What is the repayment of a CEBA loan? | David Sklar (2023)

The Covid-19 pandemic has devastated Canadian businesses like no other event in recent history.

Countless businesses across the country have suffered huge losses in revenue. They were unable to pay their employees or cover other basic operating costs. Many were on the verge of shutting down their operations permanently as sales and cash flow evaporated virtually overnight. Small businesses in particular have been hit hard.

The federal government quickly sent severalFinancial assistance programs targeted at small businesses.to combat economic devastation. The most notable was the Canadian Emergency Business Account (CEBA).

If you are a business owner, you may have received CEBA funding to keep your business afloat during this turbulent period. In this case, please note that the CEBA program is not solely a charity initiative of the Government of Canada. As the recipient, you are obligated to repay the principal and interest.

As the repayment date approaches, it is advisable to familiarize yourself with the terms of this loan. This way you will be able to develop a plan to remove this liability from your books.

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HowDoes the Canadian Business Emergency Account (CEBA) work?

CEBA was administered byThe development of Canada's exports(EDC) with the cooperation of over 230 financial institutions that have provided loans to small businesses. The program officially launched on April 9, 2020, and major Canadian banks are at the forefront of processing applications for government-backed loans.

As a business owner, you can apply for a CEBA loan from one of two streams:

  • wage flow– available to candidates with salary costs between $20,000 and $1.5 million in 2019.
  • Flow of non-deferred expenses– Available to applicants with 2019 salary spend of $20,000 or less, plus qualifying fixed expenses (rent, utilities, insurance, etc.) of $40,000 to $1,500,000.

Initially, eligible businesses could borrow up to $40,000 through the loan program. However, on December 4, 2020, the federal governmentincreased this limit by another $20,000. Therefore, as a CEBA applicant, you can borrow up to $60,000 in funding to help sustain your business.

Impact of CEBA on small businesses

Given its rapid implementation and the rapidly evolving nature of the pandemic situation, the federal government has modified CEBA many times. You can see a summary of important changes in this toolreportpublished by the Canadian Federation of Independent Business (CFIB).

In addition, a lot of confusion has arisen around the terms of CEBA loans, which is how the company can do itaccess and spend funds. CEBA's loan packages varied depending on the financial institution that provided the loan.

Below are the loan terms of five large banks in Canada:

Despite its flaws, CEBA wassuccessful initiativewhich provided much-needed support to small businesses during the pandemic.

According to the Government of Canada:

  • More than 898,000 companies have been approved for initial CEBA loans
  • More than 570,000 companies have been approved to extend the CEBA loan
  • More than $49 billion in funding has been provided to businesses through participating financial institutions.

CEBA payment terms: what you need to know

The first thing to know about CEBA loans is that you are not directly responsible for repaying the principal amount. The initial terms of the loan required repayment of the entire loan (except for the part subject to redemption) by December 31, 2022. However, the federal government later extended that deadline to December 31, 2023.

Secondly, CEBA loans are interest-free during this period, so in practice they are interest-free.

However, if you wish, you can pay off all or part of your balance before December 31, 2023. This way you will not incur any prepayment penalties.

As a result, you have a lot of freedom and flexibility to create a reasonable repayment plan for your CEBA loan. You can arrange your payments to suit your budget, cash flow and personal circumstances. There is no reason to panic and rush to pay for it.

But what if you are unable to pay off the balance after the December 31, 2023 deadline?

In this case, your CEBA loan will become a two-year loan with a fixed interest rate of 5%. Interest will start to accrue on your balance from January 1, 2024 and you will have to pay it monthly. You must ensure that you repay the principal amount in full before December 31, 2025.

Suppose your company's cash flow has improved significantly since you received the funds. In this case, it is advisable to pay off the balance gradually. In this way, you will avoid burdensome interest.

However, let's assume that this is not possible for you and you plan to transfer the balance after the due date. Fortunately, you may have the right to forgive what's left.

CEBA loan forgiveness: how it works and how to determine if you qualify

The portion of the CEBA loan that is eligible for forgiveness will vary based on the amount received and outstanding balance as of December 31, 2023.

If you borrowed $40,000 or less, the maximum amount you can claim for forgiveness is 25% of the loan. In other words,To qualify for loan forgiveness, you must repay 75% of the loan balance by December 31, 2023.

