Taxing the Forgiven portion of the CEBA (Canadian Emergency Business Account)

Clearing up the confusion about the CEBA

There has been quite a bit of confusion among business owners in regards to the CEBA. Therefore even though we do cover the basics of the CEBA, this article will focus more on the question about the taxation of the forgivable portion of that loan.

CEBA Basics:

A business must meet these requirements for eligibility:

Must be a Canadian operating business as of March 1, 2020.
Business must have an active business chequing or operating account.
Business must have a CRA business number.

A criteria must also apply under one of the following streams:

Stream 1 will apply for businesses with 2019 payroll between $20,000 and $1,500,000.
Stream 2 will apply to those businesses with 2019 payroll that is less than $20,000 and eligible for non-deferrable expenses between $40,000 and $1,500,000.

Any business that falls under the outlined criteria above will be eligible to qualify for a CEBA loan. The maximum loan at the time of writing this is $60,000.

The CEBA will remain interest free and there will be no requirement to repay the loan until January 1st 2023. If there are any outstanding balances as of January 1st 2023, then interest will start to be charged from that date forward.

An interesting condition of the CEBA is that if a business repays $30,000 of the $40,000 initial portion of the loan or $40,000 out of the total allowed limit of $60,000 by December 31st 2022, the remaining balance of $10,000 respectively $20,000 will not have to be re-paid and will be forgiven.

The Forgiven Amount

What is causing businesses confusion, is not the question of what the forgiven amount is, but rather it is understanding the timing of the taxation of the forgiven amount that is creating the issue. A plausible reason for this is that most business owners will hear about forgiven loans from an accounting perspective instead of a tax perspective, which is where most issues arise in regards to this question.

When it comes to the CEBA forgiven loans as discussed from an accounting perspective, it may be suggested that the forgiven loan amount is unknown, unlikely or uncertain. Even though these may be valid reasons for not recognizing that amount when it comes to accounting income for the year that it was received, it is important to note that there are some significant differences between regular loans and the CEBA.

The CEBA is a government issued loan.
The CEBA is a forgivable loan, therefore the government does not expect repayment of the forgiven amount.

Therefore as the forgivable amount is not expected to be repaid. It must be included as taxable income in the year it was received. The forgivable portion of the loan falls under the subparagraph 12(1)(x) of the income tax act and can be included in income in a couple of ways.

Inclusion as income or a reduction of expenses (an election must be made in the year the loan was received). You will not have to worry about reporting any future amounts for tax purposes if your business qualified for the forgiven amount.

However if you repaid less than the minimum amount of the loan by Dec 31st 2022 ($30,000 respectively $40,000 of the original amount received), meaning that you didn’t qualify for the forgiven amount anymore, you will be able to reverse the inclusion of the income at that specific moment and in that specific tax year.

The good news is that there is a deduction available for you in case you don’t reimburse the minimum amount back to CRA, that you can take advantage of and which will allow you to offset the income that was included in income in the year the loan was received. Therefore you can avoid paying tax on an amount that you did not receive, and of course the issue here is timing.

CEBA loan re-cap for taxation purposes.

The forgiven amount is considered, by default, a taxable income in the year it is received which in most cases is 2020.

There are no other tax implications if the minimum amount of the loan is paid on or prior to December 31st 2022.

A tax deduction is available for the forgiven portion that has been repaid for those that were not able to re-pay the balance of the loan prior to December 31st 2022.

Hopefully this article clarifies some of the confusion surrounding the forgiven amount of the CEBA business loan.

Disclaimer:

This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters. All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions. This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services. Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.