2020-0870981E5 CEWS - Asset sales rules 125.7(4.1)

Principal Issues: 1. How does subsection 125.7(4.2) adjust qualifying revenue with respect to an asset sale? 2. Which of the two companies, the seller or the acquirer, can claim the CEWS for the qualifying period?

Position: 1. The qualifying revenue of the seller that is reasonably attributable to the acquired assets is to be included in the qualifying revenue of the acquirer and subtracted from the qualifying revenue of the seller for the prior reference period or the current reference period, as the case may be, for the qualifying period. 2. Where all other conditions are met, both the seller and acquirer can consider their respective eligibility for the CEWS for the qualifying period.

Reasons: Legislation.

Author: Danis, Sylvie
Section: 125.7(4.1) & 125.7(4.2)

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                                                                                                                                 2020-087098
                                                                                                                                 Sylvie Danis

January 28, 2021

Dear XXXXXXXXXX,

Re:  Canada Emergency Wage Subsidy and Asset Sales

We are writing in response to your email dated November 18, 2020 to XXXXXXXXXX of the Department of Finance regarding the Canada Emergency Wage Subsidy (CEWS). More specifically, you have asked how subsection 125.7(4.2) of the Income Tax Act (Act) would apply in a given scenario.

In your email, you describe the following situation:

*    NewCo is a company incorporated in September 2020.

*    On October 11, 2020, NewCo purchased all the assets of OldCo, an arm’s length party.

*    OldCo paid its employees until October 10, 2020. On October 11, 2020, NewCo became the employer of OldCo employees.

*    OldCo's qualifying revenue for October 2019 attributable to the assets was $100,000.

*    OldCo and NewCo jointly elect under paragraph 125.7(4.1)(e) of the Act with respect to the assets.

*    Each of OldCo and NewCo meet all other conditions to qualify for the CEWS.

You have asked us for our comments in determining NewCo’s qualifying revenue for October 2019 in this scenario. Specifically, you have asked if the qualifying revenue attributable to the assets for the prior reference period (i.e., October 2019) can be pro-rated based on the number of days in the current reference period that NewCo (21 days) and OldCo (10 days) used the acquired assets in carrying on business for purposes of computing the revenue reduction percentage. Also, you inquired as to which of the two companies can claim the CEWS for the wages paid for the qualifying period 8 (September 27 to October 24).

Our comments

This technical interpretation provides general comments about the provisions of the Act 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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

Subject to certain exceptions, qualifying revenue of an eligible entity (eligible employer) for a prior reference period or current reference period is defined in subsection 125.7(1) of the Act for purposes of the CEWS and generally means the inflow of cash, receivables, or other consideration arising in the course of its ordinary activities in Canada in a particular period. Special rules are available under subsection 125.7(4.2) of the Act to adjust the qualifying revenue in respect of a qualifying period where an eligible employer (the acquirer) acquired assets (the acquired assets) of a person or partnership (the seller) during the qualifying period or at any time before that period, and all the conditions in subsection 125.7(4.1) of the Act are met.

Where these conditions are met, the acquirer will include in calculating its qualifying revenue for its prior reference period or current reference period, as the case may be, the amount of the qualifying revenue of the seller for that period that is reasonably attributable to the acquired assets (the assigned revenue). In addition, the assigned revenue is to be subtracted from the qualifying revenue of the seller for its prior reference period or current reference period, as the case may be, for the qualifying period. Special rules may apply if a portion of the assigned revenue is from a person or partnership that did not deal at arm’s length with the seller.

In our view, the assigned revenue described in paragraph 125.7(4.2)(a) of the Act refers to the qualifying revenue of the seller for the entire prior reference period that is reasonably attributable to the acquired assets. Furthermore, neither subsections 125.7(4.1) nor 125.7(4.2) of the Act provide for the proration of, or otherwise adjust, the qualifying revenue for a prior reference period as you suggest. However, we note that paragraph 125.7(4.2)(a) of the Act also refers to the qualifying revenue of the seller that is reasonably attributable to the acquired assets for the current reference period. In our view, in determining qualifying revenue for the current reference period under this provision, the acquirer would include the assigned revenue of the seller. Moreover, pursuant to paragraph 125.7(4.2)(b) of the Act, this assigned revenue would be subtracted from the seller’s qualifying revenue for the current reference period.

In regards to your second question, the CEWS is calculated for a qualifying period pursuant to subsection 125.7(2) of the Act by reference to the eligible remuneration paid to eligible employees by an eligible employer in respect of a week in the qualifying period. In our view, both the seller and acquirer in your given scenario can consider their respective eligibility for the CEWS for the qualifying period.

For more information, please refer to the Canada.ca webpage Frequently asked questions - Canada Emergency Wage Subsidy (CEWS).

We trust our comments will be of assistance.

Yours truly,

Bob Naufal
Manager
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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