Last week, the federal government announced that its $20,000 enhancement to the $40,000 CEBA loan was now live and taking applications. Loan forgiveness potential on a now $60,000 loan comes in at $20,000 or 33%.
Almost $32 billion has been pushed out to qualifying entities (almost 800,000 individual loans) through this program, targeted at small businesses and not-for-profits. The program provides an excellent source of liquidity for eligible entities as they shore up capital through the rest of the pandemic.
As we approach the end of the calendar year, we wanted to take the opportunity to look at a few of the recent enhancements to this program and do a refresher on the program itself. We also end with a few important additional considerations for applicants, including with respect to the CEBA agreements and attestations that are required to be in place between the financial institution and borrower.
The best overall source for information on this program remains the official CEBA website at ceba-cuec.ca where a significant amount of technical questions are answered.
Increase in maximum loan from $40,000 to $20,000
This announcement was made some time ago, but is just now becoming operational. The loan eligibility criteria remain unchanged from the original $40,000 – in other words you fall into either the payroll stream (based on 2019 payroll levels being between CAD $20,000 and $1,500,000) or non-deferrable eligible expense stream (less than $20,000 of employment income and eligible non-deferrable 2020 expenses of between CAD $40,000 and $1,500,000).
If you have already received the $40,000 loan, you must submit a new application to access the additional $20,000 – it will not automatically be provided to you. You will not need to resubmit the original application or re-upload expense documents. That said, it is not automatic that if you received the $40,000 loan that you will receive the $20,000 – for example, post-funding validations may have indicated discrepancies from the first application. In addition, there are new attestation requirements that a borrower must complete that may differ from when you originally received the $40,000 amount. It is critical that you read an understand the comments below (Additional Considerations section) with respect to Attestation requirements that are embedded in new loan agreements.
If you have never applied for CEBA before, you will no longer have the $40,000 loan available to you. The only accessible amount will be $60,000.
Effectively, when the additional $20,000 loan comes into play, the forgiveness calculation is combined into one blended rate of forgiveness when the outstanding balance of the loan is repaid (other than the forgiven amount) by December 31, 2022, as follows:
- 25% on the first $40,000 borrowed
- 50% on the subsequent $20,000 (i.e. between $40K and $60K)
This blended rate is only available if all other amounts outstanding are repaid by December 31, 2022. On a $60,000 loan for example, no forgiveness is available unless $40,000 is repaid.
Some forgiveness sample calculations are provided on the CEBA website and are worth reviewing for your specific situation.
Active business chequing/operating account
In previous iterations of the CEBA, loans were not available to otherwise eligible entities that did not have active business chequing or operating accounts as of March 1, 2020. This effectively excluded businesses that co-mingled business cash flows with personal cash flows (typical in an unincorporated scenario).
This rule has been adjusted to permit otherwise eligible entities to receive a CEBA loan if they open a distinct business chequing or operating account by the time of application.
Applications deadline for both the $60,000 loan or the $20,000 expansion have been extended to March 31, 2021.
Reviewing the core eligibility requirements
The core eligibility requirements are as follows:
You are positioned into one of two streams: (i) the Payroll Stream (Applicants with employment income paid in the 2019 calendar year between Cdn.$20,000 and Cdn.$1,500,000) or (ii) the Non-Deferrable Expense Stream (Applicants with Cdn.$20,000 or less in total employment income paid in the 2019 calendar year).
Every applicant must meet the following criteria:
- Has an active CRA Business Number (BN) with an effective date of registration on or prior to March 1, 2020.
- Has an active business chequing/operating account with the Lender at the time of applying for CEBA.
- Has not previously used the Canada Emergency Business Account Program (the “Program”) and will not apply for support under the Program at any other financial institution.
- Intends to continue to operate its business or to resume operations.
Within the Non-Deferrable Expenses Stream you must also meet the following criteria:
- Have eligible non-deferrable expenses between Cdn. $40,000 and Cdn. $1,500,000. Eligible non-deferrable expenses could include costs such as rent, property taxes, utilities, and insurance. Expenses will be subject to verification and audit by the Government of Canada.
- Filed an income tax return with the CRA with a tax year ending in 2019 or, if its tax return for 2019 has not yet been submitted, 2018.
As mentioned, the CEBA website at ceba-cuec.ca provides a significant amount of supporting material and definitions that can be accessed to supplement your interpretation of these core eligibility requirements.
- Not all CEBA agreements are created equal – take the time to read and understand your CEBA agreement, what you are being asked to attest to and how the timing of repayments impacts loan forgiveness.
Your agreement is with your banking institution, not the federal government itself. As a result, although the fundamentals of the loans are consistent, we have found that in some cases, agreement-level differences can have implications on loan forgiveness calculations depending on the timing of certain cash flows.
Also – be aware of the attestations embedded in loan agreements – Loan agreements that are executed that scope in this additional $20,000 amount may have different Attestation requirements depending on when the original $40,000 loan was received. Attestations may impact the entire $60,000 amount borrowed, and not just the new $20,000 amount.
Under older agreements (before the introduction of the non-deferrable eligible expense stream) generic restrictions existed on use of funds under the loan program – at least in some loan agreements, this included the term “non-deferrable operating expenses” which was not specifically defined other than some non-limiting examples, such as payroll, rent, utilities and excluded use of funds for payment of dividends or increases in management compensation.
Under the new attestation requirements, an Attestation will have to be provided with respect to Non-Deferrable Eligible Expenses which are now explicitly defined by both the Government and within the attestation embedded in the underlying agreements. As these are specifically defined, this could have an unintended limiting effect with respect to the entire $60,000, not just the new $20,000.
In addition to the above, you will need to certify that your business is facing ongoing financial hardship due to COVID-19, that you intend to continue to operate your business or to resume operations, and that in response to the pandemic you have made all reasonable efforts to reduce your costs and adapt your business to improve viability. How you answered that question in the spring/summer timeframe when there was a still a significant amount of uncertainty on how your business was being impacted or could be impacted may be different than how you would answer that question today.
These factors should be kept in mind when considering whether or not an application for this new $20,000 loan makes sense as it could have the effect of exposing your entire loan to these new Attestation definitions.
- Loan forgiveness is taxable. Understand the tax implications by reading a recent blog by my colleague Josh Smith, link here
- Revisit the program website often – as could be expected with any program rushed out to the market, there have been steady incremental changes to program documentation as well as additional clarifications on terms, meanings and restrictions, over time. If you were on the margins of eligibility a few months ago, it’s worth re-examining eligibility criteria to understand whether you may be eligible now.
If you have any questions about the CEBA loan, or any other COVID related support measure, feel free to reach out to your Welch representative.