As you’ve likely already heard, the Canadian Federal government has earmarked $65 billion for businesses that have been affected by COVID-19. The funds are accessible through three credit programs:
1. Canada Emergency Business Account (“CEBA”);
2. Small and Medium-Sized Enterprises Loan and Guarantee Program; and
3. Business Development Bank Co-Lending Program.
This post will explain CEBA.
The CEBA provides interest-free loans of up to $40,000. These loans are provided through financial institutions (such as Royal Bank, TD Canada Trust, etc.), but are backed by the Federal government. If the loan is fully repaid by December 31, 2022, then up to $10,000 of the loan will be forgiven. If the loan is not repaid in full by December 31, 2020, the loan will be converted into a 3-year term loan at an interest rate of 5%.
The loan can only be used for specific purposes, including to pay non-deferrable operating expenses, such as payroll, rent, utilities, insurance, property tax and regularly scheduled debt service. The loan cannot be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.
To be eligible for the loan, the borrower must:
- Be a Canadian-operating business in operation as of March 1, 2020;
- Have a federal tax registration;
- Have had a total payroll in 2019 between 50,000 and $1,000,000;
- Have an active business chequing/operating account with the lending financial institution (the account must have been opened on or prior to March 1, 2020 and was not in arrears on existing borrowing facilities with the lender by 90 days or more as at March 1, 2020);
- Apply for the program only at one financial institution;
- Acknowledge its intention to continue to operate its business or to resume operations; and
- Agree to participate in post-funding surveys conducted by the Government of Canada or any of its agents.
The application process requires that the business apply online through the financial institution that holds its primary business operating account. The applicant will be required to demonstrate their payroll amount by submitting a T4SUM (issued by CRA).
Despite the good intentions of the program, it does have its drawbacks. Small businesses may not meet the minimum $50,000 payroll threshold. This is particularly true if the business pays the owner (and perhaps the owner’s family members) through dividends rather than a salary. Other micro-sized and new businesses may also be ineligible based on the minimum payment threshold.
The Federal government acknowledges that the program is not perfect, and it will continue to evolve. Changes to the program could include reducing the minimum payroll threshold or providing grants for businesses that don’t qualify, and ensuring that all financial institutions (credit unions, for example) can participate in the program.
The impact of programs such as CEBA is significant; micro-sized and small businesses are the anchors of our communities. While they serve a practical purpose by providing a product/service, and serve an economic purpose by contributing financially to the provincial economy, their real value is bringing people together to engage in fundamental aspects of human life: forming connections and sharing experiences.
For more information on CEBA, please reach out to us!