I have a business that applied and received the $40K CEBA loan - they have not been able to make a go of it and now are in the process of closing the business - 2 questions:
The loan should be recognized as revenue even though it is technically not due - yes or no?
What are the rules if the business owner is unable to pay the full amount, ie $25K - do you have to recognize the full $40K as revenue? Is the loan now considered in default?
The way it normally works is any forgiven loans are income. So anything out of the $40,000 that never gets paid back is income. Whether it is taxable or not I don’t know but I would assume it is unless you can find something from the CRA that says the forgiven part is tax free like 50% of capital gains for instance. It’s also not income until it is deemed forgiven so if it was received in March, the year end is June and it wasn’t decided that the loan was unrepayable until September it would be income in the June 30, 2021 year end not June 30, 2020.
There use to be a few sections in the Act for debt settlements. If I recall correctly the income grinds loss carryforward, CCA and ECC pools. Section 89 might be the section, not sure. CRA had a very good IT bulletin – it might be called gain on settlement of debt.
Garth
Be very careful to read the fine print considering these are only government backed loans through a financial institution. My understanding is, if the recipient paid back $25M of the $40M principal, the rest of the loan would be forgiven or paid by the federal government. In the eyes of Canada Revenue Agency, even this $15M forgiveness can be considered taxable revenue and any unpaid amount may have directors’ liability attached to it.
In this case, it may be prudent for the directors/owners of this business to have a discussion with a bankruptcy trustee (and/or obtain other legal advice) in their jurisdiction to fully clarify the situation.
Where do you find the 15M forgiveness? I see 10M from the beginning.
Please check ASPE 3800
FORGIVABLE LOANS
.24 A forgivable loan is a type of government assistance drawn up in the form of a loan that is forgiven on condition that the “borrower” continues to meet certain requirements specified at the time it was granted. The Board has concluded that, in view of the intention of the government to forgive the loan, there is, in substance, no difference between a forgivable loan and a grant to which there is attached a contingent liability for repayment. Accordingly, accounting for forgivable loans is guided by this Section. The loan shall be recognized as a grant when the enterprise becomes entitled to receive it and not at the time such loans are forgiven.
.25 When an enterprise becomes entitled to receive a forgivable loan, it shall be accounted for in the same manner as a grant. The appropriate accounting treatment shall be based on this Section.
The amount to be forgiven is not $10,000 or $15,000. It is 25% of the balance…
Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000).
The question is “25% of which balance?” I read somewhere that it is the amount outstanding on Jan 1, 2021.
I can’t find a reference to this anymore.
Mondaq phrases it like this: CEBA Q&A - Corporate and Company Law - Canada
$10,000 (25%) of the $40,000 loan is eligible for complete forgiveness if $30,000 is repaid on or before December 31, 2022.
This could mean that if you didn’t repay at least $30,000 you would have to pay the full amount.
If anyone has a reference, that would be helpful.
Taxtips.ca says that it is taxable when received, but I would argue that part of the entitlement is based on the fact that $30,000 of the loan is paid off. I would argue that when that didn’t happen yet, the client wouldn’t be entitled at that point.
Any counter arguments?
This is a tax, not an accounting question so IMO, ASPE is not relevant.
What IS relevant is the Lender-Borrower relationship. The government is not the lender, the bank is, and their Agreement (that the borrower signed) will govern the loan.
Each bank will have its own specific “CEBA Terms and Conditions” statement, but they seem to follow a pattern. Among other things (this is from the Alberta Treasury Branches site):
If You have repaid at least 75% of the Term Loan Amount, and the Credit Facility is irrevocably cancelled, on or prior to the Maturity Date, We will forgive the remaining balance of the Term Loan Amount as of the Maturity Date provided that an Event of Default has not occurred.
The maximum “forgivable” portion of CEBA is 25% of $40,000 or a maximum of $10,000 and is contingent on the “balance of the loan” being repaid prior to Dec 31, 2022.
It would appear from the above, that NO amount is forgiven if a Default occurs.
11. Events of Default
Without restricting ATB’s right to demand payment at any time as described in the Credit Agreement, ATB may, by notice to You, terminate any or all of the Credit Facility and demand immediate payment in any of the following events: {snip} (c ) You undergo or experience an Insolvency Event; {continues}…
…following which they say:
12. Remedies
We have the right to require immediate payment of the Credit Facility at any time and, at ATB’s option, to exercise any of the remedies below, and, if an Event of Default occurs, We have the right, at ATB’s option, to: (a) declare all or any amounts which are not by their terms payable upon demand to be immediately due and payable; (b) reduce the amount of, or terminate, the Credit Facility; (c ) demand that You immediately pay back the full amount You owe Us; (d) refuse to make any more advances or provide any financial services to You; (e) declare You to be in default under any other agreement with ATB; (f) automatically debit any of Your accounts with ATB for all amounts payable by You pursuant to this Credit Agreement; and (g) invoke any other rights permitted by law.
The bank will do what it needs to do and will attempt to collect from whomever it can.
The principal amount of the loan would appear to be still a loan until such time as it is either repaid (and gets a grant entitlement, taxable), repays with no grant (no change, just a debt repayment) or fails to repay in whole or in part (insolvency, and likely bankruptcy).
For a proprietor or partnership, this likely means collection action against the individual; for a corporation, probably not. The OP didn’t say if the business is incorporated or not.
If the biz is able to repay only $25K of $40K, and is insolvent, what happens? Well, it won’t get the grant as it failed to meet the terms, and I would assume that normal gains on settlement of debt rules would apply. Why would they not?
My take, anyway.
@SmallBizGuy What you have explained would also be my understanding of the situation. The 25% is contingent upon 75% being paid within terms.
Yes - it is a tax question. (Although I do appreciate the accounting comments).
The client is incorporated in BC.
My interpretation is that the loan would continue to be a loan - no revenue recognition until such time that the loan is forgiven (ie if 75% is not repaid on time, the entire amount is payable)
As for collection action - I am not certain if there would be any collection action against the directors of the corporation…
Typically no collection action against Directors or Shareholders unless there is some sort of malfeasance (which I would expect is not the case given that you’re asking about the situation!).
The thing that - I think for most people - is unclear is that they think they are borrowing from “the government”. They aren’t…and so one has to go to the individual bank agreement to read the fine print. (Having said that, there may be a certain amount of boilerplate that was provided by the Feds as mandatory…the rest comes from the legal beagles in each entity.)