If you borrowed more than $40,000 to $60,000, the maximum amount you can apply for forgiveness is

  • 25% on the first $40,000; AND
  • 50% on amounts over $40,000

Therefore,To ensure you qualify for loan forgiveness, you must repay 75% of the initial loan and 50% of the additional loan by December 31, 2023.

In both cases, the maximum amount available for forgiveness is $20,000, assuming you have borrowed up to the $60,000 limit ($40,000 x 25% + $20,000 x 50%).

Below are examples illustrating how CEBA loan forgiveness works in practice.

Scenario 1: Borrow $40,000 or less

In this scenario, you must repay 75% of the loan for the balance to be eligible for forgiveness.

borrowed amountAmount refunded as at December 31, 2023Amount eligible for redemption
$40,000$30,00010 000 USD (40 000 USD x 25%)
$40,000$25,0000 dollars
$30,000$22,5007500 USD (30 000 x 25%

Scenario 2: Borrow $40,000 then up to $20,000

In this scenario, you mustFirstrepay 25% of the initial $40,000 loan,So50% extra loan over $40,000.

borrowed amountAmount refunded as at December 31, 2023Amount eligible for redemption
$60,000$40,00020 000 USD (40 000 USD x 25% + 20 000 USD x 50%)
$60,000$30,0000 dollars
$55,000$37,50017 500 USD (40 000 USD x 25% + 15 000 USD x 50%)

Scenario 3: Borrow and repay $40,000, demand forgiveness, then borrow an additional $20,000

In this scenario, you must repay 50% of the extra $20,000 you borrowed before you can apply for redemption of the remaining balance.

borrowed amountAmount refunded as at December 31, 2023Amount eligible for redemption
$20,000$7,0000 dollars

Is the forgiven portion of the CEBA loan taxable?

The redeemed portion of your CEBA is subject to income tax. You must include this amount in your income in the year you received the CEBA loan,not when you qualify for forgiveness. If you later do not qualify for forgiveness of this amount, you can claim it as a deduction on your tax return after you pay off the loan.

Who has to repay the CEBA loan: You or your company?

Suppose you run your business as a corporation and get a CEBA loan. In this case, your corporation will be responsible for paying the principal amount. The financial institution that loaned you the funds cannot legally seize your personal assets to cover possible shortfallsbankruptcy of the company.

However, this is not the case if your financial institution includes:personal guaranteein the CEBA loan agreement. This clause effectively makes you personally liable for the debt in the event your corporation fails to pay the balance. If you are unsure of your exact responsibilities, please read the terms of the contract carefully. Otherwise, you may struggle to find the cash to pay off your CEBA balance.

Let's assume you received CEBA financing by acting as a sole proprietor. In this scenario, you are solely responsible for payment. Legally, there is no distinction between your assets and those of your company. As a result, your personal assets such as your home, car and investment accounts are at risk of being repossessed to cover any outstanding balances.

So you've received a payment letter from CEBA: where are you going from here?

As CEBA's due date approaches, it's critical to assess your company's financial performance. This way you will be able to assess your ability to repay the CEBA loan.

Let's say your business has seen a significant improvement since the pandemic subsided: revenues are steadily increasing and cash flow has stabilized. In this case, it is wise to repay the CEBA loan by making periodic payments. And take forgiveness.

But let's assume your business is still struggling after the pandemic. Sales are weak, cash flow is limited, and customer demand is falling. As a result, a CEBA loan on your balance sheet can quickly become a financial burden.

Before you face a CEBA loan, seek advice and learn about the options available.

Is your CEBA loan causing you severe financial stress? If so, there is no shame in seeking advice from a qualified professional to help you develop a solid coping plan. Take your time to rob your RRSP account or take out a second mortgage on your home.

The licensed insolvency practitioners at David Sklar and Associates can review your financial situation and recommend a solution to eliminate your debt. They can help you discover a wide variety of options, some of which you may not have known were available.

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Our licensed and qualified trustee has the knowledge and experience to help you restructure your business and free up much-needed cash flow. They can also help reduce debt by negotiating with creditors through:consumer proposition.

It is worth knowing that CEBA loans can be repaid through bankruptcy. Therefore, if your situation is serious enough, aAuthorized bankruptcy trusteecan act as your trusted guide throughout the bankruptcy process. Yes, your credit score will be severely reduced, but you will be able to get out of debt and start over.

Don't let a CEBA loan unnecessarily jeopardize your business or personal assets you've worked so hard for. Be sure to talk to AAuthorized bankruptcy trusteeWho's gonna help you take it off the balance forever?

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