The government has recently increased the amount of loans available under the Canada Emergency Business Account (CEBA). Designed to provide small businesses and certain charities and not-for-profit organizations access to interest-free loans to cover operating costs during the COVID-19 crisis, the amount of loans available has recently increased to $60,000 from $40,000. If the conditions of the CEBA program are met, up to $20,000 of the loans will be forgiven. However, if the loan is not repaid by December 31, 2022, it can be converted to a three-year term loan with a 5% interest rate.
Who is eligible?
The CEBA is available to small businesses and charities and not-for-profit organizations that are actively carrying on a business in Canada (including a related business in the case of a registered charity). These include small businesses that do not have a payroll, sole proprietors who are not incorporated and earn their income directly, and family-owned businesses who pay family members with dividends rather than salaries. To qualify, applicants will need to meet the following conditions:
- Be in operation on or prior to March 1, 2020 with an active Business Number (BN) with the Canada Revenue Agency (CRA);
- Create a business bank account at their primary institution prior to applying for CEBA (under the original program in the spring, it was required to have a business bank account as of March 1, 2020 but this restriction has recently been relaxed; applicants can now open this bank account at the time they do their CEBA application);
- Have not previously used the CEBA and will not apply under the program at any other financial institution. If an organization has already applied for a $40,000 loan, they are now, as of December 4, 2020, able to apply for the additional $20,000 loan;
- Must intend to continue to operate its business or to resume operations.
There are two streams under which an organization can apply – the Payroll Stream and the Eligible Non-Deferrable Expense Stream.
Payroll Stream – Under this stream, applicants must have had total payroll between $20,000 and $1.5 million in 2019.
Eligible Non-Deferrable Expense Stream – Under this stream, available to organizations that did not have sufficient payroll in 2019, applicants must have a CRA BN and filed a 2018 or 2019 tax return, and have eligible non-deferrable expenses between $40,000 and $1.5 million, such as rent, property tax, utilities and insurance. Organizations that are in receipt of other government COVID-response programs, such as the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy, should bear in mind that adjustments may be needed in determining their eligible non-deferrable expenses for CEBA purposes.
How you can and cannot use the CEBA
The CEBA can be used to pay for eligible non-deferrable expenses. According to the CEBA website, these include the following:
- Wages and other employment expenses to independent (arm’s length) third parties;
- Rent or lease payments for real estate;
- Rent or lease payments for capital equipment;
- Insurance related expenses;
- Property taxes;
- Telephone and utility expenses (such as gas, oil, electricity, water and internet);
- Payments for regularly scheduled debt service;
- Payments incurred under agreements with independent contractors;
- Fees required in order to maintain licenses, authorizations or permissions necessary to conduct business;
- Materials consumed to produce a product ordinarily offered for sale by the borrower.
The funds obtained from the CEBA cannot be used for prepayment or refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.
How to apply
All applications for the CEBA are made through an organization’s financial institution website. If applying through the Payroll Stream, the application process is relatively straightforward. Once submitted, the application will be looked at by the government and if approved, funds will be provided to the applicant in their business account.
Organizations who apply through the Non-Deferrable Expenses Stream have an additional step. Once they have applied on their financial institution’s website, the financial institution will direct applicants to a CEBA website where they will be required to upload supporting document to support their 2020 non-deferrable expenses. Again, once approved, funds will be deposited in the organization’s bank account.
What are the tax consequences of any forgiveness of a CEBA loan?
Under the CEBA program, up to 25% of the original $40,000 loan and up to 50% of the additional $20,000 loan will be forgiven if repaid by December 31, 2022. Under tax rules, the portion of the loan that can be forgiven is taxable income at the time the loan is received. For example, for a business that has a year-end of December 31, 2020 and has applied for the maximum CEBA of $60,000, $20,000 of this loan must be included in their 2020 taxable income.
Alternatively, an election can be made to reduce the expenses in respect of which the loan is received instead of reporting the forgivable amount as income. This option can provide a deferral opportunity in certain circumstances. For example, where a business with an off-calendar year-end, such as September 30, receives the CEBA loan before its year-end for non-deferrable outlays to be made later in 2020, this election could allow a portion of the forgivable amount to be deferred to the taxpayer’s next taxation year.
If the loan is not repaid by the end of 2022 (and therefore the conditions for a portion of the loan to be forgiven are not met) a tax deduction is available at that time.
What is the deadline to apply?
All applications for the CEBA must be made by March 31, 2021.
How BDO can help
Our BDO Tax professionals understand the uncertainty and challenges your business is facing during the COVID-19 crisis. We can help you assess how the new extensions and enhancements of the government relief programs will affect your organization and determine next steps.
If you have any questions as to how the CEBA program applies to your organization, please contact your BDO advisor.
Dave Walsh, Partner, Tax Service Line Leader
Bruce Sprague, Partner, Western Canada Tax Leader
Greg London, Partner, Eastern Canada Tax Leader
Peter Routly, Partner, Southern Ontario Tax Leader
Rachel Gervais, Partner, GTA Tax Leader
The information in this publication is current as of December 4, 2020.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.