How Does CEBA Loan Repayment Work?

CEBA loan Forgiveness

Photo by Tetyana Kovyrina

The COVID-19 pandemic has wreaked havoc on Canadian businesses, unlike any other event in recent history.

Countless businesses across the country incurred staggering revenue losses. They couldn’t pay their employees and cover other basic operating expenses. Many were on the brink of shutting operations permanently as sales and cash flow evaporated virtually overnight. Small businesses, in particular, were hit hard.

The federal government swiftly dispatched several financial relief programs geared toward small businesses to combat the economic devastation. The most notable one was the Canada Emergency Business Account (CEBA).

If you’re a business owner, you may have received CEBA financing to keep your business afloat during this turbulent time. If that’s the case, it’s crucial to remember that the CEBA program isn’t purely a charitable endeavor by the Government of Canada. You, as the recipient, are obligated to repay the principal and any interest charges.

As the payment deadline nears, it’s wise to get acquainted with this loan’s terms and conditions. By doing so, you can craft a plan to clear this liability off your books.

How does the Canada Emergency Business Account (CEBA) work?

CEBA was administered by Export Development Canada (EDC) with the cooperation of more than 230 financial institutions that issued loans to small businesses. The program officially launched on April 9, 2020, with the major Canadian banks leading the way in processing applications for these government-backed loans. 

As a business owner, you could apply for a CEBA loan from one of two streams:

  • Payroll Stream – available to applicants whose payroll expense was between $20,000 and $1.5 million for 2019. 
  • Non-Deferable Expense Stream – available to applicants with $20,000 or less in payroll expense for 2019, plus eligible recurring expenses (rent, utilities, insurance, etc.) between $40,000 and $1,500,000.

Initially, qualifying businesses could borrow up to $40,000 under the loan program. However, on December 4, 2020, the federal government expanded this limit by another $20,000. Thus, as a CEBA applicant, you could borrow up to $60,000 in financing to help sustain your business.

The impact of CEBA on small businesses

Given its quick rollout and the rapidly changing nature of the situation concerning the pandemic, CEBA was amended numerous times by the federal government. You can view a compilation of the significant changes in this handy report released by the Canadian Federation of Independent Business (CFIB). 

In addition, there was much confusion surrounding the terms and conditions of CEBA loans, namely how a business could access and spend the funds. CEBA loan packages varied based on the financial institution that issued the loan.

Below are details regarding the loan terms from Canada’s big five banks:

Despite its flaws, CEBA was a successful initiative that provided a much-needed lifeline for small businesses during the pandemic.

According to the Government of Canada:

  • Over 898,000 businesses were approved for the initial CEBA loans
  • Over 570,000 businesses were approved for CEBA loan expansions
  • Over $49 billion in funding was extended to businesses through participating financial institutions

CEBA repayment terms – what you need to know

The first thing to know about CEBA loans is that you’re not immediately responsible for repaying the principal. The initial terms of the loan required payment in full (except the portion eligible for forgiveness) on or before December 31, 2022. However, the federal government later extended the deadline to December 31, 2023.

Second, CEBA loans don’t accrue interest during this period, so they’re effectively interest-free.

Still, you can pay off your entire balance or a portion before December 31, 2023, if you wish. You won’t incur any prepayment penalty in doing so.

As a result, you have a fair amount of breathing room and flexibility in creating a sensible repayment plan for your CEBA loan. You can structure your payments to align with your budget, cash flow, and personal circumstances. There’s no need to panic or rush to pay it off.

But what happens if you cannot repay your balance once December 31, 2023, deadline arrives?

In that case, your CEBA loan converts to a two-year loan with a fixed interest rate of 5%. Interest charges will begin accruing on your balance starting January 1, 2024, which you’ll need to pay monthly. You’ll need to ensure you repay the entire principal by December 31, 2025.

Suppose your business’s cash flow has improved dramatically since receiving the funds. In that case, it’s wise to pay down your balance gradually. That way, you can avoid those pesky interest charges.

But let’s say that’s not possible for you, and you anticipate carrying forward a balance passed the deadline. Luckily, you may be eligible for forgiveness on what remains.

CEBA loan Forgiveness – how it works and how to determine if you qualify

The portion of your CEBA loan eligible for forgiveness will vary depending on the amount you received and your outstanding balance on December 31, 2023.

If you borrowed $40,000 or less, the maximum amount you can claim as forgiveness is $25% of the loan. In other words, to qualify for loan forgiveness, you must repay 75% of the loan balance by December 31, 2023.

