Published: September 23, 2025
Canada Emergency Rent Subsidy Lessons: Verbal Agreements Left Businesses Without Relief
The COVID-19 pandemic forced thousands of Canadian small businesses to close temporarily. To provide relief, the federal government introduced several subsidies, including the Canada Emergency Rent Subsidy (CERS), a program designed to help businesses, non-profits, and charities cover rent and other fixed property expenses. Under subsection 125.7(1) of the Income Tax Act, only rent paid under a written lease signed before October 9, 2020, qualified as an eligible expense. Organizations directly impacted by public health orders, such as hair salons, were also eligible for an enhanced top-up subsidy.
The decision of the Tax Court of Canada in Hutchings v. The King (2025 TCC 108) highlights the consequences of overlooking this requirement. The Court denied support to a long-standing business that had always paid rent on time but operated under a verbal lease, concluding that only written agreements qualified.
This case reinforces a critical lesson: in times of uncertainty, documenting agreements properly and seeking advice from an expert Canadian tax lawyer early on can mean the difference between accessing government relief and losing vital financial support.
Tax Court Reminder: Relief Programs Depend on Paper, Not Promises
Donna Hutchings operated a hair salon in Westport, Ontario, for over 40 years. Like many service businesses, she was forced to close during the pandemic due to public health restrictions. With the help of her sister, she applied for the Canada Emergency Rent Subsidy (CERS) and the top-up subsidy. Her request was granted, and she received a total of $3,640.83 in financial assistance distributed over several months.
In 2022, the CRA reviewed her applications and determined that she was not eligible to receive the CERS because she did not meet the criteria for qualifying rent expenses. Hutchings argued that her verbal agreement with the property owners should be treated as binding in the same way as a written lease.
Her rental arrangement was entirely verbal, a customary practice in her small community of Westport. She believed that a handshake agreement was sufficient, but the CRA relied on subsection 125.7(1), which required that commercial rent be paid under a written lease entered into before October 9, 2020.
Why Evidence of Payment Was Not Enough
Ms. Hutchings even provided evidence of rent cheques that had been cashed. Still, the Court found this insufficient, holding that only obligations under a written agreement could qualify. While the Court expressed sympathy for her circumstances, it emphasized that it could not override Parliament’s explicit requirement for a written lease.
Lessons from the Tax Court
The Court explained that Parliament never intended to extend the subsidy to verbal rental agreements, because it required proof that a lease existed when the subsidy came into force. As the judge noted, “I cannot change the law. I must apply it as enacted with this specific requirement.”
The Court’s reasoning made clear that relying on a long-standing verbal arrangement, without the protection of a written lease, fell short of the statutory requirement, a reminder that an expert Canadian tax lawyer would stress is critical for ensuring eligibility under government relief programs and avoiding the loss of financial support.
Pro Tax Tips – Practical Guidance to Avoid CRA Denials
- Protect Your Relief: Review, Document, Verify: Before applying for subsidies, tax credits, or business deductions, review the eligibility criteria with a tax professional to ensure compliance with all technical requirements. Where agreements are involved, seek legal advice—a top Canadian tax lawyer would help draft contracts that both protect your interests and satisfy CRA’s documentary standards.
- Make Your Agreements Enforceable: Handshake deals may work in close-knit communities, but they rarely satisfy CRA. Put essential commitments—like rent, service contracts, or supplier terms—into clear, signed documents to protect both your eligibility for relief and your long-term financial security. Generally speaking, written agreements can be entered into subsequent to the date of commencement, but it must be clear that the document is not being backdated.
- Keep a Paper Trail: Beyond formal leases, maintain receipts, invoices, and bank statements that substantiate your financial obligations. Strong supporting records not only demonstrate compliance but also safeguard you in case of a CRA tax audit.
FAQs
If I only paid rent by cheque without a written lease, can I still qualify for the Canada Emergency Rent Subsidy (CERS)?
No. The Tax Court has made clear that cheques or receipts alone are not sufficient. To qualify, rent had to be payable under a written lease signed before October 9, 2020. Verbal agreements, even with proof of payment, did not meet the statutory requirement. However, you may still be able to enter into a written lease.
Why does the CRA insist on a written lease instead of accepting verbal agreements with proof of payment?
Because the Income Tax Act explicitly required that qualifying rent expenses be paid “under a written agreement.” Parliament wanted objective, verifiable proof of an enforceable lease in place when the subsidy came into effect. This prevents uncertainty and ensures uniform treatment across all applicants.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
About the Author
