2020-0873601I7 CERS – restricted activities of a travel agency

Principal Issues: Is a travel agency, which is required to close its office due to certain lockdown measures in effect in the city where it is located, eligible for the rent-top up percentage (lockdown support) in subsection 125.7(2.1) where employees are able to perform their duties from home?

Position: Yes, it is possible assuming all other conditions are satisfied.

Reasons: See response.

Author: Bogdan, Aleksandra
Section: 125.7(1); 125.7(2.1)

Mr. David Gagné-Therrien                                                                      HEADQUARTERS
Dedicated Telephone Service                                                                 ITRD
Canada Revenue Agency                                                                       Aleksandra Bogdan, CPA, CA
                                                                                                                2020-087360

June 7, 2021

Dear Mr. Gagné-Therrien:

Re: Lockdown support for a travel agency

This is in reply to your email in which you requested our views on a matter relating to the Canada Emergency Rent Subsidy (“CERS”) under subsection 125.7(2.1) the Income Tax Act (“the Act”).

More specifically, you inquired about the “lockdown support” component of the CERS and certain requirements contained in the definition of “public health restriction” in subsection 125.7(1) of the Act. In the situation you described, a travel agency was required to close its office due to certain lockdown measures in effect in the city where it is located. As a result of the office closure, employees of the travel agency started working from home. You have asked whether the travel agency could qualify for lockdown support.

Our Comments

Whether a particular eligible entity is subject to a public health restriction and qualifies for lockdown support is a question of fact that can only be determined after a review of all the detailed facts and circumstances surrounding a particular situation. Notwithstanding this, we can offer the following general comments which may be of assistance in making that determination.

An “eligible entity”, that is also a “qualifying renter”, who has experienced a reduction in its “qualifying revenue” for a particular “qualifying period” may be eligible for the CERS. The CERS covers a portion of an eligible entity’s “qualifying rent expense” in respect of a qualifying period, for each “qualifying property”, subject to certain maximums.  Definitions for purposes of the CERS, including the aforementioned terms, are in subsection 125.7(1) of the Act.

There are two components to the calculation of the CERS in subsection 125.7(2.1) of the Act: the base subsidy and the lockdown support. The lockdown support is generally available to an eligible entity, in respect of a particular qualifying property for a qualifying period, that has a “rent subsidy percentage” greater than zero and is subject to a “public health restriction”, as those terms are defined under subsection 125.7(1) of the Act. Lockdown support, which is computed pursuant to the formula for variable B in subsection 125.7(2.1) of the Act, is 25% of an eligible entity’s qualifying rent expense, prorated by the number of days in the qualifying period throughout which the qualifying property is subject to a public health restriction.

A public health restriction, in respect of a qualifying property of an eligible entity for a qualifying period, means an order or decision in respect of which several conditions are met, including the following conditions described in paragraphs (a) to (e) of the definition:

* it is made under a law of Canada or a province, or the authority granted under such a law;
* it is made in response to the coronavirus disease 2019 (COVID-19) pandemic;
* it is limited in scope based on one or more factors, such as
     * defined geographical boundaries,
     * type of business or other activity, or
     * risks associated with a particular location;
* non-compliance with the order or decision is a federal or provincial offence or can result in the imposition of an administrative monetary penalty or other sanction by the Government of Canada or a province;
* it does not result from a violation by the eligible entity of an order or decision that meets the conditions in paragraphs (a) to (d).

In addition, paragraph (f) (footnote 1)  of the definition of public health restriction in subsection 125.7(1) of the Act requires that, as a result of the particular order or decision, some or all of the activities of the eligible entity at, or in connection with, the qualifying property (that it is reasonable to expect the eligible entity would, absent the order or decision, otherwise have engaged in) are required to cease (referred to as “restricted activities”). This determination is based on the type of activity rather than the extent to which an activity may be performed or limits placed on the time during which an activity may be performed.

Whether a particular eligible entity has any restricted activities is a question of fact, which depends on the particular facts and circumstances of each situation. Generally speaking, if a particular order or decision results in the closure of a particular qualifying property, and, as a result, some or all of the activities of the eligible entity at, or in connection with the qualifying property are required to cease, then those activities would be considered restricted activities.

For example, in the case of a travel agency, if, prior to the closure, clients made in-person visits to the office to arrange travel bookings and in-person visits ceased upon closure of the office as a result of an order or decision, then those activities could be considered restricted activities and this condition could be satisfied. The fact that employees started working from home and started making travel bookings over-the-phone once the office closed would not preclude this condition from being met.

Several additional examples of when lockdown support may be available are provided in a recent backgrounder released by the Department of Finance on November 5, 2020 (footnote 2) . One of the examples provided of circumstances that may qualify for lockdown support, which is comparable to the situation described herein, is a fitness center providing group fitness classes that is ordered to close down, even if, for instance, it moves to online instruction.

Another condition that must be satisfied in order for a particular order or decision to be a public health restriction is described in paragraph (g) (footnote 3)  of the definition in subsection 125.7(1) of the Act.  It requires that it is reasonable to conclude that at least approximately 25% of the qualifying revenues of the eligible entity for the prior reference period that were earned from, or in connection with, the qualifying property were derived from the restricted activities. Depending on the facts and circumstances of each particular situation, an eligible entity may have some flexibility in the method it can use to satisfy this condition, provided that it is appropriate for those particular circumstances. Whether it is reasonable to conclude that at least approximately 25% of the qualifying revenues of an eligible entity for the prior reference period, were earned from, or in connection with, a qualifying property, were derived from restricted activities is a question of fact, and would have to be determined on a case-by-case basis.

In the situation described above, there is not enough information to conclude that the requirement set out in paragraph (g) is satisfied. However, if, during the relevant prior reference period, all activities were performed in-person at the travel agency, then it may be reasonable to conclude that at least approximately 25% of its qualifying revenues in the prior reference period, that were earned from the qualifying property, were derived from the restricted activities. This condition only refers to qualifying revenues of the eligible entity for the prior reference period; therefore, for the purpose of satisfying paragraph (g), the revenue that an eligible entity has earned during the particular current reference period for the qualifying period would not be relevant.

The final condition that must be satisfied in order for a particular order or decision to be a public health restriction, described in paragraph (h) of the definition in subsection 125.7(1) of the Act, is that the restricted activities are required to cease for a period of at least one week. There is no requirement that the restricted activities must cease for a period of at least one week in a particular qualifying period. Accordingly, a one-week period that straddles the end of one qualifying period and the beginning of another may satisfy the requirement in paragraph (h) of the definition in subsection 125.7(1).

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette, CPA, CA
Acting Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  The Department of Finance released draft legislation on February 24, 2021, followed on April 19, 2021 by Bill C-30, which proposes to amend paragraphs (e) to (g) of the definition of public health restriction in subsection 125.7(1) of the Act to include a “specified tenant”, which is a party with which the eligible entity does not deal at arm’s length that rents, directly or indirectly, the qualifying property from the eligible entity. Therefore, in certain situations, specified tenants may also meet the definition of a public health restriction in subsection 125.7(1) of the Act and may qualify for lockdown support, provided all other requirements are met. The Canada Revenue Agency will administer this change on the basis of the draft legislative proposals. Bill C-30 has gone through its second reading in the House of Commons on May 27, 2021.
2  Available at: https://www.canada.ca/en/department-finance/news/2020/11/lockdown-support-for-businesses-facing-significant-public-health-restrictions.html
3  Ibid.

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