Commercial landlords and tenants that apply for relief under Canada’s Emergency Commercial Rent Assistance (CECRA) program will need to consider the implications relating to the goods and services tax and harmonized sales tax (GST/HST). While this article specifically focuses on the GST/HST implications of the CECRA program, the rules would generally apply in a similar fashion for Quebec sales tax purposes.
This article provides information relating to the GST/HST treatment of the forgivable loan payment to landlords and the GST/HST implications of the rent reduction provided by commercial landlords to their business tenants.
Background - CMHC is now accepting applications for CECRA
On May 25, 2020 the Canada Mortgage and Housing Corporation (CMHC) opened the application portal for commercial landlords to apply for relief under the CECRA program. The program offers commercial rent assistance for the months of April, May and June 2020 (the Target Months). The deadline to apply is August 31, 2020.
CMHC has posted details on its website concerning the CECRA program application process, including a sample rent reduction agreement, forgivable loan agreement and attestations that must be submitted by commercial landlords who are seeking relief. Reference should be made to this site for details relating to the CECRA program.
The CECRA is intended for small business tenants experiencing financial hardship due to COVID-19 during the months of April, May and June, 2020. The CECRA will provide relief for small business tenants via their commercial landlords, for business tenants paying less than $50,000 per month in gross rent (as defined by a valid and enforceable lease agreement), who generate no more than $20 million in gross annual revenues on a consolidated basis, and who have had their revenues severely impacted by at least 70 per cent under COVID-19 conditions.
The CECRA program offers unsecured, forgivable loans to eligible commercial property owners (i.e., landlords) to reduce the rent owed by their qualifying small business tenants or to meet operating expenses on commercial properties.
The forgivable loans to qualifying landlords cover 50 per cent of three monthly rent payments that are payable by eligible small business tenants during the months of April, May and June, 2020. Landlords must offer a minimum of a 75 per cent rent reduction for the Target Months.
For example, if a small business tenant is paying $10,000 per month in rent:
- CECRA for small businesses will cover 50 per cent of the rent ($5,000), payable to the landlord in the form of a forgivable loan from CMHC;
- the tenant will pay up to 25 per cent of the rent ($2,500); and
- the landlord will forgive 25 per cent of the rent ($2,500).
This means that the landlord will receive up to 75 per cent of the rent or, in this example, $7,500 of rent per month for April, May and June. As such, up to $22,500 will be covered by the CECRA program over the course of the Target Months. The small business tenant would be required to cover the remainder of the monthly gross rent payments, up to a maximum of 25 per cent.
The loans to the landlord will be forgiven on December 31, 2020, if the landlord fulfills the applicable terms and conditions of the CECRA program.
GST/HST implications of the CECRA program
GST/HST and the Forgivable Loan Payment to Commercial Landlords
Upon approval of the landlord under the CECRA program by CMHC, CMHC will provide an unsecured, interest-free, forgivable loan to the landlord.
The Canada Revenue Agency’s (CRA) position is that the forgivable loan to the landlord is a GST/HST exempt supply of a financial service. Consequently, GST/HST will not apply on the forgivable loan payment by the CMHC to the landlord, but still needs to be reported as part of the landlord’s GST/HST return’s total supplies/revenues in the Target Months.
GST/HST and the reduction in rent under the Rent Reduction Agreement
Commercial rent charged to tenants is generally taxable for GST/HST purposes, based on the value of consideration for the supply of the property; that is, based on the rent paid or payable by the tenant under the commercial lease agreement. It is our understanding that the Rent Reduction Agreement is intended to amend the amount of rent payable under the lease agreement between the landlord and the tenant.
It is the CRA’s view that for GST/HST purposes the rent reduction under the Rent Reduction Agreement will be considered a reduction in the consideration for a taxable supply of the leased commercial property. Consequently, the amount of GST/HST payable by the tenant and collectible by the landlord is also reduced.
