The Canada Emergency Business Account (“CEBA”) is a federal support program for businesses and non-profits that are struggling with the pandemic. Nearly 800,000 applicants have received CEBA loans, and $32 billion has been disbursed through this program. Initially, the CEBA provided a loan of up to $40,000 of which up to $10,000 is forgivable if the loan is repaid by . The CEBA was recently expanded to provide an additional loan of up to $20,000 of which up to $10,000 is forgivable under the same repayment terms.
There are immediate and future tax consequences of receiving a CEBA loan. The CRA has published two technical interpretations that discuss its views of how the forgivable portion of CEBA loans should be treated for income tax purposes (2020-0861461E5 and 2020-0862931C6). Based on these documents and the relevant provisions of the Income Tax Act (the “ITA”), this article provides a summary of the key income tax implications of receiving a CEBA loan.
Income Inclusion When Loan Received
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 (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.
The election must be made with the tax return for the year in which the outlay or expense is made or incurred. For example, the CRA states in document 2020-0862931C6 that a corporation could avoid the income inclusion under paragraph 12(1)(x) by filing the election with its income tax return for its 2020 taxation year to reduce the amount of allowable non-deferrable operation expenses incurred in 2020. Similarly, a corporation could avoid the income inclusion under paragraph 12(1)(x) in its 2020 taxation year by filing the election with its income tax return for its 2021 taxation year to reduce the amount of allowable non-deferrable operation expenses incurred in 2021.