CEBA Audit Services: Canadian Tax Lawyer’s Tax Guidance

The Canada Emergency Business Account (CEBA) loan program

The Government of Canada announced on March 27, 2020 the CEBA loan program as part of the measure to support Canadian businesses to combat the economic impact caused by covid-19. It initially provides a loan of up to $40,000 to small and medium-sized businesses and not-for-profits with zero interest rate till December 21, 2022. If the business repays 75% ($30,000) of the loan by the end of 2022, $10,000 will be forgivable. Otherwise, the remaining loan balance will be converted into a 3-year term loan at an interest rate of 5% and no portion will be forgivable.

On December 4, 2020, the Department of Finance decided to increase the CEBA loan from $40,000 to $60,000. Applicants who have already received the $40,000 loan can still apply for the $20,000 expansion and the deadline is March 31, 2021. Eligible businesses and not-for-profits can still enjoy the interest free period till the end of 2022. However, if they repay $40,000 of a $60,000 CEBA loan by December 31, 2021, $20,000 will be forgivable. If not, the remaining balance will still be converted into a 3-year loan at a 5% interest rate, provided that no default under the loan has occurred.

Eligibility for CEBA

The following is a summary of the CEBA eligibility criteria:

• The borrower is a Canadian operating business in operation as of March 1, 2020;
• The borrower has a federal tax registration;
• The total employment income paid by the borrower in the 2019 calendar year was between $20,000 and $1,500,000.
• For applicants who paid $20,000 or less in total employment income in the 2019 calendar year:
  • The borrower has a Canada Revenue Agency business number and has filed a 2018 or 2019 tax return;
  • The borrower has eligible non-deferrable operating expenses (see next paragraph) between $40,000 and $1,500,000.
• The borrower has an active business chequing or operating account with the lender which is its primary financial institution. The account was opened on or prior to March 1, 2020 and was not in arrears on existing borrowing facilities, if applicable with the lender by 90 days or more as on March 1, 2020.
• The borrower has not previously used or applied for CEBA at any other financial institution.
• The borrower has intentions to continue to operate or resume its business operations.

To qualify for the extra $20,000 CEBA expansion loan, the borrower must have been approved and received the $40,000 CEBA loan and be considered in good standing which means the borrower’s existing loan is not in default.

Permissible Uses of Loan Proceeds

The CEBA loan application requires the business to enter into a loan agreement with a bank. The proceeds of CEBA loan should only be used to pay qualifying expenses and non-deferrable operating expenses of the business that are typically comprised of the followings:

• 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 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.

Restrictions on How to Spend the Loan

The loan proceeds should only be used to pay qualifying expense and non-deferrable operating expenses of the business including payroll, rent, utilities, property tax, insurance and regularly scheduled debt services. The loan may not be used for any payments or expenses such as prepayment or refinancing of existing indebtedness, dividend payments, or distributions and increases in management compensation

Pro tax tips – Eligible business should always keep detailed accounting and banking records to demonstrate their proper use of CEBA loan

Businesses should only use the CEBA loan proceeds for their stated purposes as providing false or misleading information in the loan agreement can constitute loan fraud which may subject business owners to civil or criminal liabilities. To prepare for a potential future tax audit, businesses should keep detailed accounting and banking records to demonstrate the loan proceeds were only used for qualifying purposes. It is also recommended to keep separate loan accounts so that the loan proceeds would not be accidently mixed with other funds used for non-qualifying purposes. If you have questions regarding the eligibility for CEBA or whether certain expense falls under the category of non-deferrable operating expenses, contact our law firm to speak with an experienced Canadian tax lawyer.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch