Despite a number of shortcomings, the Canadian Emergency Business Account ("CEBA") program has been a lifeline for thousands of Canadian businesses during the turbulent economic times of COVID19 pandemic. In our previous posts, we talked about how to apply for the CEBA loan.
This post is about how and when you are allowed to use your CEBA funds.
The post is based on the CEBA rules, as stated on the government's CEBA website and last updated on September 1, 2020 (the "CEBA Website" and the "CEBA Rules").
HOW TO SPEND CEBA?
There are limits on the how you are allowed to use the $40,000 CEBA funds. The limits are set in your CEBA agreement with your financial institution.
As we talk to some clients and their accountants, we see two extremes: business owners either limit their spending to the so-called Eligible Non-Deferrable Expenses ("ENDE") or treat the CEBA funds as their "birthday money".
The "ENDE spenders" are in constant contact with their accountants who confirm whether or not every new purchase qualifies as ENDE. The "birthday money" spenders would spend the CEBA funds on anything from stock market investments to Labour Day sales at the mall.
Neither approach is correct.
The "ENDE spenders" appear to be confused about the two types of expenses: those required in order to qualify for CEBA and those that one is allowed to incur using CEBA funds.
ENDE are the expenses you must have to qualify for CEBA if your 2019 payroll is less than $20,000. The list/definition of ENDE can be found on the CEBA website and it is very restrictive.
CEBA agreements with various banks define expenses you are allowed to incur using your CEBA funds. For the purposes of this post, we'll refer to the expenses as Allowable CEBA Expenses. The term is much less restrictive.
The "ENDE spenders" believe that they are only allowed to spend the CEBA funds on the very restrictive ENDE list of expenses. This is incorrect. Yes, there are limits on how CEBA funds can be used but the allowable use is not limited to ENDE.
Allowable CEBA Expenses Are Set in Agreements with Banks, not on CEBA Website
Let's review the CEBA Website rules again. There are no limits on how CEBA funds can be used. There is no statement that would limit the use of CEBA to ENDE. The only indirect reference to the use of CEBA funds is in the description of the intention of the CEBA program:
"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, thereby helping to position businesses for successful relaunch when the economy reopens."
This general reference is too vague to place specific limits on the use of CEBA funds.
But before you rush to join the "birthday money" spenders, check the CEBA agreement you signed with your bank.
This is section 8 of the attestation TD's customers must provide when they apply for their CEBA loan.
This is what CIBC advised its clients about the use of CEBA funds.
This is what HSBC's website says:
You will see similar references to vaguely defined "non-deferrable operating expenses" in CEBA agreements from all Canadian financial institutions. However defined, the Allowable CEBA Expenses in these agreements are not defined in the same restrictive way as ENDE. The definition is much wider.
The primary source for determining the Allowable CEBA Expenses should be your agreement with the financial institution, and not the [rather limited] ENDE list on the CEBA Website. Most agreements allow for CEBA funds to be used for a wide variety of non-deferrable operating expenses, including those that are excluded from ENDE, such as inventory.
Needless to say, if you're spending the CEBA funds as if it was your birthday money, you are in breach of your CEBA agreement with your bank and may face consequences.
WHEN TO SPEND CEBA?
For the businesses who relied on CEBA for survival this was never a question. They had no choice: they spent the loan proceeds as soon as they received them in 2020 to pay rent and other urgent bills. Businesses who were less affected by COVID-19, however, may have reasons to reserve the CEBA funds until 2021 or even later. Are they allowed to do so?
The answer, again, is in your CEBA agreement with your bank.
Most banks and financial institutions advanced $40,000 of CEBA funds directly into their clients' operational accounts. Most CEBA agreements with the banks provide no limits on when the CEBA funds must be used. As such, most CEBA recipients can reserve the borrowed funds and spend them when required, in 2020 or later. If the recipient repays $30,000 of the CEBA funds before December 31, 2022, 25% of the $40,000 loan, or $10,000, will be forgiven.
RBC's CEBA Package is Slightly Different
We note, however, that the RBC's CEBA agreement differs slightly from other banks.
The RBC CEBA package contains two parts.
"Part One" represents a $40,000 line of credit, which one can use to withdraw funds for their business, as needed. On January 1, 2021, the outstanding balance of the line of credit will automatically convert into "Part Two", a non-revolving term loan. No additional funds will be advanced under Part Two. The CEBA loan forgiveness amount will be calculated as 25% of the LOC outstanding balance.
What it means in practical terms:
If you are an RBC client, and you only withdrew, for example, $28,000 out of your $40,000 CEBA line of credit in 2020, you will not be allowed to borrow the remaining $12,000 in 2021 or later years. No more CEBA for you. The outstanding balance of your line of credit - $28,000 - will be converted into a non-revolving term loan starting January 1, 2021. Your loan forgiveness amount (the portion of the CEBA loan you don't have to repay) will be calculated as 25% of $28,000 ($7,000), and not as 25% of $40,000 ($10,000).
In very simple terms, if you don't borrow the entire $40,000 in 2020, you won't be able to borrow the balance in later years and your eligible debt forgiveness amount will be lower than the maximum $10,000.
As such, RBC clients may wish to speak to their advisors about borrowing - i.e transferring from your LOC to your operational account - the entire $40,000 CEBA amount during 2020.
For more information about these issues please refer to the RBC CEBA FAQ page and to questions 17 and 32 in particular and speak to your RBC advisor.
Please note that this post is only as current as its publishing date indicates, but the relevant rules change constantly.