Canada Emergency Business Account Loan - A Refresher
CEBA loan came into effect April 9th, 2020. This provided companies with a $40,000 loan at zero interest and zero repayments till December 31, 2022.
If the company repays $30,000 of this loan by December 31, 2022, then the $10,000 balance is forgivable. If the company does not repay the $30,000 by December 31, 2022, then the remaining balance is converted into a 3 year term loan at a 5% interest, and there is no forgivable amount.
Recently CRA has indicated that this loan will be increased to $60,000 – more on this later.
The Forgivable Amounts
CRA has not done as fine a job explaining what happens to the forgivable amount, at least from a tax perspective.
Our philosophy at GBA is to talk to you in plain simple terms and not confuse the issue by quoting specific provisions of the Income Tax Act. However, suffice it to say that the forgivable amount is income to the recipient. Makes a lot of sense from a logical point of view. A business owner may feel that the amount is only forgiven on December 31, 2022 when the business owner repays the non-forgivable portion, thus fulfilling the requirement of the loan provision to be forgiven> However, from a tax perspective, the loan is considered forgiven for calculating taxable income, when the loan is received. If the business fails to meet the repayment terms, such that the balance is converted into a term loan, then a deduction, equal to the income inclusion, would be deducted from the businesses taxes in the year that December 31, 2022 fell in.
For clarification, ABC Company applied for and received the $40,000 CEBA loan May 15, 2020. This was reflected in the Company’s books and records as a deposit to the bank for $40,000, and the set-up of a CEBA loan payable for $40,000.
Then we must record the revenue from the forgivable portion of the loan - $10,000 forgivable loan income, and a reduction to the CEBA Loan payable of $10,000 – at GBA we would use a sub account to reflect that the two are still separate items on the balance sheet.
Again, these two entries would be made as of May 15, 2020 (or whenever it was received) so that the income would be reflected in the businesses year end.
We have received many comments from our clients about how this appears to be unfair, however, CRA has not indicated any special provision or administrative treatment for the CEBA loans, so we must recorded it according to the Income Tax Act. We will continue to monitor CRA and the Department of Finance for any changes that may come, however, there have been no changes signaled with respect to this tax rule.
As a reminder, the deadline for applying for CEBA is December 31, 2020.
The Department of Finance recently announced on October 9th, 2020 that the CEBA support is being expanded from $40,000 to $60,000. An attestation of the impact of COVID-19 on the business will be required to access the additional financing. You should consider this to be an indication that your attestation will likely be reviewed/audited before December 31, 2022 to ensure compliance with the eligibility. Same rules apply in terms of repayment. The loan forgiveness will increase from $10,000 on the first $40,000, to a total of $20,000 on the expanded $60,000.
More details will follow, including any indication of potential penalties for aggressive or wrongfully claimed enhanced CEBA. We expect more details before the end of November.
This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA tax advisor.
GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of 22, provides Audits, Reviews, and Notice to Reader financial statements, as well as corporate tax returns. We also provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.
If you would like to schedule a call to discuss your accounting or tax needs with one of our team members, please complete the free no obligation meeting request on this page.