2021-0922321E5 Wage Subsidy-Application of 125.7(2.01) and (14.1)

Principal Issues: 1. When subsection 125.7(2.01) of the Act applies, is the loss of entitlement to the wage subsidy provided by subsection 125.7(2) of the Act 100% of the wage subsidy amount for a qualifying period even if the amount of the dividend is less than the amount of the wage subsidy the entity would otherwise be entitled to? 2. What taxable dividends are relevant for subsection 125.7(14.1) of the Act? 3. Subsection 125.7(14.1) of the Act may require the repayment of the wage subsidy provided by subsection 125.7(2) of the Act to the extent of any dividend paid. How does this apply? Do public companies have to determine what proportion of dividends are paid to an individual? 4. In what situations does subsection 125.7(14.1) of the Act apply since subsection 125.7(2.01) of the Act seems to apply in the same circumstances?

Position: 1. Where subsection 125.7(2.01) of the Act applies, the entity is precluded from claiming the wage subsidy provided by subsection 125.7(2) of the Act irrespective of the amount of dividends paid. 2. The relevant dividends for the purpose of subsection 125.7(14.1) of the Act are taxable dividends paid by the eligible entity, on its common shares, in qualifying period 24 and subsequent qualifying periods. Paragraph (b) of the description of Variable A in the formula contained in subsection 125.7(14.1) of the Act represents the amount of those common share dividends paid by the eligible entity to individuals. 3. Subsection 125.7(14.1) of the Act considers the amount of taxable dividends paid by the eligible entity on its common shares to holders who are individuals. The eligible entity must determine this amount. 4. Subsections 125.7(2.01) and (14.1) of the Act both apply where a publicly traded company (or a subsidiary of such a company) pays certain dividends. The legislation does not prevent subsections 125.7(2.01) and (14.1) of the Act from incorporating the same dividends in their respective operations.

Reasons: Textual, contextual and purposive interpretation of the law.

Author: Ross, Matthew
Section: 125.7

XXXXXXXXXX                                                           2021-092232
                                                                                   Matthew Ross, CPA, CA

July 25, 2022

Dear XXXXXXXXXX:

Re: Bill C-2 Amendments to section 125.7 of the Income Tax Act

We are writing in response to your email dated December 22, 2021, which contained a list of questions compiled by the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada. The questions concern amendments to section 125.7 of the Income Tax Act (“the Act”) made pursuant to Bill C-2: An Act to provide further support in response to COVID-19, which received Royal Assent on December 17, 2021. Specifically, your questions (footnote 1) pertain to new subsection 125.7(2.01) of the Act and new subsection 125.7(14.1) of the Act and their impact on the wage subsidy provided under subsection 125.7(2) of the Act (“Wage Subsidy”).

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.

Question 10 – Wage Subsidy Entitlement

Can CRA confirm whether the loss of the Wage Subsidy entitlement under subsection 125.7(2.01) of the Act is 100% of the Wage Subsidy amount for a qualifying period even if the amount of the dividend is less than the amount of the Wage Subsidy the entity would otherwise be entitled to?

CRA Response

Subsection 125.7(2.01) of the Act precludes an eligible entity that is a publicly traded company or a subsidiary of such a company from the Wage Subsidy in respect of a qualifying period if, in that qualifying period, certain taxable dividends are paid. Subsection 125.7(2.01) of the Act applies for the twenty-third qualifying period and subsequent qualifying periods.

Subsection 125.7(2.01) of the Act contains no requirement for the payment of a certain amount of taxable dividends in order for it to apply. Accordingly, for the twenty-third qualifying period and subsequent qualifying periods, a publicly traded company or a subsidiary of such a company will not be entitled to the Wage Subsidy in respect of a qualifying period if any taxable dividend is paid in that qualifying period to an individual who is a holder of common shares of the company.

Question 11

Subsection 125.7(14.1) of the Act grinds the Wage Subsidy amount to the extent of any dividend paid. How does this apply? Do public companies have to determine what proportion of dividends are paid to an individual?

CRA Response

Subsection 125.7(14.1) of the Act imposes a requirement on certain eligible entities to repay all or a portion of the Wage Subsidy they received. In particular, the amount of the Wage Subsidy received by an eligible entity on a particular date under subsection 164(1.6) of the Act, in respect of any of the twenty-fourth qualifying period and any subsequent qualifying period, is deemed to be a Wage Subsidy amount that has been refunded to the eligible entity on that particular date in excess of the amount to which the eligible entity was entitled as a refund under this Act to the extent of the lesser of the amount of the Wage Subsidy and the amount determined by the formula

A – B

where

A is the greater of

(a)     the executive compensation repayment amount of the eligible entity, and

(b) with respect to a qualifying entity that is a publicly traded company or a subsidiary of such a company, the amount of taxable dividends paid by the company or its subsidiary to an individual who is a holder of common shares of the company or of the subsidiary of the company; and

B is the total of all amounts deemed to be an excess refund to the eligible entity under this subsection in respect of refunds made after the particular date

Paragraph (a) of the description of Variable A refers to an eligible entity’s “executive compensation repayment amount” (“ECRA”). This term is defined in subsection 125.7(1) of the Act. The ECRA of an eligible entity is nil unless the shares of the capital stock of the eligible entity are listed or traded on a stock exchange or other public market or the eligible entity is controlled by such a corporation.

Paragraph (b) of the description of Variable A (“Paragraph B”) is applicable to a particular eligible entity that is a publicly traded company or a subsidiary of such a company. In our view, the taxable dividends that are relevant for the purposes of Paragraph B are those paid by the particular eligible entity in the twenty-fourth qualifying period and any subsequent qualifying period on its common shares held by individuals. Where such taxable dividends are paid, Paragraph B requires the eligible entity to determine the amount paid to individuals.

Question 12 – Interaction between subsection 125.7(2.01) of the Act and 125.7(14.1) of the Act

In what situations does subsection 125.7(14.1) of the Act apply since subsection 125.7(2.01) of the Act seems to apply in the same circumstances?

CRA Response

Taxable dividends paid in certain qualifying periods by a certain type of eligible entity on its common shares held by individuals are relevant for each of subsection 125.7(2.01) of the Act and subsection 125.7(14.1) of the Act.

If subsection 125.7(2.01) of the Act applies in a particular qualifying period, the eligible entity is not eligible for a Wage Subsidy in respect of that qualifying period. On the other hand, subsection 125.7(14.1) of the Act imposes a requirement on a certain type of eligible entity to repay all or a portion of the Wage Subsidy received for the twenty-fourth qualifying period and any subsequent qualifying period. In such a case, taxable dividends paid in the twenty-fourth qualifying period and any subsequent qualifying period by a particular eligible entity that is a publicly traded company or a subsidiary of such a company to individuals who hold its common shares will affect the amount of the Wage Subsidy that must be repaid if the amount of such taxable dividends is greater than the eligible entity’s ECRA. The same taxable dividends may be relevant for the purposes of both subsection 125.7(2.01) of the Act and subsection 125.7(14.1) of the Act.

For example, consider an eligible entity that was not entitled to a Wage Subsidy because of the application of subsection 125.7(2.01) of the Act in the twenty-fourth qualifying period because it paid $100,000 of taxable dividends on its common shares held by individuals. These same dividends will also be included in the calculation of the total amount of taxable dividends paid for purposes of Paragraph B.

We trust our comments will be of assistance.

Yours truly,



Amanda Couvrette CPA, CA
Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate

FOOTNOTES

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

1 Please note that not all of the questions submitted are addressed in this technical interpretation. Also note that the numbered questions below correspond to your original inquiry.

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