DFK Tax Newsletter
Tax Treatment of Canada Emergency Business Account (CEBA)
By Jeff Saunders, CPA, CA, Tax Partner
Teed Saunders Doyle, Fredericton, NB, DFK Affiliate Firm
The Canada Emergency Business Account (CEBA) was launched by the Federal Government on April 9, 2020. The purpose of the program is “…to support businesses by providing financing for their expenses that cannot be avoided or deferred as they take steps to safely navigate a period of shutdown, thereby helping to position businesses for successful relaunch when the economy reopens.” It does this by providing small businesses and not-for-profits with interest-free loans of up to $40,000. If the balance of the loan is repaid on or before December 31, 2022 the government will forgive 25% of the loan (up to $10,000).
On October 9th the Federal Government announced several changes to the CEBA program. These changes include increasing the maximum loan amount to $60,000; increasing the forgivable amount to up to $20,000 ($40,000 x 25% + $20,000 x 50%); extending the deadline for applications to December 31, 2020; and expanding the eligibility criteria for the program. The November 30, 2020 Fall Economic Statement extended the application deadline to March 31, 2021.
The additional $20,000 of loan is only available to eligible businesses, and not-for-profits "that continue to be seriously impacted by the pandemic". The government has not yet released the criteria that will be used to determine who is “seriously impacted by the pandemic” and eligible for the additional support.
Many small business owners are unsure of how these loans will be treated for tax purposes. The tax treatment is determined based on how the funds are used, as well as by whether a portion of the loan is forgiven. The use of CEBA funds is restricted to certain expenses. The eligible expenses are as follows :
- Wages and other employment expenses to independent (arm’s length) third parties;
- Rent or lease payments for real estate used for business purposes;
- Rent or lease payments for capital equipment used for business purposes;
- Payments incurred for insurance related costs;
- Payments incurred for property taxes;
- Payments incurred for business purposes for telephone and utilities in the form of natural gas, oil, electricity, water and internet;
- Payments for regularly scheduled debt service;
- Payments incurred under agreements with independent contractors and fees required in order to maintain licenses, authorizations or permissions necessary to conduct business by the borrower.
- Payments incurred for materials consumed to produce a product ordinarily offered for sale by the Borrower.
Most of the eligible expenses in the list above are deductible expenses for tax purposes. If government assistance (the forgivable portion of the CEBA loan) is used to pay for these expenses, then the tax-deductible amount will be reduced by the amount of government assistance. As a result of this reduction to the expense, the taxable income will increase, which has the effect of making the forgivable portion of the CEBA loan taxable. Alternatively, the forgivable portion can be included in taxable income by adding it to your revenue.
Payments for regularly scheduled debt service is different in that there is typically a principal portion and an interest portion of these payments. The interest portion is a deductible expense but the principal portion being repaid is not. If the forgivable portion of a CEBA loan is used for debt service payments, all of it must still be included in taxable income.
The tax treatment of the forgivable portion of the loan was difficult to determine. Fortunately, some CRA officials participated in a webinar hosted by CPA Canada on October 26, 2020. In this webinar (beginning at approximately 39:36 of the webinar) Costa Dimitrakopoulos, Director General, Income Tax Ruling Directorate, Legislative Policy and Regulatory Affairs Branch discusses CRA’s interpretation of the tax treatment of the forgivable portion of a CEBA loan. CRA’s position is that the full forgivable portion will be included in taxable income in the year in which the loan is received (generally 2020), even if the forgivable portion is not forgiven until 2022. However the business can file an election to not include the forgivable portion in income in 2020 and to reduce expenses in the following taxation year (2021). This election, ultimately, still has the effect of the $10,000 being treated as taxable income. However, it provides a one-year deferral to 2021. This election must be made in a letter to CRA filed by the deadline for your income tax return (attached to the return if you file manually).
If you are unable make the required CEBA loan repayment by December 31, 2022 and are required to repay the forgivable portion, then you can claim a deduction for that repayment on your tax return for the year that you make the repayment.
It is important to remember that there is no partial forgiveness for a partial repayment of a CEBA loan or loans. For, example if you borrowed $40,000 in the first round, then borrowed $20,000 when the program was extended, you must repay $40,000 ($40,000 x 25% + $20,000 x 50%). If you only repaid $30,000 ($40,000 x 75%) there would be no forgiveness on either part of what you borrowed.
The CEBA program, as well as other Covid-19 related relief programs, are very technical and have been updated several times. You should consult your local DFK tax advisor for specific questions regarding how to qualify for these programs and how they are treated for tax purposes.