Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: (1) Whether payments made by an operator of a mine to its third party contractors to assist with payroll costs during a temporary suspension of operations at the mine due to the COVID-19 pandemic will be required to be included in the qualifying revenue of the contractors, and (2) whether the anti-avoidance rule in subsection 125.7(6) will apply if the contractors reimburse the operator for such payments to the extent they receive assistance under the CEWS.
Position: General comments provided.
Reasons: See below.
Author: Wharram, Kimberley
Section: Subsection 125.7(1) - "Qualifying Revenue" and subsection 125.7(6)
July 15, 2020
Re: Canada Emergency Wage Subsidy
We are writing in response to your letter dated April 21, 2020 in which you requested our views relating to the Canada Emergency Wage Subsidy (the “CEWS”) under section 125.7 of the Income Tax Act (“the Act”).
You have told us that the operator of a mine (the “Operator”) placed its mine on care and maintenance, thereby suspending operations, due to the COVID-19 pandemic.
While operations at the mine are suspended, the Operator has offered assistance to its third party contractors (the “Contractors”), all of whom deal at arm’s length with the Operator. The assistance is in the form of gratuitous payments to cover a portion of the Contractors’ payroll costs (the “Payments”). The Contractors had no legal entitlement to the Payments under their contracts with the Operator or otherwise.
The sole purpose of the Operator in making the Payments is to ensure that an available workforce is ready when operations resume at the mine. The Operator is concerned that if the shut-down continues for an extended period of time, the work-force may seek opportunities at other mining operations within Canada. The ability of the Contractors to provide services to the Operator is essential to the Operator’s transition of the mine site out of care and maintenance and into full operation.
Each Contractor has experienced the required decrease in its qualifying revenue for the applicable current reference period as compared to the applicable prior reference period for a qualifying period, if the receipt of the Payments is not taken into account in determining qualifying revenue. The Contractors otherwise meet all the requirements to qualify for the CEWS.
If a Contractor receives an amount under the CEWS in respect of its payroll costs (a “CEWS Amount”), the Operator will reduce future amounts that it pays to the Contractor by an amount equal to the CEWS Amount (a “Payment Adjustment”).
1. Will the Contractors be required to include the Payments in computing their qualifying revenue for their current reference period for a qualifying period?
2. Will the anti-avoidance rule in subsection 125.7(6) apply if a Payment Adjustment is made?
This technical interpretation provides general comments about the provisions of the Act (Canada) and related legislation (where referenced). 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 IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Qualifying revenue of an eligible entity is generally determined in accordance with its normal accounting practices. (footnote 1) Qualifying revenue means the inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of the eligible entity in Canada in a particular period. For greater certainty, qualifying revenue does not include extraordinary items. (footnote 2)
“Extraordinary items” is not a term defined in the Act. Generally, the CRA would expect extraordinary items to meet all three of the following characteristics:
a. Not be expected to occur regularly or frequently within several years
o Grants or other government assistance that an entity is eligible to receive on a regular or reoccurring basis would not meet this criteria.
b. Not typical of the normal activities or risks inherent in the normal operations of the entity
o Consideration should be given to the nature of the services or products offered by an entity and the normal environment in which it operates.
c. Primarily out of the control of owners or management
o Consideration should be given to the extent that inflows are influenced by the decision of owners or management.
Relevant considerations in the current situation could include whether the Contractor had received payments in the past upon the temporary suspension of operations at the mine, whether the Contractor was entitled to receive compensation upon a suspension of operations at the mine under its contract with the Operator and the degree of control the Contractor had with respect to the Payments and Payment Adjustments.
The determination of whether a Payment is included in qualifying revenue and/or excluded from qualifying revenue on the basis that it is an extraordinary item is a question of fact that could only be determined after a consideration of all the detailed facts and circumstances surrounding the Payment.
The Anti-Avoidance Rule in subsection 125.7(6) reads as follows:
(6) The qualifying revenue of an eligible entity for a current reference period for a qualifying period is deemed to be equal to the qualifying revenue of the eligible entity for the relevant prior reference period, if
(a) the eligible entity, or a person or partnership not dealing at arm’s length with the eligible entity, enters into a transaction or participates in an event (or a series of transactions or events) or takes an action (or fails to take an action) — other than, for greater certainty, a decision under subparagraph (a)(ii) or (b)(ii) of the definition qualifying revenue in subsection (1) or the decision to use one of the methods of computing qualifying revenues under subsection (4) — that has the effect of reducing the qualifying revenues (determined without reference to this subsection) of the eligible entity for the current reference period; and
(b) it is reasonable to conclude that one of the main purposes of the transaction, event, series or action in paragraph (a) is to cause an eligible entity to qualify for the deemed overpayment under subsection (2) in respect of that qualifying period.
One of the requirements for the application of the Anti-Avoidance Rule in respect of an eligible entity is that the applicable transaction, event, series or action listed in paragraph 125.7(6)(a) must have the effect of reducing the qualifying revenue of the eligible entity.
Further details would be needed with respect to the Payment Adjustment in order to determine whether it would have an impact on the qualifying revenue of a Contractor.
In the course of our discussions with you, we also raised the possibility that the salaries and wages paid to the employees of the Contractors may not qualify as “eligible remuneration” by virtue of the application of paragraph (c) of the definition of that term in subsection 125.7(1) in light of the receipt of the Payments by the Contractors. We confirm that we no longer consider this to be an issue. In our view, paragraph (c) of the definition of “eligible remuneration” would not be applicable in this situation.
We trust that our comments will be of assistance.
Yours very truly,
Manager, Resources Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 “Qualifying revenue” is defined in subsection 125.7(1). In addition, there are a number of special rules in subsection 125.7(4) relating to the calculation of qualifying revenue that apply in certain circumstances.
2 See paragraph (c) of the definition “qualifying revenue” in subsection 125.7(1). Also see the discussion of “extraordinary items” at https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy/cews-frequently-asked-questions.html#h_3.
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