COVID-19 Subsidies – Explanatory Notes Relating to the Income Tax Act and Income Tax Regulations

Explanatory Notes Relating to Bill C-2

Preface

These explanatory notes describe certain amendments made to the Income Tax Act and the Income Tax Regulations by Bill C-2, tabled in Parliament on November 24, 2021. These explanatory notes do not address changes announced after that date.

Clause 1

Subclause 1(1)

Definitions

ITA
125.7(1)

Subsection 125.7(1) contains definitions that are relevant for the Canadian Emergency Wage Subsidy (CEWS), the Canada Emergency Rent Subsidy (CERS), and for the Canada Recovery Hiring Program (CRHP). The opening words in subsection 125.7(1) are amended to clarify that the definitions in this subsection are also applicable for the purposes of the 25% penalty applicable to a CHRP payment to which the anti-avoidance rule in subsection 125.7(6.1) applies.

Subclause 1(2)

Base percentage

ITA
125.7(1)

The rate of the CEWS provided in subsection 125.7(2) is comprised of two components: the base percentage and a top-up percentage.

Base percentages for qualifying periods that had been prescribed by regulation are moved to the definition for consistency and ease of reference.

This subclause amends the definition "base percentage" in subsection 125.7(1) so that, for the twentieth qualifying period, an entity that has a revenue decline of 50% or more would have a base percentage of 25%. For entities with a revenue decline of less than 50%, the base percentage would be determined using a factor of 0.625 times the entity's revenue decline in excess of 10%. For the twenty-first qualifying period, an entity that has a revenue decline of 50% or more would have a base percentage of 10%. For entities with a revenue decline of less than 50%, the base percentage would be determined using a factor of 0.25 times the entity's revenue decline in excess of 10%.

For the twenty-second qualifying period to the twenty-sixth qualifying period, an entity that is either a qualifying tourism or hospitality entity in the qualifying period or subject to a qualifying public health restriction in the period and that has a revenue decline of 40% or more would have a base percentage equal to the lesser of 75% and the entity's revenue reduction percentage in the qualifying period. An entity that is not a qualifying tourism or hospitality entity in the qualifying period and is not subject to a qualifying public health restriction in the period may have a non-zero base percentage if the entity has a prior year revenue decline of at least 50% in the qualifying period. In such a case, if the entity's revenue reduction percentage for the qualifying period is at least 50%, the entity's base percentage is equal to 10% plus a factor of 1.6 times the entity's revenue decline in excess of 50% (with a maximum base percentage of 50%).

For the twenty-seventh qualifying period and the twenty-eight qualifying period, an entity that is either a qualifying tourism or hospitality entity in the qualifying period or subject to a qualifying public health restriction in the period and that has a revenue decline of 40% or more would have a base percentage of the lesser of 37.5% and one half of the entity's revenue reduction percentage in the qualifying period. An entity that is not a qualifying tourism or hospitality entity in the qualifying period and is not subject to a qualifying public health restriction in the period may have a non-zero base percentage if the entity has a prior year revenue decline of at least 50% in the qualifying period. In such a case, if the entity's revenue reduction percentage for the qualifying period is at least 50%, the entity's base percentage is equal to 5% plus a factor of 0.8 times the entity's revenue decline in excess of 50% (with a maximum base percentage of 25%).

The rate for the twenty-first period and subsequent periods may also be changed by regulation.

Subclause 1(3)

Current reference period

ITA
125.7(1)

The revenues for an entity's current reference period are compared with its revenues for the relevant prior reference period for the purpose of determining its revenue decline, which is relevant to the CEWS, the CERS, and the CRHP.

The definition "current reference period" is amended to provide the current reference periods for the twenty-third qualifying period to the twenty-eighth qualifying period.

Subclause 1(4)

Executive compensation repayment amount

ITA
125.7(1)

This definition is relevant to subsection 125.7(14) and new subsection 125.7(14.1), which can require certain CEWS recipients to effectively repay CEWS amounts received in respect of active employees for the seventeenth and subsequent qualifying periods. The definition essentially provides the amount that an eligible entity is required to repay under those subsections.

