The Canadian government has been assisting small businesses affected by the pandemic through various relief programs, including the Canada Emergency Business Account (CEBA) loan. This loan provides financial support of up to $60,000 to eligible small businesses and non-profit organizations. However, as businesses received the much-needed funding, they also had concerns about the repayment terms and deadlines to avoid defaulting on the loan. In this blog post, we’ll delve into the details of CEBA loan repayment and refinancing to help you make informed decisions.
1. CEBA Loan Repayment Overview
Under the CEBA program, small businesses can avail of a $40,000 loan administered by the federal government in collaboration with financial institutions. An additional $20,000 is available to eligible businesses on top of the initial $40,000 CEBA loan, provided that the first $40,000 CEBA loan was fully repaid or refinanced. The loan bears zero percent interest until December 31, 2022. After this date, the interest rate is set at 5 percent per annum, and a reminder will be sent to the borrowers six months before the interest rate takes effect.
Businesses that pay back 75 percent of the loan on or before December 31, 2022, can request loan forgiveness from their financial institution. This means that they will only have to repay the remaining balance of 25 percent, corresponding to up to $10,000. The deadline for completing the full repayment of the loan is no later than December 31, 2025.
2. CEBA Loan Refinancing Options
CEBA loan refinancing is an option for businesses that cannot repay the loan by the deadline or those who want to extend the repayment period. If you are in the situation of being unable to repay the loan, you can extend the repayment period by either making interest-only payments for up to twelve months or deferring the repayment of both principal and interest for up to twelve months. Note, however, that interest will continue to accrue during the period the borrower is not making payments.
If you want to refinance the loan, you can seek assistance from your financial institution to transfer the CEBA loan balance into a new loan at the end of the term. When refinancing, the interest rate and repayment terms of the new loan may vary from that of the initial loan. Ensure to acquaint yourself with the terms and conditions of the new loan before signing.
3. CEBA Loan Repayment and Taxes
When businesses repay their CEBA loan, it is considered a tax-neutral event, meaning that the loan repayment does not affect the business’s taxable income. On the other hand, businesses that request loan forgiveness must include the forgiven amount in their taxable income for the year of forgiveness.
Also, interest paid on the CEBA loan from January 1, 2021, is tax-deductible for businesses. Your accountant can best guide you on how to claim the interest expense when you file your taxes.
4. CEBA Loan Eligibility Criteria
To be eligible for the CEBA loan program, businesses must have a 2019 payroll between $20,000 and $1.5 million. Also, businesses must have total employment income of $20,000 in 2019 or $40,000 in the sum of employment income, net self-employment income, and maternity and parental benefits claimed.
It is crucial to ensure that your financial institution has the correct business and owner information to avoid any delays or complications during the repayment process. Your financial institution will make the final decision on your eligibility for the loan and whether to grant a loan extension or refinance.
In summary, CEBA loan repayment is due no later than December 31, 2025, but businesses that pay back 75 percent of the loan on or before December 31, 2022, can request loan forgiveness. CEBA loan refinancing options are available to businesses, including deferring repayment or extending the repayment period. When financing, ensure to be aware of the interest rate and repayment terms of the new loan before signing. Eligible businesses must have a 2019 payroll between $20,000 and $1.5 million and must meet other criteria laid down by the program. It is advisable to contact your financial institution to verify your eligibility, extension, or refinance options. By carefully understanding the repayment and refinancing options and complying with the terms and conditions of the program, businesses can make the most of the CEBA loan program to keep their operations running amidst the pandemic.