2021-0877511I7 CERS- Written Agreement

Principal Issues: Whether a letter of understanding to lease real property is a “written agreement” for purposes of the CERS.

Position: Question of fact.

Reasons: A “written agreement” is not defined in the Act. In general, a written agreement requires mutual assent of the parties to the agreement, clear intent to create binding and enforceable contract, and all essential terms and conditions.

Author: Koh, Kah Foo
Section: 125.7

                                                                                             January 20, 2022

David Gagné-Therrien
Dedicated Telephone Service, Section I                       Income Tax Rulings
Canada Revenue Agency                                                 Directorate
David.Gagne-Therrien@cra-arc.gc.ca                          Kah Foo, Koh
                                                                                             2021-087751

Subject: CERS- Written Agreement

We are writing in response to an inquiry regarding the Canada Emergency Rent Subsidy (“CERS”) under section 125.7 of the Income Tax Act (the “Act”).

The inquiry asked if a particular binding offer to lease would be considered a written agreement and whether an amount paid is a “qualifying rent expense” (“QRE”), as defined in subsection 125.7(1) of the Act, under the following circumstances:

* Landlord and taxpayer (“TP”) deal at arm’s length.
* On June 25, 2020 TP entered into a binding offer to lease (letter of understanding (“LOU”)) to lease real property.
* Signed LOU was definitive on lease terms (i.e., length, costs, use, etc.) with no option for either party to terminate or opt out of the agreement prior to executing the formal lease and a non-refundable amount was paid on signing.
* Occupancy was to be October 1, 2020, but was delayed due to construction.
* TP occupied the space as of November 1, 2020.
* Formal lease document was not fully executed until November 19, 2020 (the “Lease”).

Our Comments

The CERS is based on a “qualifying renter’s” QRE in respect of a “qualifying property” for a “qualifying period” as those terms are defined in subsection 125.7(1) of the Act. In order for an amount to be QRE, among other requirements, that amount must be paid (or payable in certain circumstances) under a written agreement entered into before October 9, 2020, or pursuant to the renewal (on substantially similar terms) or assignment of a written agreement entered into before October 9, 2020.

The term “written agreement” is not defined in the Act.

Whether a document would constitute a written agreement is a question of fact depending on the language used and the terms specified in the documents. A determination could only be made after a review of the documents and circumstances of each case. Generally, while there is no requirement that the documents be signed, other conditions must be present: the written documents must show a clear intention to create a binding and enforceable contractual relation, outline all the essential terms and conditions of the agreement, and demonstrate an acceptance in writing by both parties of the terms and conditions.

In the present inquiry, the TP entered into the LOU prior to October 9, 2020. The LOU contained detailed information about the arrangement and lease terms, and prohibited either party from terminating the arrangement prior to executing the formal lease. A non-refundable amount was paid by the TP upon the execution of the LOU. The Lease was not executed until after October 9, 2020. While a question of fact, based on the facts as presented, it appears that the LOU has the requisite characteristics to be a written agreement.

As mentioned above, the definition of QRE imposes several requirements before an amount paid can be QRE. One of these requirements is that the amount has to be paid under a written agreement entered into before October 9, 2020. In the absence of any explicit language in the LOU and the Lease to the contrary, it is possible for the Lease to be a continuation or extension of the LOU, assuming that the Lease includes the same enforceable and binding rights and obligations, and terms and conditions, as the LOU. This determination will depend on the particular details and circumstances in the situation.

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette CPA, CA
Acting Manager
For Division Director
Business and Employment Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

UNCLASSIFIED

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