Paragraph (a) of the definition provides that, in order for an eligible entity to have an executive compensation repayment amount, its shares must be listed or traded on a stock exchange or other public market or it must be controlled by a corporation the shares of which are listed or traded on a stock exchange or other public market.

For such eligible entities, paragraph (b) provides the calculation of the amount to be repaid. This is determined by the formula A × B.

Variable B determines the total amount of CEWS that must be repaid under subsection 125.7(14), or new subsection 125.7(14.1), by a group of companies. The relevant group for these purposes is a publicly listed or traded company and each corporation controlled by that company. Variable A provides the percentage of that total amount that is to be repaid by each member of a corporate group. Variable B is amended consequential on the extension of the CEWS beyond the twenty-second qualifying period.

Variable A is now divided into two relevant time periods: the seventeenth qualifying period to the twenty-third qualifying period and the twenty-fourth and any subsequent qualifying periods. Accordingly, the agreed upon percentage applicable to each member of the group for the seventeenth to twenty-third qualifying period may be different from the percentage agreed upon for the twenty-fourth and subsequent qualifying periods.

Subclause 1(5)

Executive compensation repayment amount

ITA
125.7(1)

Variable B is now also divided into two relevant time periods: the seventeenth qualifying period to the twenty-third qualifying period and the twenty-fourth and any subsequent qualifying periods.

For the seventeenth qualifying period to the twenty-third qualifying period, variable B is determined under new subparagraph (i). For these qualifying periods, the CEWS repayment amount is the lesser of all CEWS payments for the group of entities for any of those qualifying periods and the amount determined by the formula C – D, which represents the excess of the group's 2021 executive remuneration over the group's 2019 executive remuneration. For this purpose, the amount of executive remuneration is determined with respect to the calendar years and so, where a corporation reports its executive remuneration for an off-calendar year fiscal period, a proration of the fiscal periods that overlap the calendar year is required based on the number of days in the fiscal period that fall within the calendar year.

For the twenty-fourth qualifying period and any subsequent qualifying periods, variable B is determined under new subparagraph (ii). For these qualifying periods, the CEWS repayment amount is the lesser of all CEWS payments for the group of entities for any of the qualifying periods and the amount determined by the formula E + F – G, which represents the excess of the group's 2022 executive remuneration (plus any excess amount of executive compensation from subparagraph (i) that is not set off against CEWS amounts under that subparagraph) over the group's 2019 executive remuneration. For this purpose, the amount of executive remuneration is determined with respect to the calendar years and so, where a corporation reports its executive remuneration for an off-calendar year fiscal period, a proration of the fiscal periods that overlap the calendar year is required based on the number of days in the fiscal period that fall within the calendar year.

Subclause 1(6)

Prior reference period

ITA
125.7(1)

The revenues for an entity's current reference period are compared with its revenues for the relevant prior reference period for the purpose of determining its revenue decline, which is relevant to the CEWS, the CERS, and the CRHP.

The definition "prior reference period" is amended to provide the prior reference periods for the twenty-third qualifying period to the twenty-eighth qualifying period.

Subclause 1(7)

Prior reference period

ITA
125.7(1)

The definition "prior reference period" provides for a special prior reference period using the average qualifying revenues of January 2020 and February 2020 if an eligible entity meets certain conditions. Consequential on previous amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition is amended to update existing cross-references to paragraphs in the definition "qualifying period" to the respective defined names. An existing election available for the fourteenth qualifying period to the seventeenth qualifying period that had been prescribed by regulation is moved to the definition for consistency and ease of reference.

A new election (similar to that available for the fourteenth qualifying period to the seventeenth qualifying period) is added for the twenty-sixth qualifying period to the twenty-eighth qualifying period. This election allows new businesses (that were not carrying on their ordinary activities on March 1, 2019) to elect to use the January/February of 2020 prior reference period. This accommodates new entities that may not have prior reference period revenues for the standard prior reference periods (which would be March 2019, April 2019, and May 2019).

Subclause 1(8)

Qualifying period

ITA
125.7(1)

An entity's wage subsidy, rent subsidy and hiring program claims are made in respect of a qualifying period. The definition "qualifying period" is amended to provide the dates for the twenty-third qualifying period to the twenty-eighth qualifying period.

