The Payback:  CEBA Loans

Evelyn Jacks

It’s been confirmed, but the news was disappointing.  Canada Emergency Business Account (“CEBA”) loans  provided interest-free loans to 900,000 small businesses and non-profit organizations. Partial loan forgiveness would be available to those organizations which were to repay the balance of the loan on or before December 31, 2023. There’s been an extension, but for only 18 days for those who don’t have to refinance.  For the others, new loan repayment dates have been set.  Here’s what happened:

Recall that CEBA loans came with a “forgiven amount” that was reported on the tax return when the loan was received.  Some qualified for a $40,000 loan early on, with $10,000 forgiven on prompt payment.  Others qualified for $60,000, with a $20,000 forgiveness.  A good deal it was if you repay the loan.  Unfortunately, only 10% of the recipients have done so.

Failure to repay the portion that would not be forgiven would have expensive results:  a forfeiture of the forgiven amounts and the requirement to repay the whole amount with 5% interest. The September 14, 2023 announcement had the following extension features:

• The repayment deadline was extended 18 days to January 18, 2024.
• This repayment will result in loan forgiveness of $10,000 for a $40,000 loan and $20,000 for a $60,000 loan.
• If recipients have to borrow the $40,000 to make the repayment, and therefore make a refinancing application, this  must be done by January 18, 2024.  The repayment deadline is then extended to March 28, 2024.
• All outstanding CEBA loans will convert to a term loan due December 31, 2026 with an interest rate of 5%

Adjust Prior Filed Returns.  Remember:  the forgivable portion of a CEBA loan was included in the recipient’s taxable income when the loan was received, not when it is repaid.  Tax advisors should amend tax returns for which this reporting criteria was missed and if the loan is not repaid, reverse the income so that the taxpayer can receive a refund for the taxes paid on the income reported.  This will help to pay down the refinanced loans.

Facing a CEWS audit.  This income inclusion was possible at the time because, according to the CRA, the forgivable portion of a CEBA loan meets all the characteristics of an extraordinary item.  That brought up an important audit defence nugget for those who must face a Canada Emergency Wage Subsidy (CEWSP audit in the future.  The forgivable portion of a CEBA loan is not included in qualifying revenue for the purposes of CEWS (Canada Emergency Wage Subsidy).

Make A Difference:   Small business owners are struggling under the burden of a changing economy that has been difficult to navigate.  From labor force and supply chain issues to the reality of ten interest rate hikes within a year, failure to meet pandemic support audits and repayment requirements can bring added financial risk.  Year end planning conversations are crucial to avert financial disaster in many cases.  This is the time to add real value and sound advice in advisor -client relationships.

ADDITIONAL EDUCATIONAL RESOURCES:  Sharpen your knowledge saw with new CE Savvy Collections and earn 15 CE Credits before year end.