Last week, I reviewed some of the steps we can take to build our financial immunity to economic shocks. The Covid-19 pandemic is the most recent crisis. There will be more. Fortunately for many, governments have been providing a second chance for those who were caught swimming naked when the tide went out. Even those with less stimulating swimwear can take advantage of some of the fiscal stimulus being tossed out of helicopters as life support for the economy. The Canadian Emergency Business Account (CEBA) is a gift for most small businesses with a payroll, whether adversely impacted by Covid-19 or not.
This post will examine the CEBA with some detailed notes about applying and how it is actually being operationalized by different banks. I will do the same for CEWS and SBWS in a future post.
Disclaimer: I have done my best to be accurate. This is a fluid situation and how things are being done can change. Do your own due diligence and consult the appropriate professionals for your specific case. If you find something inaccurate or that has changed, please let me know. I plan to update this post as a living document.
Requirements for Canadian Emergency Business Account (CEBA)
#1 You need a business number.
They will ask for your 15 digit number. It is actually a combination of numbers and letters. For example, 1234560789RC001. You should be able to find this on any CRA correspondence to your company or on your business tax return. Self-employed that simply get T4A income are out of luck for CEBA, but if receiving no income at all they may be able to apply for CERB.
#2 You must have paid out salary between $20K and $1.5MM in 2019 or meet other criteria if <$20K/yr.
Update: Those who just paid out dividends from their CCPC were initially SOL, but they can now qualify if they meet other criteria (see above flow chart). The government is spewing money everywhere, but I keep harping on this one. Salary with CPP and an RRSP is politically favored because it is understood by, and available to, the unwashed masses. It diversifies against legislative risk and is a politically more difficult target. Plus, it is usually better in the long run than putting all of your eggs in the CCPC basket anyway. This theme is recurrent!
For those using dividends only or <$20K/yr payroll, you also need to have filed 2018 or 2019 business tax return and have non-deferrable operating expenses (like rent, utilities, etc) between $40K-$1.5M/yr.
You will need the amount from Box 14 on your business’ 2019 T4Sum for the application.
#3 You must have had a business account at the bank and been in operation prior to March 1, 2020.
It will ask for your branch and account number. This can be found on one of your statements. One of the problems people have had is that the branch number needs to be 4 digits. So, if it is branch 10 you need to enter 0010 in the application or it will get rejected. If you look on a cheque, there may be a 5 digit transit number and the branch is the first 4 digits of that.
#4 You need to attest that you will use it as intended.
“Per the requirements of the Canada Emergency Business Account Program (the “Program“), as set out by the Government of Canada, the undersigned acknowledges that the funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower 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.” -TD Website Application Attestation
CEBA Forgiveness: Pay it back on time and get free money.
Actually, it is free money right away. You get forty thousand dollars within a few days. It is a revolving line of credit which means there are no minimum payments until Dec 31, 2020 at which point it converts to a regular line of credit. Even though payments become due, there is still no interest until Dec 31, 2023. So, why would you pay it back sooner?
Well, there is more free money. A quarter of the loan is forgivable. How that works is a bit complicated. Your balance as of January 1, 2021 is the baseline. If you pay off 75% of that before December 31, 2022 then the remaining is forgiven. [Update July, 2020: The reference to January 21, 2021 as baseline has now disappeared from the literature and replaced with a a more broad “Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000)” on both CRA and various banking sites. Speaking with one bank representative, it now appears no problem if you re-pay early. However, you should speak to your own bank to confirm if you are thinking of repaying before Jan 1, 2021 for some reason.]
To summarize: Get $40K loan. Probably don’t pay it back before January 1, 2021 unless you must. Then pay $30K back before Dec 31, 2022.
Two main ways that CEBA is being operationalized.
This isn’t an exhaustive list and if you know of other details for other banks, please add them in the comments section. However, there are two ways that I have heard of how this is being implemented.
One is to deposit $40K into the business account associated with the application.
