Paragraph 12(1)(x) of the ITA includes any government assistance in income from a business or property if the assistance is otherwise not included in income. It is the CRA’s view that the forgivable portion of the CEBA is an amount that is described under subparagraph 12(1)(x)(iv). Accordingly, based on the value of the loan received, the total forgivable amount must be included in income in the year the loan is received by virtue of paragraph 12(1)(x). This income inclusion is required regardless of whether a loan is eventually forgiven, but an election and/or a deduction are potential remedies. For example, if a business receives the entire $60,000 CEBA loan in 2020 and subsequently repays the loan after December 31, 2022 (i.e., nothing is forgiven), the taxpayer must still include the $20,000 forgivable portion in income in 2020. However, if a taxpayer enjoys the loan forgiveness by repaying the loan in a subsequent year, there is no further obligation to include an amount in income since the income was recognized in a prior year.
Election to Reduce Income Inclusion
Although the forgivable portion of a CEBA loan is included in income in the year that the loan is received, a borrower can avoid this income inclusion by electing under subsection 12(2.2) of the ITA. The election can be made where a taxpayer receives an amount that would be included in income by virtue of paragraph 12(1)(x) in respect of an outlay or expense (other than an outlay or expense for the cost of property) that is incurred before the end of the following taxation year. These conditions would likely be met since the purpose of the CEBA is to provide borrowers with capital to pay their employees and other non-deferrable expenses. A taxpayer can elect under subsection 12(2.2) to reduce the amount of the expense by up to the amount of the CEBA loan that is otherwise included in income. As a result, the deductible expense is reduced by the elected amount and the income inclusion under paragraph 12(1)(x) is equally reduced.
I don’t have the reference for this at the tips of my fingers, but I am quite sure that the $20,000 should have been declared as income the year the loan was given not the year it was paid back. I put it with other income in 8242 Subsidies and Grants.
How we can make the rebate as an income unless the conditions are met. The condition is the repayment of $40K. If we take it as an income in the year of loan then what if the client is not able to payback $40K before the period?
If the $20,000 was recognized as income in 2020, then why on earth it went to Balance Sheet? Someone obviously double booked that part and needs to be rectified. Things will balance out once that double booking error is corrected.
In 2020 the whole amount is still debt (on the balance sheet). However the CRA wanted the “potentially” forgiven amount to be recognized as income in the year the loan was received.
The “potentially” forgiven amount is not actually forgiven until all the criteria have been met including paying back $40,000.00 of the $60,000.00 within a certain time frame.
You can’t go both ways. It is against the very foundation of accounting. You either book the entire amount as debt on the BS or partial BS and remainder into income statement. I am not debating the validity of that $20,000 as income. I am saying whatever entries have been done at the time of recognition are wrong and need to be corrected. The only reason it is still outstanding on the account is because it was recorded incorrectly.
Unless you are using ASPE, I don’t see any benefit of the way you recorded the transaction.
But since it was done, I think maybe the best way to deal with it, is on the S125, you will recognize the $20,000 as income again, but on S1, include a deduction for $20,000 to offset the income inclusion on S125, so it won’t be taxed again.
And on your FS, then you can reverse the $60,000 debt with $40,000 repayment and $20,000 as income inclusion.
I don’t know if it was such a big issue, but there was confusion in the first couple months. I have clients with July and Sept year end. CRA wasn’t being very specific about the forgiven amount at the time, I called couple times in July and August 2020 because I thought it would have to be included in the income in the year it was received.
I guessed, lots of people were calling for the same issue, and by October, CRA confirmed it would had to include in income, and CPA issued a similar publication