When are Forgivable CEBA Loans Reported?

Evelyn Jacks

The Canada Emergency Benefit Account (CEBA) provided two loans to businesses that suffered revenue declines due to the pandemic.  They amounted to a total of $60,000, with $20,000 forgivable,   if the loan is repaid  December 31, 2022.  However, very few expected a 2020 income inclusion. Here are the rules:

The original CEBA loan was for $40,000 and a second CEBA was announced October 9, 2020 for $20,000 for a total of $60,000.   In each case up to $10,000 is forgivable; for a total of $20,000.  Here’s the catch:  to qualify for the forgiveness, the non-forgivable portion ($40,000) be repaid on December 31, 2022.  The loans are also interest-free until then.

So, when is the forgivable amount declared as income, assuming loan repayment is made on time?  CRA has confirmed their interpretation, which is that the forgivable portions of the two CEBA loans are taxable on receipt of the loan. 

Many taxpayers may not have anticipated this income inclusion for the 2020 tax year, and it’s important for advisors to make them aware of this requirement if the loans were received in that year.   Note that when the balance of the loan is repaid by the deadline, there are no further tax consequences down the line.

But, if a business cannot afford to repay any of the loan by December 31, 2022, the full amount of the loan is repayable.  The outstanding amount becomes a term loan attracting a 5% interest rate. When that happens, an adjustment to the income inclusion will have to be made.  In that situation, a deduction will be allowed for the previously reported income amount.  

Further down the line, what happens if the taxpayer defaults on the term loan? In that case, if further forgiveness is required, regular debt forgiveness rules under Section 80 of the Income Tax Act will apply.     

Tax professionals should discuss these rules with clients to anticipate 2020 taxes payable as a result of this complexity. Get the credentials to help as a DFA-Tax Services Specialist™.         The 2021 Advanced Personal Tax Course from Knowledge Bureau is a certificate course that can also you get up-to-speed for the upcoming tax season, and the 30 CE/CPD credits you’ll earn can be used towards your Designation.