Careful of the CEBA Expansion
On December 4th the terms of the CEBA loan expansion were released. As a reminder, the original loan was $40,000 for eligible businesses with 25% being forgivable if paid back by the end of 2022. Many businesses applied for the loan as the eligibility criteria was broad. The eligibility has stayed broad since the beginning and has expanded (see here for eligibility rules - https://ceba-cuec.ca/) , but the uses of funds has narrowed under the new loan agreements. To entice you to sign the new loan agreements, the government expanded the loan to be $60,000 with half of the additional $20,000 (or $10,000) being forgiven on top of the 25% of the $40,000. But it is a buyer beware situation, as this new agreement will supersede your old one and you may now become offside. Keep in mind that the new agreement highlights that Knowingly submitting inaccurate information or documentation as part of this Attestation could result in criminal penalties of up to 14 years’ imprisonment, as well as significant fines, and the court-ordered repayment of any monies advanced. (note - the government highlighted the line not us).
Issue 1 - Attestation to Financial Impact
You certified: (i) that your business is facing ongoing financial hardship (including, for example, a continued decline in revenue or cash reserves, or an increase in operating costs) as a result of the COVID-19 pandemic; (ii) that you intend to continue to operate your business or to resume operations; and (iii) that in response to the COVID-19 pandemic you have made all reasonable efforts to reduce your costs and to otherwise adapt your business to improve your viability. You will not use any loan received under the Program to make any payment or pay any expense other than Eligible Non-Deferrable Expenses. Specifically, you will not use any loan received under the Program to make any prepayment/refinancing of existing indebtedness, any payment of dividends, distributions or increases in management compensation or to increase the compensation of related parties.
If you qualify for the above, then we go to issue 2 - Eligible Non-Deferrable Expenses
Under an early CEBA loan, the terms (TD) said you had to spend the money as follows:
"Per the requirements of the Program, as set out by the Government of Canada, you acknowledge that the funds from this Loan shall only be used by you to pay your non-deferrable operating expenses including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and 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."
For many professionals, the terms "without limitation, payroll..." meant that they could cover their own salary as an eligible use of the loan. Note that this was before the wage subsidy program.
Under the new CEBA agreement, the terms (TD) says the following:
"Eligible Non-Deferrable Expenses” means the following expenses (and only the following expenses) incurred or to be incurred in 2020 provided that they are not deferrable after 2020:
(i) wages and other employment expenses to independent (arm’s length) third parties;
(ii) rent or lease payments for real estate used for business purposes;
(iii) rent or lease payments for capital equipment used for business purposes;
(iv) payments incurred for insurance related costs;
(v) payments incurred for property taxes;
(vi) payments incurred for business purposes for telephone and utilities in the form of gas, oil, electricity, water and internet;
(vii) payments for regularly scheduled debt service;
(viii) payments incurred under agreements with independent contractors and fees required in order to maintain licenses, authorizations or permissions necessary to conduct your business;
(ix) payments incurred for materials consumed to produce a product ordinarily offered for sale by you; and
(x) any other expense in a category other than the above as may be indicated by GOC on https://application-demande.ceba-cuec.ca/ (the "Web Page") from time to time as being an Eligible Non-Deferrable Expense for the purpose of the Program.
For greater certainty, the following expenses are not Eligible Non-Deferrable Expenses and you cannot use the funds received under the Program 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 falls under clause (x) above."
So what does this mean?
If you can fit the terms in the revised agreement, then review the rest of the document and consider applying. BUT, if you cannot, perhaps because the largest expense is your salary (as a professional corporation that often is the case), then do not apply unless you are sure you can meet all of the criteria, as this will rewrite the original agreement.