Do you pay tax on the CEBA loan? Let’s find out!
The Canadian government introduced the Canada Emergency Business Account (CEBA) loan at the onset of the pandemic. An interest-free loan of up to $60,000 (an initial $40,000 plus a $20,000 expansion offered until June of 2021), this measure was designed to help businesses weather the financial storm. As the CEBA loan forgiveness deadline approaches and more business owners repay the loan, those who have used the funds might be wondering how their CEBA loan impacts their tax return.
This article will delve into the effects of the CEBA loan on your business taxes, as well as some insights on the best strategies for repayment:
CEBA Loan Income Inclusion
Business owners who repay the loan before December 31, 2023 are eligible for loan forgiveness. CEBA loan forgiveness is up to $20,000 for borrowers who took out a $60,000 loan, and $10,000 for borrowers with a $40,000 loan.
However, since this forgiveness is a feature of the loan, borrowers had to include the CEBA loan income on their tax return in the year they took out the loan. For example, if a borrower took the full amount of $40,000 in 2020, they would have had to include the CEBA loan income of $10,000 on their 2020 tax return. If they took the full $60,000 out in 2021, they would declare (or elect to reduce) $20,000 on their 2021 taxes. If they spent the funds on non-deferrable expenses (as many businesses did), they could elect to reduce the outlay or expense instead of taking the income inclusion of the CEBA loan.
In 2023, the CEBA loan income inclusion has likely already ‘hit the books’ on your taxes. This matters to borrowers who are no longer eligible for CEBA forgiveness of the loan (for example, if they had originally received a $40,000 loan and then were told they did not qualify). In these cases, the business owner would have to repay the full amount of the loan but may be eligible for a deduction.
CEBA loan factors affecting taxes
The CEBA loan program was essentially a government ‘bailout’. During a collective economic (and health) emergency, CEBA was a lifeline to small businesses. Many of them took these funds, with a total of 898,271 businesses borrowing $49.2 billion. The interest-free loan was designed to be delivered quickly (funds were disbursed through financial institutions) and to cover essential expenses that would otherwise have sunk the enterprises.
Favorable repayment terms, including an interest-free period and a loan forgiveness portion, made the loan appealing to borrowers. Those who took part had to include the CEBA loan forgiveness portion as income, as stated above. However, it was possible to elect to deduct the CEBA income amount from an expense or outlay. Although this can also increase income, taking advantage of the forgiveness built into the CEBA loan is still preferable.
Borrowers are unable to repay the forgivable portion of the loan balance in full by the December 31, 2023 deadline will miss the opportunity for loan forgiveness. From January 1, 2024, interest of 5% per year will be charged, and the loan will convert to a 2 year term loan that must be paid by December 31, 2025.
Unfortunately, it seems borrowers who do not take advantage of the loan forgiveness (missing the deadline), will not have this CEBA loan income inclusion removed from taxes filed in previous years. As in the case of businesses who realized they didn’t qualify for CEBA after the fact, a deduction might be possible—but it’s best to consult with a tax professional to make sure.
Will Repaying your CEBA loan Early Mean Paying Less Tax?
Given the CEBA loan income inclusion measures described above, early repayment of the CEBA loan can have various impacts on your taxes—the best way to understand the specifics of tax for your business would be to speak with a tax professional. While early repayment of your CEBA loan reduces your total debt, the forgiven amount is considered taxable income unless an election is made. This may result in a higher tax obligation for that fiscal year, but the pandemic’s impact in 2020 and 2021 when the loans were offered likely softened the blow. In any case, the decision to repay CEBA loans early, refinance them, or take the 5% interest rate on the term loan, is one that should be made in consultation with an advisor or other financial professional.
Is it Better to Repay your CEBA Loan by Refinancing it?
One strategy for managing your CEBA loan repayment is refinancing. Replacing your CEBA loan with a new loan, potentially offering better terms like a longer repayment period or lower principal. For those who took the full amount, the advantage here is that you only need to borrow $40,000 instead of $60,000, saving you on the interest for the $20,000 that would be forgiven.
In the CEBA terms set out by the Government of Canada, borrowers only pay interest from January 1, 2024 until the December 31, 2025 repayment of the loan. At 5% annual interest, this amounts to $3000 per year, plus the additional $60,000 in principal—a $66,000 loan.
If you refinanced to take advantage of CEBA loan forgiveness, you’d only need to pay back $40,000 in principal. For eligible businesses, CEBA refinancing can be done at interest rates of 8.2%. Although it results in more interest paid overall ($6,560 if using the exact same terms, although this might not be the case in reality), CEBA refinancing makes it only a $46,560 loan.
Do you pay tax on the CEBA loan: The Future of CEBA Loans
The CEBA loan was a lifeline to businesses impacted by the pandemic. However, this choice’s tax implications and repayment strategies should be carefully considered. Whether you opt to repay your loan in 2025 or refinance it now, the best strategy will depend on your business’s credit, financial situation, and goals.
It’s advisable to engage with a financial advisor or a tax professional who can provide you with guidance that takes into account your business’s current circumstances. In this challenging economic climate, making informed financial decisions can be crucial for your business’s survival. Understanding the options available to repay your CEBA loan can help you make decisions that are best for your future.