The original CEBA is a $40,000 loan with 25% or up to $10,000 forgivable if repaid by December 31st, 2022. This is an interest free loan until December 31, 2022. As of December 4th, the CEBA loan has been expanded to include an additional $20,000 loan, with 50% forgivable or $10,000.
Another way to look at this is if you repay the full $60,000 loan by December 31s, 2020, 33.3% or $20,000 will be forgivable. This subsidy is taxable and must be taken into income, which I discuss in more detail below.
Eligibility: The eligibility on the $20,000 expansion is slightly different than the original $40,000 loan. I will discuss the primary criteria below. Please note that there are additional criteria not listed below.
Original 40,000 Loan eligibility criteria:
Have an active CRA Business Number (BN) with an effective date of registration on or prior to March 1, 2020.
Must have a business account with bank
Intends to continue to operate its business or to resume operations.
20,000 CEBA Expansion eligibility criteria:
Must have applied for the $40,000 CEBA
Business is facing ongoing financial hardship (including, for example, a continued decline in revenue or cash reserves, or an increase in operating costs) as a result of the COVID-19 pandemic
that in response to the COVID-19 pandemic it has made all reasonable efforts to reduce its costs and to otherwise adapt its business to improve its viability
The eligibility criteria are very broad and open to interpretation. Most businesses could justify that they were impacted by the COVID-19 pandemic and faced some financial hardship. It does not specify exactly what financial hardship is defined as besides a decline in revenue or an increase in operating costs.
Deadline: The deadline to apply for both the $40,000 CEBA and additional $20,000 is March 31st, 2021.
Tax on Loan: The forgivable portion of the CEBA loan is taxable for the business.
One puzzling aspect of the CEBA loan is that the forgivable portion of the loan must be included in income on the date the loan was issued. This may seem confusing as you will not know how much will be forgivable until December 31st, 2022. If you do not receive the full forgivable amount in 2022, you can take a deduction to income at that time.
This is an important detail that hasn't been made explicitly clear by the CRA, except in a webinar with the CRA and CPA Canada (https://www.videotax.com/web-tips-articles/cews-cra-webinar-and-new-faqs). Most businesses would have applied for the loan in the last 6 months, and therefore would be required to pay tax on the forgivable amount in their current fiscal year.
If you are a small business in Alberta and subject to the Small Business Deduction, the tax you will pay on the full $20,000 is approximately $2,200.
Examples:
Below are some examples to help explain how the loan works.
Example # 1
In May of 2020 you applied for the $40,000 CEBA loan. In December of 2020 you applied for the additional $20,000 CEBA loan. You repay $40,000 of it by December 31st, 2022. Your tax year end in December 31st.
In 2020 you will have to pay tax on $20,000 for the CEBA loan. For small businesses in Alberta this is approximately $2,200 in tax.
Since you repaid the full amount that is required to be repaid by December 31, 2022, you can retain the remaining $20,000.
Example # 2
In May of 2020 you applied for the $40,000 CEBA loan. You decide not to take the $20,000 CEBA expansion loan. You repay $30,000 of it by December 31st, 2022. Your tax year end in December 31st.
In 2020 you will have to pay tax on $10,000 for the CEBA loan. For small businesses in Alberta this is approximately $1,100 in tax.
Since you repaid the full amount that is required to be repaid by December 31, 2022, you can retain the remaining $10,000.
Example # 3
In May of 2020 you applied for the $40,000 CEBA loan. In December of 2020 you applied for the additional $20,000 CEBA loan. You need some additional cash to operate your business and can only repay $35,000 of it is by December 31st, 2020
In 2020 you will have to pay tax on $20,000 for the CEBA loan. For small businesses in Alberta this is approximately $2,200 in tax.
Unfortunately, none of the loan will be forgiven. You will be required to repay the full $60,000 on the loan and interest you incur while repaying the principal. However, you can deduct $20,000 of income that you included in 2020 on your income tax return.
As you can see in the above examples, it is critical that only take the additional $20,000 CEBA expansion if you are certain you can repay the full $40,000 by December 31, 2022.
For more details and examples of the CEBA loan, please visit the GOC CEBA page below.
If you have questions on the eligibility, repayment or tax implications of the CEBA or expanded CEBA loans, feel free to drop us a line.