The purpose of this blog isn’t to discuss the generalities of the CEBA loan (although we do cover the basics) but to discuss the taxation of the forgivable portion of that loan as it has been a source of confusion for many business owners.
Provided a business meets these general requirements:
- Canadian operating business on March 1, 2020
- Active Business chequing or operating account
- CRA business number
And applies under one of the streams:
- Stream 1 for those with 2019 payroll between $20,000 and $1,500,000
- Stream 2 for those businesses with 2019 payroll less than $20,000 and eligible non-deferrable expenses between $40,000 and $1,500,000
That business may qualify for a loan. At the time of writing this, the loan is limited to $40,000 (a $20,000 increase has been mentioned by the government, but not passed into legislation yet).
The loan is non-interest bearing with no requirements of repayment until January 1, 2023. Interest will start to be charged on loans with an outstanding balance on January 1, 2023.
If the business repays 75% of the loan on or before December 31, 2022, the remaining 25% of the loan will be forgiven.
The Forgiven Amount
Determining the amount to be forgiven isn’t causing businesses issues. The forgiven amount is 25% of the total amount borrowed. Rather, it is the timing of the taxation of the forgiven amount that is causing issues. I can understand why this would cause issues for business owners as they often hear about forgiven loans from an accounting, not a tax perspective.
When discussing forgiven loans from an accounting perspective you will hear suggestions that the forgiven amount is unknown, unlikely, uncertain, etc. All of these are good reasons not to recognize the amount in accounting income in the year received and in some of these circumstances it may even be reasonable not to include those loans in taxable income in the year. However, there are two differences between the CEBA and most of those loans:
- The CEBA is a loan from the government;
- The CEBA was provided as a forgivable loan, the government does not expect repayment of the forgiven amount.
As a result of these two differences, the forgivable loan portion falls within the scope of subparagraph 12(1)(x) of the Income Tax Act and must be included in income in the year it is received. The forgiven amount can be included in income in one of two ways:
- Inclusion as income;
- Reduction of expenses (this requires an election to be made in the year the loan is received or the expense is incurred).
Provided your business qualifies for the forgiven amount you will not need to worry about any future reporting for tax purposes.
However, if your business didn’t qualify for the forgiven amount you have now paid tax on an amount you didn’t receive. The bad news is that you have paid that tax. The good news is that a deduction is available to you to offset that tax in the year the forgiven portion is repaid. The result is that you don’t pay tax on an amount you didn’t receive; the issue of course is timing.
Now a short recap of the CEBA loan for taxation purposes:
- Forgiven amount is taxable in the year received (2020 in most cases);
- If 75% of the loan is repaid prior to December 31, 2022, no other tax implications;
- If not repaid prior to December 31, 2022, a deduction of the forgiven portion repaid is available in the year repaid.
I hope this has helped clarify the taxation issues surrounding the forgiven amount of the CEBA loan for your business.