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CRA puts tighter limit on qualifying rent expense for CERS

August 6, 2021

Authored by RSM Canada LLP

John Greenidge shared this article


Authored by RSM Canada

This content originally published on Canadian Tax Foundations newsletter: Canadian Tax Focus. Republished with permission.

According to the government’s Canada Emergency Rent Subsidy (CERS) website, there is a $75,000 limit on qualifying rent expense “per business location.” However, it is unclear whether this interpretation is consistent with the legislation, since one reading of the legislation is that the $75,000 cap applies to each eligible entity’s use of the business location rather than the business location itself.

A recent technical interpretation (CRA document no. 2020-0872751I7, June 17, 2021) confirms the government’s position in the context of non-arm’s-length net leases (where landlord and tenant share expenses billed by arm’s-length third parties, such as utilities companies or banks). In light of the new CRA opinion, businesses should consider revisiting their prior CERS claims to determine whether adjustments should be made.

Consider a simple situation in which a landlord and a tenant are not at arm’s length, and the tenant does not sublease the property to a third party. The definition provides that each eligible entity’s qualifying rent expense in respect of a qualifying property is the lesser of $75,000 and the total of amounts paid to an arm’s-length party. Where the lease is a net lease, such amounts include rent plus certain additional amounts that are rent for the use of, or the right to use, the qualifying property (subsection 125.7(1)). These additional amounts include, for example, mortgage interest, utilities, insurance, and property taxes.

The key question is whether, in this non-arm’s-length situation, these additional amounts the tenant pays to arm’s-length parties under a net lease constitute qualifying rent expenses. The CRA’s reasoning is as follows:

As these amounts constitute part of the tenant’s rent . . . any [such] amount . . . is treated in the same manner as amounts paid directly to the non-arm’s length lessor. Accordingly, such amounts will not be considered qualifying rent expenses.

This newly stated technical argument may come as a surprise to taxpayers; focusing on the fact that the payments were to arm’s-length parties would lead to the opposite conclusion regarding whether these amounts qualify.

This technical interpretation has two potentially problematic implications for parties in non-arm’s-length net leases:

  1. Only a landlord can have a qualifying rent expense for amounts it pays to arm’s-length parties. A tenant will not have any qualifying rent expense.
  2. Expenses paid by a tenant to arm’s-length parties are not part of the landlord’s qualifying rent expenses; as a result, no party can include them in a CERS claim.

For example, suppose Holdco owns a property with a mortgage that it leases to Opco, a related party. Specifically, for every four-week CERS period, (1) Holdco pays mortgage interest of $50,000 to an arm’s-length lender; (2) Opco pays $200,000 of rent to Holdco; and (3) Opco pays $60,000 for utilities directly to an arm’s-length party, the utilities company.

For Holdco, the qualifying rent expense claim is $50,000 (the lesser of $75,000 and the $50,000 of mortgage interest). The CRA opinion does not change that.

For Opco, the CRA opinion states that the additional payments are not qualifying rent expenses (because they are treated as being paid for the use of a property that is rented from a non-arm’s-length party). Hence Opco can make no CERS claim at all, and the total CERS claim of both entities is just $50,000. In this scenario, the $60,000 of utilities costs are not qualifying rent expenses for either Holdco or Opco.

On the other hand, if these expenses had been considered to qualify—as might have been expected before the CRA published its opinion—Opco’s qualifying rent expense claim would be $60,000 (the lesser of $75,000 and the $60,000 paid to the utilities company), and both entities combined could claim $110,000 ($60,000 for Opco plus $50,000 for Holdco)—an amount exceeding the government’s stated limit of $75,000 per business location.

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This article was written by Sigita Bersenas, Yoni Moussadji and originally appeared on 2021-08-06 RSM Canada, and is available online at

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