Tax Complexity Comes With Last Chance For CEBA Loan Forgiveness

Evelyn Jacks

March 28 marks the last day CEBA loan recipients who have submitted a refinancing loan application on or before January 18, 2024 can qualify for up to $20,000 of loan forgiveness.  The outstanding principal of the CEBA loan must be repaid on or before March 28, 2024.  Otherwise, unpaid loans remaining become non-amortizing term loans with full repayment due December 31, 2026.  But there is still at least one bright spot for those loan holders, but it comes with tax complexity.

The Backdrop.  Recall that the government’s CEBA program offered $49.2 Billion in interest-free loans of up to $60,000 to close to 900,000 small businesses and not-for-profits, with up to $20,000 of those loans to be forgivable if repaid on time.  In the year the loan was approved, the forgiven portion was required to be added to income.

CEBA loans were available from more than 220 financial institutions across the country, and there were several extended deadlines for repayment.  However, the program has now ended and loan holders in good standing could take advantage of a final extended deadline of January 18, 2024. 

Businesses that could arrange for financing and repay the loan by March 28, 2024, can keep the forgivable portion (up to $20,000); therefore, on a $60,000 loan, only $40,000 needs to be repaid.  However, and this is very important,  the interest accrued from January 18 to March 28, charged at 5%, must be repaid as well, in order for the forgiveness to occur. 

Businesses which were not in good standing with their financial institutions, were required to repay the outstanding amount of their CEBA loan(s), in full, by December 31, 2023. 

For those in good standing at that time, if the loan remained outstanding on January 19, 2024, a grace period was allowed to refinance with their financial institution.  If the principal and interest in the grace period is not repaid by March 28, 2024 the loan becomes a non-amortizing term loan with full repayment required by December 31, 2026.

Business who have lost access to the forgivable portion of the loan and now must repay the full amount received.  Failure to repay in either case will most likely result in an assignment of the loan by the financial institution to the government’s CEBA collection program.  

Here’s the bright spot:  these businesses can take a deduction for the prior income inclusions.  This is very poorly covered in the CEBA information provided by the government and taking this deduction is complicated.  The tax treatment was described in a CRA technical tax interpretation November 10 of  2020:  External T.I. 2020-0861461E5 - TI – Tax Treatment of Loan Forgiveness under CEBA.

Briefly, CRA noted that the forgivable portion of the CEBA is included in income under paragraph 12(1)(x) in the year of receipt and is considered to be received in respect of an outlay or expense. Specifically, it notes that an amount included under subparagraph 12(1)(x)(iv) may be reduced by an election under subsection 12(2.2).  An off-setting deduction is available under paragraph 20(1)(hh) if the amount is repaid, but only in the year of repayment.

The deduction (under paragraph 20(1)(hh) of the Income Tax Act)  is calculated based on the portion of the loan repaid in the year.  This proration would create a partial deduction for the forgiven amount up to $20,000, potentially for multiple years, until the loan is fully paid.  

Example:   The $60,000 CEBA loan, with a prior year income inclusion of $20,000 to represent the potential “forgivable portion”, is repayable at 5% over 3 years starting January 1, 2024 and ending December 31, 2026.  The monthly principal and interest payments would be $1798.25 and the total interest payable in the period would be $4737.14.  Sum of principal and interest paid over the period:  $64,737.14.  The annual principal and interest paid is $21,579.05 of which $1579.05 is attributable to interest costs.  These interest costs on the loan are tax deductible.

The $20,000 of principal paid for the year is prorated by one third to represent the forgivable amount added to income in the previous year. The deduction for the forgivable amount would therefore be $6666.67.

Total deductions (interest plus CEBA forgiveness deduction) are $8245.72.  Businesses paying a 20% marginal tax rate would save $1649.14, which could be put towards further paying down debt. 

If the CEBA loan is not fully repaid – let’s say the business defaults entirely -  the debt forgiveness rules in Section 80 of the Income Tax Act would require the reduction of certain other tax advantages that may otherwise be allowed, such as loss carry over provisions and capital cost allowance.  It is assumed the previous income inclusion would be fully cleared at this time with a remaining deduction, although the guidance from CRA is silent on this.

In short, three potential sections of the ITA need to be consulted:    12(1)(x); 12(2.2); and 80.   However, alternatively, the technical bulletin from CRA notes:  “the taxpayer may choose to deduct such outlays or expenses under a different applicable provision of the Act (such as section 9).”

Bottom Line:  To take advantage of all the tax provisions available for the right net tax result will require the services of a well informed, experienced tax specialist, and that’s important because it would not be a stretch to think that these post-CEBA program transactions could be subject to audit in the future.