Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: What is the tax treatment of forgivable portion of a loan granted under the CEBA program?
Position: Generally, forgivable portion is included in income under paragraph 12(1)(x) in the year of receipt, with an off-setting deduction available under paragraph 20(1)(hh) if the amount is repaid, in the year of repayment. See comments below.
Reasons: The law.
Author: Flisfeder, Anna
Section: 12(1)(x); 12(2.2); 80
November 10, 2020
Re: Canada Emergency Business Account (CEBA) loan forgiveness
This is in reply to your letter of August 27, 2020 sent to our general email inquiry inbox, concerning the taxation of the forgivable portion of a loan granted under the Canada Emergency Business Account (“CEBA”).
Originally launched on April 9, 2020, CEBA is intended to support businesses by providing financing for their expenses that cannot be avoided or deferred as they take steps to safely navigate a period of shutdown during the COVID-19 pandemic. This program provides interest-free loans of up to $40,000 to small businesses and not-for-profit organizations. Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000). CEBA is available through the taxpayer’s financial institution. For more information about CEBA please refer to https://ceba-cuec.ca/.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 12(1)(x) of the Act provides, among other things, that government assistance received in respect of an outlay or expense by a taxpayer, in a taxation year, in the course of earning income from a business, must be included in income to the extent that the amount was not otherwise included in income (such as under section 9 of the Act) or did not reduce the amount of an outlay or expense under subsection 12(2.2) of the Act. To the extent that a taxpayer repays an amount included under paragraph 12(1)(x) in a later year, an offsetting deduction is available to the taxpayer under paragraph 20(1)(hh) in the year of repayment.
It is our view that the forgivable portion of the CEBA is an amount described in subparagraph 12(1)(x)(iv), because it is an amount received by the taxpayer from a person described in subparagraph 12(1)(x)(i), in the course of earning income from a business, and that amount “can reasonably be considered to have been received…as a…forgivable loan…in respect of...an outlay or expense”. Accordingly, the forgivable portion of the CEBA (for example $10,000 in respect of a $40,000 loan) is to be included in the taxpayer’s income under paragraph 12(1)(x) in the year the loan is received.
An amount included under subparagraph 12(1)(x)(iv) may be reduced by an election under subsection 12(2.2) by operation of subparagraph 12(1)(x)(vii). In general terms, subsection 12(2.2) of the Act provides that a taxpayer may elect to reduce the amount of an outlay or expense that is made or incurred by the taxpayer before the end of the taxation year following the year in which the loan is received (other than an outlay or expense in respect of the cost of property) where an amount received in respect of the outlay or expense would otherwise be included in income under paragraph 12(1)(x) of the Act. Alternatively, the taxpayer may choose to deduct such outlays or expenses under a different applicable provision of the Act (such as section 9).
In the year the taxpayer repays the CEBA:
* if the taxpayer qualifies for the 25% forgiveness under the terms of the CEBA, and the loan is settled for 75% of the principal amount, the taxpayer will not have any further tax consequences.
* if the taxpayer does not qualify for the 25% forgiveness, and the taxpayer settles the loan for 100% of the principal amount, the taxpayer may claim a deduction under paragraph 20(1)(hh) in respect of the amount previously included in income under paragraph 12(1)(x), as long as the taxpayer meets the criteria in that provision. This is also the case where the taxpayer made a subsection 12(2.2) election to reduce the paragraph 12(1)(x) inclusion in the year of receipt.
* if the loan is settled for less than 75% of its principal amount, the debt forgiveness rules under section 80 may have application in the year of settlement in respect of the portion of the loan that was not otherwise included in the taxpayer’s income under paragraph 12(1)(x) in the year of receipt.
We trust these comments will be of assistance.
Partnerships and Corporate Financing Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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