Surprise Reporting Requirements: CEBA Loan Forgiveness

Evelyn Jacks

Hundreds of advisors from coast to coast were caught off guard at Knowledge Bureau’s January 20 CE Summit with the news that the forgivable portion of the CEBA loan is taxable when the loan is received.

Specifically, funds provided by the banks under the Canada Emergency Business Account (CEBA) program must be used non-deferrable operating expenses of the business including payroll, rent, utilities, insurance, property tax and regularly scheduled debt service. 

Assuming that is the case here are the rules about the reporting of the portion that will be forgiven if the loan is repaid by December 31, 2022:

1. The part of the loan that is forgivable is included in the income of the year in which the loan is received by virtue of paragraph 12(1)(x) of the Income Tax Act.
2. The inclusion in income under paragraph 12(1)(x) can be avoided if an election is made to reduce the amount of outlay or expense under subsection 12(2.2).
3. If the amount included in income under paragraph 12(1)(x) (or not deducted as outlay or expense because of the election under subsection 12(2.2)) is subsequently repaid pursuant to a legal obligation to repay the amount, a deduction can be obtained for the year in which the repayment is made by virtue of paragraph 20(1)(hh).

Therefore, if the forgivable amount is $10,000, that amount is taxable in the year in which the loan is received.  If the amount included in income (or not deducted as outlay or expense because of the election above) is subsequently repaid as a forgiven amount, a deduction is permitted.

Where the forgivable loan is received in respect of outlay or expense of the recipient that is made or incurred before the end of the taxation year following the year in which the loan is received, the recipient can elect not to include the forgivable loan amount in the income of the year in which the loan is received, and reduce by the same amount the deduction for the outlay or expense.  A signed letter accompanying the income tax return for the year the forgivable loan is received or for the year the outlay or expense is made or incurred, whichever is later must be filed.

The Advanced Tax Update for 2021 is available online for interested advisors who seek more cutting-edge information like this before the tax season starts. Enrol online or call 1.866.953.4769.