 2, 2008, while ACo was in default of its obligation to remit source deductions, Mr. X transferred 50% of his interest in two properties to his wife, Mrs. X, who is the taxpayer in this appeal. The fair market value of the 50% interest of the first property was $41,250 and the fair market value of the 50% interest of the second property was $187,500. As consideration for these interests, Mrs. X paid Mr. X $2.00 for each property.

On October 10, 2008, the Minister issued a notice of assessment to ACo for unremitted source deductions, interest and penalties totalling $631,554. ACo did not file a notice of objection to this assessment.

On August 6, 2009, a certificate for ACo’s tax debt in the amount of $794,286 was registered in the Federal Court under section 223 of the Act.

On November 23, 2010, the Sheriff was directed to enforce the writ for $776,380. This amount reflected payments already made to reduce the tax debt.

On January 4, 2011, ACo’s tax debt was executed and returned unsatisfied.

On March 28, 2011, the Minister issued a notice of assessment to Mr. X under section 227.1 of the Act in the amount of $733,812. Mr. X did not file a notice of objection to this assessment.

On January 13, 2016, the Minister issued notices of assessment to Mrs. X under section 160 of the Act. The assessments were in the amounts of $187,498 and $41,248, which represented the fair market value of the two properties transferred to the taxpayer by her husband, less the $2 consideration per property. The taxpayer filed notices of objection to these assessments and subsequently appealed to the Tax Court of Canada (TCC).

At trial, the TCC found that the taxpayer was not liable for her husband’s tax debts under section 160 and allowed the appeal. The Crown appealed that decision to the FCA.

Tax Court of Canada decision

This case involved the interaction of sections 160 and 227.1 of the Act, both of which are anti-avoidance provisions. Subsection 160(1) is intended to prevent a transferor from avoiding the payment of tax by transferring property to certain non-arm’s-length persons, such as a spouse. Where subsection 160(1) applies, the transferor and transferee are jointly and severally liable for tax owed by the transferor. Similarly, section 227.1 imposes joint and several liability on corporate directors where the corporation fails to deduct, withhold, remit or pay withholding taxes imposed under the Act.

At trial, the material issue was whether Mr. X, the transferor, was liable under the Act to pay an amount “in or in respect of” the taxation year in which the properties were transferred (or any preceding taxation year). This condition is contained in subparagraph 160(1)(e)(ii) of the Act. In other words, the TCC had to decide whether Mr. X’s liability under section 227.1 was an amount he was liable to pay “in or in respect of” his 2008 taxation year, the year in which the properties were transferred.

The TCC acknowledged that subsection 227.1(1) of the Act imposes joint and several liability on “the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay” certain specified amounts. However, if a corporation failed to do so, the TCC was of the view that the provision was silent as to when this liability arose.

The TCC also noted that subsection 227.1(2) provides that a “director is not liable under subsection 227.1(1) unless… a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part.”

Based on the above, the TCC was of the view that the text of subsection 227.1(2) was “very clear and unambiguous, and strongly suggests that a director’s liability for unremitted source deductions… does not arise until the relevant preconditions set out in subsection 227.1(2) of the Act are met.” In other words, a director’s liability does not arise under subsection 227.1(1) “unless and until the relevant preconditions in subsection 227.1(2) are satisfied”.

In this case, these preconditions were not met until January 4, 2011, when the tax debt was executed and returned unsatisfied. Therefore, Mr. X's liability as a director of ACo did not arise under section 227.1 until January 4, 2011, when the preconditions in subsection 227.1(2) were met. As a result, the transfers of the properties in 2008 were not caught by section 160 of the Act, and Mrs. X's appeals were allowed.

Federal Court of Appeal decision

At the outset, the FCA confirmed that section 227.1 must be interpreted using a textual, contextual and purposive analysis.

The FCA disagreed with the TCC’s conclusion that subsection 227.1(1) was silent about when the director’s liability arises. The FCA acknowledged that both the English and French versions of subsection 227.1(1) were ambiguous. However, it was of the view that any ambiguity is eliminated when one considers the context and purpose of the provision.

According to the FCA, the most important contextual factor is found in subsection 227.1(2). Contrary to the TCC’s view, the FCA was of the view that subsection (2) makes it clear that it is subsection (1) that imposes liability on directors. Subsection (2) is a relieving provision that sets out specified circumstances when the liability otherwise imposed by subsection (1) may be avoided. Thus, a “director is not liable under subsection 227.1(1), unless.”

