The Canada Emergency Business Account loan program (CEBA) was announced by the Government of Canada on March 27, 2020, as part of the measures taken by the Government to support Canadian businesses from the economic impacts of the COVID-19. Applications were accepted as of April 9, 2020.
The program provides to small and medium size businesses and not-for-profits access to a loan (the “CEBA Loan”) of up to $40,000, interest-free until the end of 2022. A portion of the loan (25% or up to $10,000) will be forgiven provided the balance of the loan is repaid on or before December 31, 2022.
If the loan cannot be repaid by December 31, 2022, it can be converted into a 3-year term loan charging an interest rate of 5%.
As of April 9, 2020, only operating businesses (i.e. not mere holding companies) that have paid between $50,000 to $1 million in total payroll in 2019, as evidenced by the business’s 2019 T4 Summary of Remuneration Paid (T4SUM), were eligible to apply for this program. On April 16, 2020, eligibility was expanded to included payroll of between $20,000 and $1,500,000. This means that the following businesses are not currently qualified to apply for this program:
- Businesses with salary expenses lower than $20,000, such as a small family-run restaurant where all family members are working in the business and whose documented payroll is less than $20,000;
- Corporations whose earnings are distributed by way of dividends to the exclusion of salaries.
- Businesses that hire most of their staff through independent contracts and have insufficient documented payroll.
Administration of the loan
The CEBA Loan is implemented and administered by eligible financial institutions. Businesses should apply through their primary financial institution. The business’ primary institution is the financial institution where the business does the majority of its day-to-day banking, including employee payroll, supplier payments, and collection of receivables.
Most financial institutions are offering online applications to ensure convenient, efficient and fair access for all eligible businesses.
Permissible uses of loan proceeds
The application for the CEBA Loan requires the business to enter into the Canada Emergency Business Account loan agreement (the “Agreement”). The Agreement provides that the proceeds of the CEBA Loan shall be used only to pay qualifying expenses and non-deferrable operating expenses of the business including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.
By entering into the Agreement, the business agrees to use the proceeds of the CEBA Loan for qualifying purposes only. Using the proceeds of the CEBA Loan for non-qualifying expenses will result in breach of the Agreement by the business, making the business liable for damages, and in particular, could result in forfeiture of the $10,000 forgivable portion.
Further, not using the CEBA Loan proceeds for stated qualifying purposes or providing false and misleading information in the loan application can be construed as loan fraud and may expose the business, and in some instances, the directors, officers or operating minds of the business, to civil or criminal liability.
Advice to businesses that intend to apply for the CEBA Loan
To ensure compliance with the terms of the Agreement, businesses should avoid using the proceeds of the CEBA Loan for non-qualifying purposes. Businesses should also keep detailed accounting and banking records as documentary evidence to show that the CEBA Loan proceeds are used only for qualifying purposes. In the event of an audit, it would be helpful to have segregated the loan proceeds into its own account to avoid the potentially serious consequences of an argument that funds have been used for non-qualifying purposes.
If your business experiences a reduction in revenue and financial hardship due to COVID-19, you may be eligible to qualify for additional relief measures. To find out about the other relief measures available to your business, please contact your financial advisor or accountant.
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