This definition is also amended to provide the ability to prescribe by regulation, further qualifying periods ending no later than July 2, 2022.

Subclause 1(9)

Qualifying recovery entity

ITA
125.7(1)

The definition "qualifying recovery entity" provides requirements for an eligible entity to qualify for the CRHP refundable tax credit in subsection 125.7(2.2) for a qualifying period.

Paragraph (b) of this definition is amended to clarify that an eligible entity is not required to apply for the CEWS in order to qualify for the CHRP.

Subclause 1(10)

Qualifying recovery entity

ITA
125.7(1)

Subparagraph (e)(ii) of the definition "qualifying recovery entity" provides that an eligible entity must have a revenue reduction percentage greater than 10% for a qualifying period in order to be eligible for the CHRP in that qualifying period. This requirement currently applies for the eighteenth qualifying period to the twenty-second qualifying period.

Consequential on the extension of the CHRP to the twenty-eighth qualifying period, subparagraph (e)(ii) is amended to provide that the requirement for a revenue reduction percentage in excess of 10% will now apply for the eighteenth and subsequent qualifying periods. This greater than 10% revenue reduction percentage requirement can be changed by regulation.

Subclause 1(11)

Recovery wage subsidy rate

ITA
125.7(1)

This definition provides the relevant rates for each qualifying period for the CRHP, as follows:

• 50% for the seventeenth qualifying period to the nineteenth qualifying period;
• 40% for the twentieth qualifying period;
• 30% for the twenty-first qualifying period; and
• 20% for the twenty-second qualifying period.

The rate for the twenty-second qualifying period was subsequently prescribed by regulation to be 50%.

Paragraph (d) of this definition is amended to provide that the subsidy rate for the CHRP is 50% for the twenty-second qualifying period and for each subsequent qualifying period. This rate can be changed by regulation.

Subclause 1(12)

Rent subsidy percentage

ITA
125.7(1)

The "rent subsidy percentage" definition sets the rate for the base rent subsidy for a qualifying period. For the eighteenth qualifying period and subsequent qualifying periods, an eligible entity's rent subsidy percentage has been set as matching the percentage provided under the CEWS.

Consequential on the extension of the wage subsidy and rent subsidy to the twenty-eighth qualifying period, paragraph (a.1) of this definition is amended to provide that the subsidy percentage provided to an eligible entity under the CERS will continue to match that provided under the CEWS.

Subclause 1(13)

Rent subsidy percentage

ITA
125.7(1)

Consequential on the amendment to the definition "qualifying period" that allows for a qualifying period to be prescribed by regulation after the twenty-eighth qualifying period, paragraph (b) of the definition "rent subsidy percentage" is amended to provide that a rent subsidy percentage may be prescribed by regulation for a qualifying period after the twenty-eighth qualifying period. If no percentage is prescribed for such a period, the default percentage is set as nil.

Subclause 1(14)

Rent top-up percentage

ITA
125.7(1)

The "rent top-up percentage" definition sets the rate for the Lockdown Support, which applies in addition to the base rent subsidy, for a qualifying period. To be eligible for the Lockdown Support for a qualifying period, an eligible entity must be subject to a public health restriction in respect of a qualifying property during the qualifying period. The rent top-up percentage is prorated based upon the proportion of a qualifying period that an eligible entity is subject to a public health restriction.

This amendment maintains the rent top-up percentage of 25% for the eighth qualifying period to the twenty-eighth qualifying period, which may be changed by regulation. For subsequent periods, the rate is set at nil, with the authority to prescribe a rate by regulation.

Subclause 1(15)

Top-up percentage

ITA
125.7(1)

The rate of the CEWS provided in subsection 125.7(2) is comprised of two components: the base percentage and a top-up percentage.

An entity's top-up wage subsidy rate is determined by its top-up percentage, which is currently determined by formula. Existing top-up percentages for qualifying periods that had been prescribed by regulation are moved to the definition for consistency and ease of reference.

This subclause amends the definition "top-up percentage" in subsection 125.7(1) so that, for the twentieth qualifying period, an eligible entity's top-up percentage is the lesser of 15% and a factor of 0.75 times the entity's revenue decline in excess of 50%.