The FCA also noted that subsection 227.1(2) does not state that a director is not liable for the corporation's default “unless and until” the specified actions take place. The FCA found that the TCC impermissibly read the words “and until” into subsection 227.1(2) to conclude that a director's liability does not arise under subsection 227.1(1) “unless and until the relevant preconditions in subsection 227.1(2) are satisfied.”

According to the FCA, the purpose of subsection 227.1(2) is, among other things, the avoidance of double taxation. Thus, subparagraph 227.1(2)(a) operates to avoid double taxation by prohibiting the Minister from recovering unremitted source deductions from a director otherwise liable for the deductions if the corporation had already paid all of its liability.

The FCA cited its decision in Smith v Canada, 2001 FCA 84, 273 N.R. 357, and held that:

Subsection 227.1(1) was enacted to strengthen the Crown's ability to enforce the statutory obligation imposed on corporations to remit source deductions. It was “perceived that a corporation, particularly a corporation in financial difficulty, might prefer to default on its obligation to remit taxes, in order to satisfy creditors whose claims were more immediately pressing.” The directors' liability provision was enacted to deter corporations from pursuing such a course. The provision was “based on the presumption that a decision by a corporation to default on its remittance obligations would originate with the directors”.

The FCA indicated that the TCC’s interpretation would render this purpose pointless because the TCC’s interpretation would allow a director significant time following the corporation's default to reorganize his or her financial affairs to avoid personal financial responsibility. Parliament cannot have intended the directors' liability provision to be avoided as it was in the present case.

As a result, the FCA concluded that Mr. X’s liability for unremitted source deductions arose “in or in respect of” his 2008 taxation year and Mrs. X was liable under section 160 for ACo’s unremitted source deductions to the extent of the fair market value of the property transferred to her.

Lessons learned

This case is an important decision for corporate directors and their spouses (or other non-arm’s-length persons) who may receive property from them. It serves to remind corporate directors of the importance of exercising due diligence in ensuring their corporation’s source deductions are remitted in a timely manner.

This case is also a powerful reminder that the interaction of sections 160 and 227.1 can have far-reaching implications.

Tax Alerts – Canada

Tax Alert 2020 No. 38 – Saskatchewan budget

Tax Alert 2020 No. 39 – Prince Edward Island budget

Tax Alert 2020 No. 40 – Federal Court of Appeal rejects Crown appeal in Cameco transfer pricing case
On 26 June 2020, the Federal Court of Appeal (FCA) released its decision in the case of The Queen v. Cameco Corporation, 2020 FCA 112, an appeal of the September 2018 Tax Court of Canada (TCC) decision in Cameco Corporation v. The Queen, 2018 TCC 195. The FCA upheld the TCC’s decision in favour of the taxpayer, and in doing so set out a succinct interpretation of the transfer pricing recharacterization provisions in the Income Tax Act.   

Tax Alert 2020 No. 41 – Federal government delivers its 2020 Economic and Fiscal Snapshot
On 8 July 2020, federal Finance Minister Bill Morneau delivered a 2020 Economic and Fiscal Snapshot, taking into account the more than $230 billion in economic measures introduced to support individuals and businesses impacted by the COVID-19 crisis. 

Tax Alert 2020 No. 42 – Redesign and extension of the Canada Emergency Wage Subsidy (CEWS 2.0)
The federal government extended the Canada Emergency Wage Subsidy (CEWS) through to November 2020 and proposed major changes to provide a wage subsidy to any employer who has experienced a revenue decline between July 2020 and November 2020 when compared, generally, to the respective prior month in 2019.

Tax Alert 2020 No. 43 – Finance announces extension to incur flow-through share qualifying expenditures
On 10 July 2020, the Department of Finance announced proposals to change the flow-through share rules in order to alleviate the challenges faced by exploration companies in the mining industry amid the COVID-19 pandemic. The proposals aim to extend the timeline for resource corporations to incur eligible expenses by 12 months. As of the date of writing, legislative amendments to implement the proposals have not been released.

Tax Alert 2020 No. 44 – Alberta announces Innovation Employment Grant
On 22 July 2020, Alberta premier Jason Kenney announced the launch of the Innovation Employment Grant (IEG) set to come into effect on 1 January 2021. The IEG will provide grants worth up to 20% of a company’s research and development (R&D) costs incurred in Alberta.

Tax Alert 2020 No. 45 – Transition plan from the CERB announced
On 20 August 2020, the federal government announced its $37b plan to transition from the Canada Emergency Response Benefit (CERB) into a simplified and enhanced Employment Insurance (EI) program or new benefits.