This is how TD, BMO, National, and CIBC are doing it. The money will appear as a deposit about 5 days after the application is submitted.
For BMO, the money is put in the business account as a cash advance from a newly created Mastercard account. You’d pay the Mastercard account back to pay back the loan. Some people have gotten the Mastercard letter in the mail and then had to call to have it linked to their online account.
For TD, the money is put in the business account. A Demand Loan with a $40K balance to pay back will appear on the online banking page. This took a few days to show up for me, but it may be faster now. Still no option to repay (no hurry as outlined above).
It is still unclear is how to pay the loan back for CIBC or National. Presumably, there will be an explicit payment to be made that distinguishes paying for this loan separately from the usual flow of money into and out of a business account.
The second method is creation of a VISA account.
This is how Scotiabank and RBC have operationalized the line of credit. You can use this to pay for salaries and the intended expenses. That is nice and clean for fulfilling the “use as intended” condition. If you pay money into the VISA account, you cannot get it back out. Do not pay off the VISA account until after Jan 1st, 2021 if you want to get the grant component of CEBA.
Does taking CEBA restrict how your business invests?
If you have an interest-free loan and don’t really need the money, then one way to use that money is to invest it. Any profit would be money you would not otherwise have. This seems an attractive use for those who get CEBA even though they don’t need it. However, I see a couple of problems.
Some may not feel right using this money when they didn’t need it.
Others may rationalize it as money that is being given to everyone and everyone who makes income will be paying for it in the future. Those who make more income, even more so. It also seems unfair that those who saved enough to weather a downturn are just stuck with paying the future bill while those who did not get bailed out. That will be a personal opinion.
Whatever your opinion, there is a risk of getting taken to task if you are aggressive. The attestation part of the application could come back to haunt you if CRA comes calling.
Does taking CEBA restrict how you pay yourself?
Part of the CEBA attestation is that it is meant to pay for salary and other fixed expenses. It also specifies that the loan will not be used to pay for dividends or distributions. Further, it cannot be used to increase management’s compensation.
How will that work for a CCPC that pays some dividends?
I don’t think anyone knows the answer to that yet. I would talk to my accountant before giving myself any dividends if using this program. I did speak to mine and his opinion was that you should not increase your salary. However, if you pay your salary, payroll expenses, rent, and other fixed overhead for a few months, then that would also consume the $40K pretty quickly for most of us.
What happens after that is still unclear to me. Could you then pay dividends if needed or do you need to pay the loan back fully first? Paying it back before Jan 1, 2021 means you lose the $10K grant portion. Would a shareholder loan be an alternative way to get the money you need to live off or does that count as a distribution? Again, I would consult your accountant about it. If I get more clarity, I will also update this post.
Update: On May 19th, they expanded CEBA to allow business that pay their owners via dividends only to qualify. The details aren’t released, but it would also be contradictory to then not allow dividends. The criteria seem to emphasize using the loan for operating expenses.
What happens if you default?
We all hope that this is a temporary downturn from which our businesses will recover. That is highly likely for those of us in fields like medicine. However, it is less of a certainty for other small businesses. Even more so if there is a structural change to their industry (could happen) or this drags on for a long time (likely to some degree).
As pointed out in one of the comments below, even though this is a business loan, you need to back it personally. So, default would have consequences for your personal finances and credit situation and not be insulated by the business structure. That means a careful weighing of risk/benefit for precarious businesses. That is very unfortunate since those are also the businesses that need CEBA the most!
Where do I find the Application for CEBA?
Applications are found on the website of the bank at which your business account is held:
There are also some other smaller banks that are offering this. They may not have info readily available, but may come up with something if you persist. For example, one of my readers was apply to apply via his Manulife Financial account after some persistence! Manulife
What if I have business accounts at more than one bank?
You can choose whichever one suits your style (deposit in account vs VISA). Another factor to consider is that if you have overdraft or an outstanding line of credit, the money may be applied against that before you get access to it.