For the twenty-first qualifying period, an eligible entity's top-up percentage is the lesser of 10% and a factor of 0.5 times the entity's revenue decline in excess of 50%.

For the twenty-second qualifying period and subsequent qualifying periods, the rate is set at nil, with the authority to prescribe a rate by regulation.

Subclause 1(16)

Definitions

ITA
125.7(1)

This subclause introduces three new definitions that are relevant for the application of the wage subsidy and rent subsidy for qualifying periods beginning on October 24, 2021.

"prior year revenue decline"

This definition is relevant for the purpose of determining whether an eligible entity is eligible for the wage subsidy and rent subsidy after October 23, 2021. It is the average revenue reduction percentage for the eligible entity for qualifying periods 1 – 13. As the eleventh qualifying period repeats the same computation as the tenth qualifying period only one of those periods is included in determining the average revenue reduction percentage. For this purpose, the revenue reduction percentage of the eligible entity for each qualifying period is determined without reference to the deeming rule in subsection 125.7(9), and is calculated without reference to section 257. This means that if the eligible entity has increased revenues in one or more relevant qualifying periods, relative to the prior reference period for the qualifying period, it will have a negative revenue reduction percentage for that qualifying period. That negative percentage will be included in calculating the average revenue reduction percentage of the eligible entity, and will therefore decrease its prior year revenue decline.

The computation excludes qualifying periods in which an eligible entity was not carrying on its ordinary activities throughout the qualifying period, other than due to a public health restriction. This addresses circumstances where, for example, a seasonable business is not carried on throughout a particular qualifying period.  If the reason an eligible entity was not carrying on its ordinary activities in a qualifying period was because of a public health restriction (i.e., all or a significant portion of its activities had to cease because of a COVID-19 public health order) this qualifying period will be included in the entity's average revenue reduction computation. Because an entity that is subject to a public health restriction would generally be expected to have reduced revenues during such a period, the inclusion of this period in the computation  should generally increase its average revenue reduction percentage and would therefore typically be beneficial to such an entity.

 "qualifying public health restriction"

This definition relies upon the existing definition of "public health restriction". In general, a public health restriction is a mandatory, targeted order or decision related to COVID-19 that is made under a law of Canada or a province or under an authority granted by such a law. The order or decision must result in some or all of the activities (responsible for at least approximately 25% of qualifying revenues for the relevant prior reference period at a particular location) of the eligible entity, or a specified tenant of the eligible entity,  completely ceasing for a week or more.

An eligible entity would be subject to a qualifying public health restriction in a qualifying period if one or more locations of the eligible entity, or a specified tenant of the eligible entity, are subject to a public health restriction for at least seven days in the period and the restricted activities accounted for at least 25% of the total qualifying revenues of the eligible entity, together with those of any specified tenants of the eligible entity, for the prior reference period. Those total qualifying revenues would include revenues from locations of the eligible entity and any specified tenants not subject to a public health restriction in the prior reference period, if any.

"qualifying tourism or hospitality entity"

This definition has the meaning prescribed by regulation.

Subclause 1(17)

Wage subsidy

ITA
125.7(2)

Until the end of the nineteenth qualifying period (which ended on August 28, 2021) the CEWS provided a wage subsidy to employers for their portion of contributions in respect of the Canada Pension Plan, Employment Insurance, the Quebec Pension Plan, and the Quebec Parental Insurance Plan for furloughed employees.

Existing paragraph (a) of the variable D (the furloughed employee employer contribution subsidy) provides that for the fifth qualifying period and subsequent qualifying periods, the rate for this portion of the subsidy is set as nil unless the eligible entity has a non-zero wage subsidy base percentage or top-up percentage. Paragraph (a) is amended so that it applies for the fifth qualifying period to the nineteenth qualifying period.

Subclause 1(18)

Wage subsidy

ITA
125.7(2)

New subparagraph (a.1) of the variable D provides that it is nil for a qualifying period after the nineteenth qualifying period. This eliminates the subsidy for the employer's portion of contributions under the Canada Pension Plan, the Employment Insurance Act, the Quebec Pension Plan, and the Quebec Parental Insurance Plan in respect of furloughed employees for qualifying periods after the nineteenth qualifying period.

