What will the Canadian Government do next?

What will the Canadian Government do next?

In a previous posting, we indicated that it was crucial that the political class coalesce around the response in the same manner in which they were asking citizens, businesses and civic organizations to.

As we write this piece, the legislation that implemented the first phases of Canadian federal government assistance, has now received Royal Assent. This is despite some brief moments of uncertainty (more on that later). This will achieve a significant amount for Canadians, with $82 billion in estimated relief ($27 billion in stimulus and $55 billion in tax deferrals).

This is good news. But our concern is that this first phase of Canada’s COVID-19 Economic Response Plan has only landed at a time when the need for Phase 2 or Phase 3 is already here.

In addition, what we are hearing from business owners right now is the challenge associated with digesting new programs, supplements to existing programs, and the patchwork of responses that are now multiplying across the entire country at both provincial and municipal levels. Trying to navigate this maze while trying to keep the business moving is difficult.

It is useful to look at what is happening south of the border and internationally as a possible framework for future direction here in Canada (at least on the stimulus side). The international response is trending towards a much blunter approach.

Here’s what we mean.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

Senate Bill 3548 – this Bill does a lot. It will bring the total value of assistance packages to close to $2 trillion (USD). It is 880 pages long. For frame of reference, the Canadian COVID-19 Emergency Response Act is 42 pages long.

But two things in the Bill in particular struck us as a possible direction that may need to be taken here in Canada to start moving things much more quickly.

Small Business Administration Loans

The Bill provides for small businesses (defined as those with less than 500 employees) to obtain federally guaranteed loans of up to $10 million through the Small Business Administration’s existing loan guarantee program.

These aren’t just traditional loans. They are forgivable loans with incentives for businesses to retain their employees through the crisis.

The loans must be used for rent expenses, mortgages and servicing of debts and payroll during the period from February 15, 2020 to June 30, 2020. This particular initiative is pegged at $350 billion USD alone in the proposed Bill.

To the extent that loan proceeds are used to fund payroll and service debt obligations during the covered period, these loans will be forgiven up to these amounts. If there are reductions in the workforce, the amount of forgiveness will accordingly be reduced.

Eligibility for these loans requires that a) the business be operating on March 1, 2020 and b) have employees for which it paid salaries and payroll taxes. Eligibility also extends to non-profit organizations.

In addition to the above, the Bill appears to waive any requirements for personal guarantees or collateral. It also asks those applying to exercise good faith in the application process that their business has indeed been impacted negatively and that the loan is needed.

The critical point in this economic crisis is providing access to liquidity during this highly compressed period of supply and demand shocks to the economy, and doing so quickly. At first glance, this Bill appears to help achieve that on paper.

We have some concerns that the Small Business Administration, an agency that disbursed approximately $30 billion in 2019 will be able to handle the sheer volume of paperwork. But, the key point here is that the SBA alone does not deliver the funds. Banks do. There is an existing network of SBA qualified lenders that will be pushed to move funds quickly. A federal guarantee incentivizes them to do so.  

Canada could easily have the same vehicles and mechanisms to provide this type of funding. We could see this take the form of guarantees at the federal level and the provision of funds through organizations such as BDC. Alternatively, this could be orchestrated through existing bank relationships, as they have more infrastructure to actually do the work on the ground.

Direct relief to certain industries

The bill provides for direct relief to the airline industry, including loan and loan guarantee provisions of up to $25 billion for passenger air carriers. These loans would be provided in such a manner so as to compensate the United States Government for the risks it was taking on.

In a previous announcement by the Canadian federal government, the use of the Canada Account was foreshadowed. This account has been used previously by the Canadian government to deal with distressed industries and entities of significance to the Canadian economy, including the General Motors bailout in 2009.

Direct cash payments

In addition to these specific measures for business, direct cash payments (which we suggested in our previous post as being a critical aspect of any response) are being provided to every American taxpayer.


The CARES Act is emergency relief as much as it is stimulus. It’s about keeping the lights on for small businesses who employ workers in the US economy.

$2 trillion USD in relief is clearly unprecedented. And it’s not just the United States.

There are other international examples that far outpace the Canadian response to date – the Dutch, for example, have guaranteed up to 90% of salaries for businesses for three months, where sales are expected to decline by more than 20%.

In the United Kingdom, 80% of worker salaries have been guaranteed up to a certain limit (2,500 GBP) for the next three months.

Canada has guaranteed 10%. Up to a maximum of $25,000.

The UK has also introduced their own Business Interruption Loan scheme, where government guaranteed interest-free loans (with terms up to six years) can be accessed by businesses experiencing Covid-19 related difficulties, but where those business will be liable to repay amounts in full.

Based on the direction in the U.S. and experience internationally, Canada has some catching up to do in terms of the scope of its own fiscal response and perhaps increasing its own credit exposure.

The reader should note that in a draft version of the Canadian bill, there were extremely broad spending and taxation powers being asked for by the Governing Liberals that had not been announced in advance. Opposition parties balked at this, not willing to cede oversight. This may have been an attempt to take the temperature of the House or to lay the groundwork for further moves.

We’ll be watching for indications of this direction going forward. Canada has the debt capacity needed to make a big move. We believe it needs to happen.

At Welch, we will continue to monitor developments in the Canadian government’s response and its impact on our clients and our community.

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