Updated: Jul 11
The highly debated #CECRA for small businesses is now open for applications in select provinces. Many are wondering however, if this program is too little, too late. With the onus entirely on the landlord to make the application, small business tenants have no direct way to access the rent relief that they desperately need. On the flip side, what about landlord rights and interests?
The eligibility of this program can be found on CMHC's website https://www.cmhc-schl.gc.ca/en/finance-and-investing/covid19-cecra-small-business. Much like the #CEWS program, a small business would need to see a drop in revenue in order to qualify (different % drop than the CEWS). This can be completed through year-to-year analysis or an averaging calculation. There are also eligibility requirements for the landlord but thankfully, it appears like the initial requirement for the landlord to hold a mortgage has been removed.
Once eligibility has been determined for both parties there is a long list of documents needed for the application process; Tenant or Sub-tenant’s Attestation, Property Owner’s Attestation, Rent Reduction Agreement, Forgivable Loan Agreement, among other documents. This may be a detriment to the program as the bureaucratic red tape may lead some landlords to not apply. The deadline for application is August 31st and the credit can be applied to rent for months other than April, May, and June 2020 depending on the specific tenant-landlord situation.
Ignoring the gobbledegook of the relief program as it is currently stated, there are two major concerns that this program presents. One for the small business owner and one for the landlord. In order to qualify for rent relief, small businesses would need to follow these guidelines regarding revenue decreases:
"If I need to attest to a 70% drop for 3 months, does my landlord need to wait until the end of June to apply?
-Your landlord must apply for all 3 months at the same time.
-Your eligibility on the 70% factor will be determined on the average of April, May and then, forecasting June revenues."
This puts many businesses in a difficult place. Many owners tried to generate as much revenue as possible throughout March and April in order to support staff, pay fixed expenses and provide for their families. Same can be said for this businesses moving forward, while operating at reduced capacity or other government mandates. Are they supposed to shutter their business to ensure that they meet the forecasted June revenue decrease? Will they run into audit concerns should they exceed the threshold in June, yet received rent relief? Will this program be extended to qualify months beyond June? Businesses need certainty in order to make plans, hire staff, and plan for social distancing requirements. This program fails at every turn.
Regarding the landlord, his/her concern would stem from the requirement to include a moratorium on eviction for the period during which the property owner agrees to apply the loan proceeds. The uncertainty that COVID-19 has brought will undoubtedly result in numerous business foreclosures. If small businesses close down, this could result in cleanup costs, leasehold improvement expenses and legal fees for the landlord, many of whom are truly small business owners themselves. The ability of a landlord to maintain control over their property through the eviction process is important to protect their assets.
If it's too late for business owners and landlords under this program, what needs to happen going forward? As suggested by Dan Kelly with CFIB in April, the #CEBA loans could be expanded upon to allow small business the flexibility they need to pay fixed costs. These loans could replace the CECRA program at its conclusion. This would give the government and opposition parties a few weeks to hammer out a new plan to provide continuity going forward. A proposed plan (in addition to maintaining some of the existing guidelines) could be as follows:
Consult with business groups such as CFIB to determine businesses currently not eligible for CEBA (businesses without business accounts, etc.).
Additional CEBA payments of $20,000/month for the next 6 months to be used for the purpose of paying rent.
Landlord reserves the right of eviction under standard lease terms in order to protect their assets.
Landlord would verify that rental payments are being made by small business. If funds not used to pay rent, the benefit becomes fully repayable.
The small business would report amounts received from the government as taxable income on their next applicable tax return.
If a business received the full benefit ($20,000 x 6) and was located in Alberta, the tax payable on this benefit would be $13,200 ($120k x 11%).
The above recommendations would protect the interests of both the small business owner and the landlord and provide what both parties value the most, certainty. It also provides incentive to small businesses to push forward and generate revenue and return to profitability in conjunction with health guidelines. Small businesses are the backbone of the Canadian economy. We need these businesses in order to relaunch our economy. They support their communities, employees and families. It's time for the government to support them.
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