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As part of the Federal government’s effort to aid small Canadian businesses, eligible businesses can receive interest-free loans from the Canada Emergency Business Account (“CEBA”) in an amount of up to $60,000. Further, if the CEBA loan recipient repays the loan by December 31, 2022, then one third of the loan will be forgiven. You can consult the criteria for eligibility by clicking this link.

The tax treatment of the forgivable portion of CEBA loans was recently explained by the Canada Revenu Agency (the “CRA”) in its T.I. “2020-0861461E5”, where the CRA clarified that recipients of CEBA loans should make sure to declare the portion subject to potential forgiveness in their income in the year in which they received the CEBA loan pursuant to paragraph 12(1)(x) of the Income Tax Act (the “ITA”), regardless of whether they anticipate meeting the requirements to benefit from the partial loan forgiveness.

Alternatively, under certain circumstances, CEBA loan recipients can elect pursuant to subsection 12(2.2) of the ITA to reduce the amounts of certain outlays or expenses in the same amount of the forgivable portion of the CEBA loan if that amount was received in respect of those outlays or expenses. In simple terms, a taxpayer could elect to reduce an outlay or expense in the full amount of the forgivable portion of the CEBA loan to avoid the income inclusion under paragraph 12(1)(x) of the ITA.

However, if the CEBA loan recipient repays the loan after December 31, 2022 and thus fails to meet the requirements for loan forgiveness, then the CEBA loan recipient will be able to claim an offsetting deduction in the year in which the loan is repaid pursuant to paragraph 20(1)(hh) of the ITA.

For example, if a CEBA loan recipient received a CEBA loan in 2020 in the amount of $60,000, the recipient must include the forgivable portion of that loan, that is $20,000 in their income for the year 2020. If the loan is repaid before December 31, 2022, the recipient will have nothing else to declare in relation to the loan in the year of repayment, since the income inclusion will have been made in a previous year, whereas if the loan is repaid after December 31,2022, the recipient will be able to take a deduction in the amount of $20,000 in the year in which the loan is repaid.

Finally, if the CEBA loan is ultimately settled for an amount less than the principal, the debt forgiveness rules set out at section 80 of the ITA could apply if the forgiven amount arising from the debt settlement is higher than the amount previously included in the CEBA loan’s recipient income in the year in which the loan was received.

In that case, the debt forgiveness rules set out at section 80 of the ITA could cause the non-capital losses and ABIL losses of the CEBA loan recipient to be decreased or could even cause an income inclusion. To learn more about the application of the debt forgiveness rules, you can consult my article on the subject by clicking this link.

In short, CEBA recipients should remember to include the forgivable portion of the CEBA loan in the year in which they have received the loan, not in the year in which the loan is repaid. Further, they should consider the option of electing under subsection 12(2.2) of the ITA to claim an offsetting deduction and remember to claim the corresponding deduction in a subsequent year pursuant to paragraph 20(1)(hh) of the ITA if no portion of the loan is ultimately forgiven.

If you have any questions regarding the foregoing, feel free to contact the author.