Does your dealership qualify for the federal rent subsidy?
Many businesses are trying to navigate how they fit into the Canada Emergency Rent Subsidy (CERS), a federal program designed to help businesses overcome challenges due to the pandemic. For dealerships, understanding how they might qualify for the program can be difficult; the following are some key examples of what qualifies – and how you can benefit from the CERS.
For both stand-alone dealerships and dealership groups, it is common to find real estate held in a holding company (Hold Co.) and rented to the operating company (Op Co.). If they are both under common control, the Hold Co. and Op Co. are typically considered to be related for tax purposes. As a result, the rent paid from Op Co. to Hold Co. is not eligible for CERS and, in a structure like this, the Op Co. would not be eligible for the CERS.
Hold Co. on the other hand, as the property owner, may be eligible to make a claim under the CERS with respect to eligible expenses. To qualify for a particular period, a revenue decline must have been experienced by Hold Co., Op Co. or a combination of both depending on the chosen method of calculating revenues.
In the case of a property owner, expenses eligible for the CERS include property taxes, property insurance and mortgage interest. These amounts must be paid or payable in respect of the claim period. However, if these amounts have not been paid, the property owner must attest the amounts will be paid within 60 days of receipt of the rent subsidy payment.
An additional complication comes into play when determining the eligible amount of mortgage interest. The interest amount that can be claimed is based on the lesser of the cost amount of the property and the lowest total principal amount secured by one or more mortgages on the property, at any time after it was acquired. Additional analysis will be required in situations where a mortgage was previously re-financed. This can be quite common in the dealership sector where perhaps a re-financing has been done to fund new acquisitions or where a store has gone through a reimaging project.
There are a number of methods available to determine revenue declines including:
Hold Co. – Stand Alone – If Hold Co.’s only source of revenue is from related dealerships, this method will not be available as all non-arm’s length revenue is excluded from the revenue calculation. Often Hold Co. will have some arm’s length revenue from sources such as portfolio investments or income from offshore captives. If there has not been a decline in arm’s length revenue, Hold Co. would not qualify for the CERS on its own.
Related Party Method – If more than 90 percent of Hold Co.’s revenue is from related dealerships, an election can be made to determine Hold Co.’s revenue decline based on the revenue decline of those related entities. This is a more complex calculation that takes into account each related entity that Hold Co. is earning revenue from and requires an election to be made by Hold Co. and each of the related entities.
Under this method, Hold Co. may qualify for a revenue decline if the individual dealership(s) that are paying rent to Hold Co. have experienced a decline in their revenue.
Consolidation Method – It is also possible for Hold Co. and all affiliated entities to elect to determine their revenue on a consolidated basis. This method may produce a similar result to the related party method described above, however there may be some differences depending on the ownership structure of the group. The key difference is that under the consolidation method, the revenue of every affiliated entity must be included in the calculation, whereas under the related party method, Hold Co. would only factor in revenues of related entities it is receiving revenue from.
Interplay with the Canada Emergency Wage Subsidy (CEWS)
It is important to understand the calculation of revenues must be done under the same method for both the CERS and the CEWS. However, what works well for one program may not work well for the other.
For example, using the consolidation method may allow Hold Co. to qualify for the CERS, however it may have a negative impact on the potential CEWS claim for individual dealerships. If an individual dealership is significantly down in revenues, it may qualify for a greater benefit under CEWS if it computes its revenue on a stand-alone basis.
Given the interplay between the two programs, when selecting your approach for calculating revenue it is critical to evaluate the potential benefits each approach will have on both the CERS and the CEWS claim of the entities involved. This will allow you to select the method that will maximize your overall benefit as a corporate group.
Due to the intricacies of these programs and the complexity involved with the calculations, it is important to reach out to your MNP advisor who can help you navigate the rules and access the support programs you may be eligible for.
For a general overview of the CERS, see our blog.
Article Written by MNP
Trevor Tamke, CA, is a Partner and member of MNP’s Taxation Services group. Based in Lethbridge, Trevor delivers a wide range of specialty tax services to owner-managed businesses in a variety of sectors, including equipment dealers.
For more information contact Trevor Tamke, CA, at 403-329-2881 or firstname.lastname@example.org.