The government of Canada announced on October 9th, 2020 that an additional $20,000 loan would be available of which only $10,000 has to be repaid by December 31, 2022. Those second applications are now open to be processed.
-As of December 4, 2020, CEBA loans for eligible businesses will increase from $40,000
to $60,000.
-Applicants who have received the $40,000 CEBA loan may apply for the $20,000
expansion, which provides eligible businesses with an additional $20,000 in financing.
-All applicants have until March 31, 2021, to apply for $60,000 CEBA loan or the
$20,000 expansion.
However, with these loans a Attestation form is required which focuses on "facing ongoing financial hardship", having made reasonable attempts to adapt the business to COVID-19 (and reduce expenses), intention to continue the business, and using the fund for specific purposes (non-deferrable eligible expenses for 2020 or 2021).
The borrowed funds can only be used by the borrower to pay non-deferrable operating expenses of the borrower including, without limitation, payroll, rent, utilities, insurance, property tax, and regularly scheduled debt service.
The funds may NOT be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.
The Non Deferrable eligible expenses are as follows;
1 Wages and other employment expenses to independent (arm’s length) third parties
Wages and other employment expenses to independent (arm’s length) third parties include payments on account of employees – e.g. salary, employment insurance premium, benefits (e.g. pension, medical/dental), or bonuses.
2. Rent or lease payments for real estate used for business purposes;
3 Rent or lease payments for capital equipment used for business purposes;
Capital equipment used for business purposes includes, machinery, computer equipment, furniture, and other durable equipment (e.g. vehicle, tractor, marine vessel).
4 Payments incurred for insurance-related costs;
Insurance-related costs pertaining to items such as property, professional liability, vehicle, and business interruption are considered eligible non-deferrable expenses so long as the insurance coverage protects the business entity..
5 Payments incurred for property taxes;
6 Payments incurred for business purposes for telephone and utilities in the form of gas,
oil, electricity, water and internet;
7 Payments for regularly scheduled debt service;
8 Payments incurred under agreements with independent contractors and fees required in
order to maintain licenses, authorizations or permissions necessary to conduct business
by the Borrower.
Fees required in order to maintain licenses, authorizations or permissions necessary to conduct business include, professional dues for licensed professionals, fishing licenses, and taxi medallions. This expense category may also include payments for the use of intellectual property (e.g. software licensing and subscriptions) and patent fees to the extent that it is required to conduct business.
9. Payments incurred for materials consumed to produce a product ordinarily offered for
sale by the Borrower.* July 2020 updated
Payments incurred for materials consumed to produce a product ordinarily offered for sale by the Borrower reflects payments for input materials that are consumed or transformed in producing, or become part of, the product that is ordinarily offered for sale, such as raw materials, ingredients, supplies, seed or livestock feed. Finished goods’ inventory or purchases of capital assets are not included.
These expenses above are considered “Eligible Non-Deferrable Expenses” if they were already incurred in January and/or February 2020, or are due to a legal or contractual obligation as at March 1 and cannot be avoided or deferred beyond 2020 even during a period of shut down and depressed revenues as a result of COVID.
Please note that CEBA cannot be used to pay dividends or increase compensation to owner/managers.
From Aaron Schechter CPA, CA in Toronto, Ontario he has a caution about taking the extension or extra $20,000 since you have to Attest to a whole new set of rules which retroactively impact the initial loan. The attestations are as follows;
the business is facing ongoing financial hardship as a result of the COVID-19 pandemic;
the business intends to continue to operate or resume operations;
in response to the COVID-19 pandemic the business has made all reasonable efforts to reduce its costs or adapt its business to improve its viability; and
the business has not used any amount received previously under the CEBA Loan Program to make any payment or pay any expenses other than “Eligible Non-Deferrable Expenses” (note the capitalized nature of the words (i.e. it is a defined term per the definition above)).
For greater certainty, the following expenses are not “Eligible Non-Deferrable Expenses” and the funds received under the CEBA Loan Program cannot be used to pay such expenses: any other payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions, increases in management compensation and increases of the compensation of related parties, in each case except to the extent that such expense has been indicated by the Government of Canada as qualifying.
In addition, under the Amendment, businesses must certify that:
the business is facing ongoing financial hardship as a result of the COVID-19 pandemic;
the business intends to continue to operate or resume operations;
in response to the COVID-19 pandemic the business has made all reasonable efforts to reduce its costs or adapt its business to improve its viability; and
the business has not used any amount received previously under the CEBA Loan Program to make any payment or pay any expenses other than “Eligible Non-Deferrable Expenses” (note the capitalized nature of the words (i.e. it is a defined term per the definition above)).
Finally, it should be pointed out that knowingly submitting inaccurate information as part of an Attestation could result in criminal penalties of up to 14 years in prison and fines.
Based on the new Attestation, which includes a continuation of the more restrictive “Eligible Non-Deferrable Expenses” definition and the additional certification, it is clear that many businesses will not want to apply for or may not even be eligible for the additional $20,000 CEBA Loan extension. I would agree with this caution and the government makes all these big announcements, but in the background it's very different ie false hope or bait and switch!
Applications will close March 31, 2021.
2020© Peter Wiesner CPA, CA All Rights Reserved
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