If you are a small business owner you are likely aware of the Canadian Emergency Business Account (CEBA) and may have received a loan under this program. This loan program is facilitated by Canadian lending institutions under which an interest-free loan of up to $40,000 is made to a qualifying small business or not-for-profit organizations. Under the terms of the loan, 25% of the loan (up to $10,000) will be forgiven if the balance of the loan is repaid on or before December 31, 2022.
This is a small but welcomed relief used by many small businesses. If we survive the pandemic and can refinance or repay the loan there is $10,000 in income to the small business. But wait, the 25% amount that might be forgiven if the loan is repaid by December 31, 2022, is taxable in the year end that includes December 31, 2020! Without getting into the technical aspects of this, the Income Tax Act will tax 25% of the amount advanced under this program. The corporate tax rate will determine how much tax you will be paying on the amount potentially forgiven in Calendar year 2020.
If by December 31, 2022 the loan has not repaid you can then deduct any amount previously included in your income when it is repaid. If this is repaid over the following five years (from 2023 to 2028), a deduction will be available when it is paid. The question is, when is the 25% that was originally to be forgiven repaid? Is it deductible proportionally with each repayment of principal or on another basis?
CECRA – Rent Relief
Canada Emergency Commercial Rent Assistance (CECRA) is a loan plan administered by the Canada Housing and Mortgage Corporation (CMHC).
Under this program, the loans will be forgiven if the qualifying property owner agrees to reduce their small business tenants’ rent by at least 75 percent under a rent reduction agreement, and will include a term not to evict the tenant while the agreement is in place. The small business tenant would cover the remainder, up to 25 percent of the rent.
The same reasoning applies to the portion of the CECRA loan that can be forgiven; it will be considered taxable when the loan is received from CMHC. If the loan is not forgiven, there will be an income deduction when the portion of the loan that was included in income is repaid.
Written by Brad Berry from Mowbrey Gil. This document was written for our quarterly bulletin, Canadian Overview, published by Canadian member-firms of Moore North America.