As we leave 2020 behind us, we expect that the impacts of 2020 and everything it had to offer will be felt for a long time. One of the effects that will be felt sooner rather than later is the tax impact of the various forms of COVID-19 government support offered to individuals and businesses.
This article addresses the tax implications of two forms of support: the Canada Emergency Business Account (the "CEBA") program and the Canada Emergency Wage Subsidy (the "CEWS").
The CEBA program provides interest free loans to certain eligible business with a portion of that loan potentially being forgivable in the future if certain conditions are met. While a portion of the CEBA loan is potentially "forgivable", that unfortunately does not make it tax free. Below we provide an overview of the CEBA program and then set out the tax implications for businesses or not-for-profits participating in the program (the "Participants").
As for the CEWS, you can find an in-depth explanation of this program and the eligibility requirements here. In this article, we set out the tax implications for the recipients of the CEWS, including a discussion of the Canada Revenue Agency's ("CRA") comments on the timing of reporting the CEWS.
Overview of the CEBA
The CEBA was introduced by the federal government in April of 2020 to help small businesses and not-for-profits combat the impacts of COVID-19. The CEBA program provides interest free loans to eligible businesses with a portion of the loan potentially being forgivable.
The loan amount was originally $40,000 with up to $10,000 being forgivable. These amounts were increased on December 4, 2020 such that for new applicants the loan amount is now $60,000 with up to $20,000 being forgivable. Participants who received the initial $40,000 loan may apply for a $20,000 expansion.
To be eligible for the CEBA program, a business or not-for-profit must:
- have an active Canada Revenue Agency ("CRA") business number with a registration date on or before March 1, 2020;
- have an active business chequing/operating account;
- intend to continue, or resume, operating the business; and
- have paid 2019 employment income of less than $1,500,000.
Additionally, participants can only use the program once.
There are two separate streams for applicants: 1) those with 2019 employment income between $20,000 and $1,500,000; and 2) those with 2019 employment income of less than $20,000.
For those applicants falling into category #2, the applicant must additionally have "eligible non-deferrable expenses" (i.e. expenses like rent, property taxes, utilities, etc.1) between $40,000 and $150,000 and it must have filed a 2018 or 2019 tax return with the CRA.
Once approved, if the Participant repays the balance of the loan on or before December 31, 2022, the relevant portion of the loan (i.e. either $10,000 for the $40,000 loan or $20,000 for the $60,000 loan, the "Forgivable Portion") will be forgiven.
Implications for the 2020 Tax Return
For those applicants that are successful and receive the CEBA loan, there are (unsurprisingly) tax consequences. The CRA recently issued a technical interpretation clarifying exactly what those consequences are.2
In the year that the Participant receives the CEBA loan, the Forgivable Portion of the loan must be included in income under section 12 of the Income Tax Act3 ("ITA"). In particular, the CRA considers the Forgivable Portion of the loan to meet the definition in section 12(1)(x)(iv), that is it is an amount received by the taxpayer in the year, in the course of earning income from a business, from a government, which can reasonably be considered to have been received as a forgivable loan.4
In essence, the Forgivable Portion of the loan must be included in the income of the Participant, despite the fact that it is unclear at that point whether the portion of the loan will in fact be forgiven. Whether or not the portion of the loan is actually forgiven will instead impact the tax consequences in the year of repayment.
If the Participant would prefer not to classify the entire amount as "income", it can instead elect under section 12(2.2) of the ITA to use all or a portion of the funds to reduce expenses deducted in the tax return. Essentially, as the CEBA funds are used to pay for the non-deferrable expenses (such as payroll or other eligible non-deferrable expenses mentioned above), the Participant can elect to reduce the amount of that expense reported for tax purposes. Any amount of the Forgivable Portion not used up in this way must still be reported as income.
