2020-0846831E5 CEWS - Public institution

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.

Author: Thibault, Stéphane
Section: 149(1)(a), 149(1)(b), 149(1)(c), 149(1)(d) to (d.6), 149(1.1), 125.7(1), 125.7(2)

XXXXXXXXXX                                                                                 2020-084683
                                                                                                         S. Thibault
June 3, 2020

Dear XXXXXXXXXX,

Re: Eligibility to the CEWS for the XXXXXXXXXX

We are writing to you in response to your enquiry of April 22, 2020, wherein you are requesting confirmation regarding the eligibility of the XXXXXXXXXX(the Entity) to apply for the Canada Emergency Wage Subsidy (CEWS) under recently enacted section 125.7 of the Income Tax Act (the “Act”). Our understanding is that your Entity is a registered charity.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Unfortunately, due to the large number of enquiries that our Directorate is receiving in the context of the COVID-19 pandemic, we will not be providing any advance income tax ruling regarding the qualification of a specific entity as a public institution for the purpose of the CEWS. Such a determination is also a question of fact which must be resolved on a case by case basis. We understand that making this determination may be difficult if you are not familiar with the tax legislation. Therefore, we will provide the following general comments to help you, and your tax advisor, determine if your Entity is an eligible entity for the purpose of the CEWS.

The CEWS, computed under subsection 125.7(2) of the Act, is available to a “qualifying entity”.  A “qualifying entity”, under subsection 125.7(1) of the Act, must first be an “eligible entity”.

A registered charity can be an “eligible entity”, as defined in subsection 125.7(1) of the Act for the purpose of the CEWS, as long as the charity is not a “public institution”. A “public institution” is defined in subsection 125.7(1) of the Act to mean

(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.

Paragraphs 149(1)(a) and (b) of the Act refer to individuals and are not relevant to your case.

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 corporation 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 trust our comments will be of assistance.

Yours truly,

Michel Lambert, CPA, CA, M.Fisc.
Manager
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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