If you borrowed more than $40,000 and up to $60,000, the maximum amount you can claim as forgiveness is

  • 25% on the first $40,000; and
  • 50% on the amount above $40,000

Thus, to ensure you qualify for loan forgiveness, you must repay 75% of the initial loan and 50% of the additional loan by December 31, 2023.

In any case, the maximum amount available for forgiveness is $20,000, assuming you borrowed up to the $60,000 limit ($40,000 x 25% + $20,000 x 50%).

Below are examples that illustrate how CEBA loan forgiveness works in practice.

Scenario 1 – Borrow $40,000 or less

In this scenario, you must repay 75% of your loan for the balance to qualify for forgiveness.

Amount BorrowedAmount repaid by December 31, 2023Amount eligible for forgiveness
$40,000$30,000$10,000 ($40,000 x 25%)
$40,000$25,000$0
$30,000$22,500$7,500 (30,000 x 25%

Scenario 2 – Borrow $40,000 plus up to $20,000 thereafter

In this scenario, you must first repay 25% of the initial $40,000 loan, then 50% of the additional loan above $40,000. 

Amount BorrowedAmount repaid by December 31, 2023Amount eligible for forgiveness
$60,000$40,000$20,000 ($40,000 x 25% + $20,000 x 50%)
$60,000$30,000$0
$55,000$37,500$17,500 ($40,000 x 25% + $15,000 x 50%)

Scenario 3 – Borrow and repay $40,000, claim forgiveness, then borrow an additional $20,000

In this scenario, you must repay 50% of the additional $20,000 you borrowed to be eligible to claim forgiveness on the remaining balance.

Amount BorrowedAmount repaid by December 31, 2023Amount eligible for forgiveness
$20,000$10,000$10,000
$20,000$7,000$0

Is the forgivable portion of your CEBA loan taxable?

The forgivable portion of your CEBA is subject to income tax. You must include this amount in your income in the year you receive your CEBA loan, not when you become eligible for forgiveness. If you subsequently fail to qualify for forgiveness for this amount, you can claim it as a deduction on your tax return once you repay your loan.

Who has to repay a CEBA loan – you or your corporation?

Suppose you operate your business as a corporation and receive a CEBA loan. In that case, your corporation will be responsible for repayment of the principal. The financial institution that loaned you the funds cannot legally seize your personal assets to cover any shortfall due to corporate bankruptcy.

However, this isn’t the case if your financial institution includes a personal guarantee in your CEBA loan contract. This clause effectively holds you personally liable for the debt should your corporation fail to cover the balance. If you’re unsure of your exact obligations, carefully review the terms and conditions of your contract. Otherwise, you could find yourself scrambling for cash to pay off your CEBA balance.

Let’s say you received CEBA financing while operating as a sole proprietor. Under this scenario, the responsibility for repayment rests solely on you. From a legal perspective, there’s no distinction between your assets and your business’ assets. As a result, your personal assets, such as your home, car, and investment accounts, are at risk of being seized to cover any outstanding balance. 

So, you’ve received a CEBA repayment letter – where do you go from here?

As the CEBA repayment deadline looms, it’s crucial to assess how your business is holding up financially. In doing so, you can gauge your ability to repay your CEBA loan.

Let’s assume your business made a solid recovery since the pandemic subsided: revenue is steadily rising, and cash flow has stabilized. In that case, it’s prudent to retire your CEBA loan by making periodic payments. And to take advantage of the forgiveness provision.

However, let’s say your business is still struggling after the pandemic. Sales are weak, cash flow is tight, and customer demand is plunging. As a result, the CEBA loan on your balance sheet can quickly become a financial burden.

Before tackling your CEBA loan, seek advice and know your options.

Is your CEBA loan causing you severe financial stress? If so, there’s no shame in asking for advice from a qualified professional who can help you develop a solid plan to tackle it. Don’t simply rush to raid your RRSP account or take out a second mortgage on your home.

A Licensed Insolvency Trustee can review your financial situation and recommend a solution to eliminate the debt. They can help you explore a wide range of options – some of which you may not have known were available to you in the first place.

A qualified Licensed Insolvency Trustee has the knowledge and experience to help you restructure your business and free up much-needed cash flow. They can also help reduce your debt by negotiating with your creditors through a consumer proposal

It’s worth knowing that CEBA loans can be discharged through bankruptcy. Thus, if your situation is dire enough, a Licensed Insolvency Trustee can act as your trusted guide throughout the insolvency process. Yes, your credit score will take a big hit, but you’ll be able to emerge debt-free and get a fresh start.

Don’t let a CEBA loan needlessly jeopardize your business or the personal assets you’ve worked so hard to attain. Be sure to speak with a Licensed Insolvency Trustee who can help you wipe it off your balance sheet for good.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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