For example, if the rent payable in April 2020 was $10,000, the applicable HST in Ontario was $1,300, calculated at the rate of 13 per cent. If the rent is reduced by 75 per cent to $2,500 under the Rent Reduction Agreement between the landlord and small business tenant, the applicable HST is also reduced to $325.
Adjusting, Crediting or Refunding GST/HST
Under the CECRA program, if the tenant has already paid rent in excess of the reduced rent for the Target Months, the landlord must reimburse the excess payment from the proceeds of the CECRA loan or agree to give the tenant a credit for the excess against the rent next coming due. If the landlord gives a credit for the excess against the rent for a future month, this does not reduce the GST/HST owing in that subsequent month.
Whether the landlord refunds the excess rent collected, grants a credit for the excess rent against future rent payable, or adjusts the rent collectible but not yet paid, the amount of GST/HST payable by the tenant for the Target Months can be reduced through the issuance of a credit note from the landlord. For GST/HST purposes, a credit note must be issued by the landlord (or debit note must be issued by the tenant) and provided to the tenant, as a means of reducing the GST/HST payable where the excess tax was payable but not collected, or refunding or crediting GST/HST that was payable and collected.
The landlord is not required under the GST/HST legislation to adjust, refund or credit the GST/HST when the rent is subsequently reduced. This is optional to the landlord.
Where the tenant is a registrant engaged in taxable GST/HST activities (e.g., a retailer), the landlord may choose not to adjust, refund or credit the GST/HST previously charged or collected. This may be appropriate where the landlord has already accounted for the tax and the tenant has already claimed or is entitled to claim a corresponding input tax credit (ITC).
However, certain tenants, such as banks, insurance companies, public service bodies and medical practices, may not be entitled to claim ITCs to recover all of the GST/HST on the rent. In these circumstances, the landlord may choose to adjust, refund or credit the tax.
If the landlord chooses not to adjust, refund or credit GST/HST on the reduced rent, the tenant can make application for a rebate for tax paid in error. A rebate claim may be submitted by the tenant within 2 years of the day the GST/HST was paid by the tenant using form GST189, General Application for Rebate of Goods and Services Tax.
If the landlord does adjust, refund or credit the GST/HST, the landlord must issue a credit note. This will allow the landlord to claim a deduction in the landlord’s GST/HST return for the amount of GST/HST adjusted, refunded or credited to the tenant. A credit or debit note must contain prescribed information pursuant to the Credit Note and Debit Note Information (GST/HST) Regulations under the Excise Tax Act.
The landlord is entitled to deduct the amount of the tax adjusted, refunded or credited when determining the net tax for the reporting period in which the credit note is issued to the tenant. This deduction is allowed to the extent that the amount has been included in determining the landlord’s net tax for that reporting period or a preceding reporting period of the landlord.
The tenant is required to add the amount of the tax adjusted, refunded or credited by the landlord when determining the tenant's net tax for the reporting period in which the credit note is received, to the extent that the amount has been included in determining an ITC in a return filed for the reporting period or a preceding reporting period of the tenant.
Also, tenants that have claimed a GST/HST rebate for the GST/HST that is subsequently adjusted, refunded or credited by the landlord, and the rebate exceeds the rebate to which the tenant would be entitled, must remit the excess amount to the CRA. A repayment of a rebate or part of a rebate by a person who is not a GST/HST registrant is made using form RC159, Amount Owing Remittance Voucher.
For GST/HST purposes, the rent reduction under the Rent Reduction Agreement will be considered a reduction in the consideration for a taxable supply of the leased commercial property. Consequently, the rent reduction will reduce the amount of GST/HST payable by the tenant and collectible by the landlord.
However, there is no requirement for the landlord to refund, adjust or credit the GST/HST charged or collected. It is at the discretion of the landlord whether the tax is adjusted, refunded or credited. If the landlord adjusts, refunds or credits the tax relating to the reduced rent, it is important that the documentation and timing requirements for the GST/HST adjustments for both the landlord and tenant be complied with.
If the landlord does not adjust, refund or credit the reduced tax, the tenant may file an application for a rebate of tax paid in error, where the tenant is not entitled to full ITCs.