The section 12(2.2) election creates an opportunity to actually reduce the total taxable income that would otherwise be payable if the entire forgivable portion was included in income. If a company has expenses that are not deductible for tax purposes, the forgivable portion of the loan that can theoretically be put towards reducing those expenses.5 As the expenses cannot be deducted for income tax purposes in any event, the company has not reduced the total expenses deducted from its taxable income. By doing so, the company avoids including that portion of the forgivable loan in income.
Implications for the Year of Repayment
In the year that the Participant repays the loan, the tax implications will depend on whether the Forgivable Portion of the loan is in fact forgiven.
If it is forgiven, there are no further tax consequences. At that point, the Participant will have already paid the necessary tax on the Forgivable Portion and nothing further is required.
However, if when the loan is repaid, the Forgivable Portion is not forgiven then the Participant has paid tax on a benefit that it did not actually receive. In that case, the Participant may claim a deduction under section 20(1)(hh) of the ITA for the amount originally included in income or used to reduce expenses under section 12(2.2). By doing so, the Participant will reduce their tax payable in the year of repayment.
The onus will be on your business to recognize that you may be entitled to a deduction in the year of repayment. Make sure that you have a reminder in place to do so; you do not want to be paying more taxes than you need to.
How to Report the CEWS
The CEWS received by an employer will be reported for tax purposes in one of two ways: either under section 9(1) of the ITA, or, if not included there, then under section 12(1)(x) (the same provision as the CEBA).
Section 9 of the ITA sets out the income or loss from a business. The basic rule is that "a taxpayer's income for a taxation year from a business . is the taxpayer's profit from that business".6 Whether an expense or income receipt appropriately forms part of the business's "profit" is a question of law, something that is addressed in detail in the Supreme Court of Canada decision Canderel Ltd v Canada.7
Per Canderel, the ultimate goal under section 9 is to compute the business's income "in such a way as to constitute an accurate picture of [its] income situation, subject, of course, to express provisions in the Act which require specific treatment of certain types of expenses or receipts."8
The CRA's general position is that including CEWS in the computation of profit for a business under section 9 of the ITA will likely be appropriate and in line with the principles in Canderel.9
If there are situations where the principles in Canderel lead to the opposite conclusion, that is that including the CEWS under section 9 would not lead to an accurate depiction of the company's profit, the CRA takes the position that the CEWS amount would instead be included under section 12(1)(x).10
There is, therefore, no hard and fast rule about which section of the ITA applies in every single situation. Instead, a contextual analysis will be required for each employer. That being said, in most situations, based on the CRA's commentary, it appears that their preferred approach is reporting the CEWS amounts under section 9.
When to Include in Income
The CRA recently indicated that any particular CEWS amount received by an employer will generally need to be included in income in the employer's taxation year in which the relevant CEWS claim period falls, even if not actually claimed or received until much later.11
Theoretically, a company may have already filed their tax return for a taxation year before they apply for CEWS for a claim period falling under that taxation year. The CRA's position means that the employer in that situation would be required to file an amended tax return for that taxation year.
The CRA specifically stated that it will not be providing administrative relief in the form of allowing the CEWS to be reported in a later period.12 Therefore, it is imperative that employers accurately report the CEWS in the time period for which the CEWS amount actually relates to, even if this requires filing an amended tax return.
1 See the CEBA website for more information on what constitutes an eligible non-deferrable expense: https://ceba-cuec.ca/.
2 CRA Views 2020-0861461E5: TI - Tax Treatment of Loan Forgiveness under CEBA -- Section 12(1)(x); 12(2.2);
80 (10 November 2020).
3 RSC 1985, c 1 (5th Supp), s 12 [ITA].
4 Ibid, s 12(1)(x)(iv).
5 CRA Views, Tech Interp (external), 2003-0048545 -- Refund of non-deductible outlay.
6 ITA, s 9(1).
7  1 SCR 147 [Canderel].
8 Ibid at para 29.
9 CRA Views 2020-0865661I7: SSUC-moment de l'inclusion au revenu/CEWS-inclusion in income -- Section 125.7(2), 125.7(3), 9(1), 12(1)x).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.