Subclause 1(19)

Rent subsidy

ITA
125.7(2.1)

The rent subsidy is paid in respect of an eligible entity's qualifying rent expenses for a qualifying period. Qualifying rent expenses for each qualifying period are capped at $75,000 per location and are subject to an overall cap of $300,000 that is shared among affiliated entities.

New variable E.1 is added to the formula. Variable E.1 provides for an increase in the cap for affiliated entities from $300,000 to $1,000,000 for the twenty-second qualifying period and subsequent qualifying periods.

Subclause 1(20)

Rent subsidy

ITA
125.7(2.1)

This amendment provides that the cap for affiliated entities remains at $300,000 for the eighth qualifying period to the twenty-first qualifying period and is increased to $1,000,000 for the twenty-second qualifying period.

Subclause 1(21)

Executive compensation

ITA
125.7(2.1)

Subsection 125.7(14) effectively requires an amount of CEWS received in respect of active (i.e., not on leave with pay) employees to be repaid, based on an eligible entity's executive compensation repayment amount.

This is effected by deeming all or a portion of the amount of a CEWS payment received on a particular date to be an amount that was refunded to the eligible entity in excess of the amount to which the eligible entity was entitled. Subsection 160.1(1) would then deem that amount to have became payable to the Receiver General on that particular date. The portion of any such CEWS payment that is deemed to be an excess refund is determined by the formula A – B.

Variable A is the total amount required to be repaid by the eligible entity (i.e., its executive compensation repayment amount). Variable B is the total of all deemed excess refunds for later CEWS payments. This effectively provides an ordering rule, where later CEWS payments are required to be repaid before earlier payments.

Consequential on the amendment to the definition "executive compensation repayment amount", this subsection is amended to provide that it will apply for the seventeenth qualifying period to the twenty-third qualifying period.

Subclause 1(22)

Executive compensation

ITA
125.7(14.1)

New subsection 125.7(14.1) provides the same executive compensation repayment requirement as in subsection 125.7(14). Subsection 125.7(14.1) applies for the twenty-fourth and subsequent qualifying periods.

Regulation

Clause 2

Qualifying tourism or hospitality entity

ITR
8901.1(2)

New subsection 8901.1(2) defines a "qualifying tourism or hospitality entity" for the purposes of subsection 125.7(1) of the Act.

An eligible entity would be a "qualifying tourism or hospitality entity" if it meets a two part test. First, the entity must have a prior year revenue decline in the period of at least 40%. Second, the total of all of the entity's qualifying revenue for each of the prior reference periods for any of the first qualifying period to the thirteenth qualifying period must have been earned primarily from carrying on one or more of the tourism or hospitality-related activities described in paragraph (b). As with the computation of the prior year revenue decline, only one of the prior reference periods for the tenth qualifying period and the eleventh qualifying period is included in the computation.

The tourism or hospitality-related activities described in paragraph (b) include activities which relate to the following categories:

• Hotels, motor hotels, resorts, casino hotels, motels, bed and breakfasts, cottages and cabins, and other traveler accommodation.
• Full-service restaurants and limited-service eating places, drinking establishments and special food services.
• Travel arrangement and reservation services.
• Performing arts companies.
• Heritage institutions.
• Festivals.
• Scenic and sightseeing transportation.
• Charter buses/motor coaches.
• Amusement and theme parks.
• Skiing facilities.
• Fitness and recreational sports centres.
• Marinas.
• Amusement activities, such as amateur sports clubs, teams or leagues, archery or shooting, ballroom dancing, river rafting, curling clubs, mini golf, and bowling centres, excluding golf.
• Recreational vehicle parks and campgrounds.
• Overnight recreational and vacation camps.
• Hunting and fishing camps.
• Duty Free Retailers at Land Borders.
• Motion picture and video exhibition such as cinemas.
• Amusement arcades.
• Cruise terminals.
• Airports, excluding navigation services.
• Casinos.
• Destination tourism marketing and industry organizations or associations.
• Banquet/event halls.
• Convention and trade show organizers.
• Event planning organizations for events that are tourism or hospitality related, such as weddings, festivals, and tours.