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The Canadian Emergency Business Account ("CEBA") $40,000 loan may help many small businesses avoid bankruptcy during these trying times. Only the businesses who paid between $20,000 and $1,500,000 in payroll in 2019 qualify for CEBA.

My thoughts in the article were inspired by the CBC story by James Dunne, as well as by my earlier posts devoted to COVID-19 government support.

In this article, I analyze the flaws in the CEBA eligibility criteria and offer solutions.

What is CEBA?

The Canadian Emergency Business Account program ("CEBA") was designed to "ensure that small businesses have access to the capital they need to see them through the current challenges".

Businesses may be eligible for a $40,000 interest free loan until December 31, 2022. If you have repaid $30,000 before December 31, 2022, $10,000 of loan will be forgiven.

If you are unable to repay $30,000 before December 31, 2022, the interest will start accruing at 5% per annum. You will have 3 more years, until December 31, 2025, to repay the loan and interest.

In very simple terms, the CEBA loan is unlike all others you have seen before. Not only is it interest-free for 2.5 years, if you repay $30,000 within 2.5 years, you get a $10,000 "gift" from the government in the form of debt forgiveness. I would expect the $10,000 forgiven loan amount to be taxable.

Only Businesses Who Paid Between $20,000 and $1.5 Million in Salaries in 2019 Are Eligible

Currently, only the businesses who demonstrate that they paid between $20,000 and $1.5 million in total payroll in 2019 (the amount that appears on your T4SUM form filed with the Canada Revenue Agency) may qualify.

The program is being administered through eligible financial institutions. For more information about the application process, please contact your primary bank (CIBC, RBC, TD, Scotia Bank, BMO, BDC).

Your eligibility is not automatic. Even if you paid over $20,000 in salaries in 2019, banks require that you have "good standing as an existing borrower".

Terms of Use

A number of major banks made terms of the CEBA loans available to the public. Detailed overview of the terms is outside the scope of this article.

For the purposes of this article, paragraph 8 of Schedule A of the TD Canada Trust Term Loan Agreement is most notable. It requires the borrower to attest that:

- the borrower would only use the funds of the loan to pay non-deferrable operating expenses; and

- the borrower would not use the funds to repay existing debts, pay dividends, distribute or increase management compensation. It means that CEBA cannot be used to pay dividends or increase compensation to owner/managers.

"Per the requirements of the Program, as set out by the Government of Canada, you acknowledge that the funds from this Loan shall only be used by you to pay your non-deferrable operating expenses 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."

Absurd Results: CEBA Excludes Those Who Struggle, but May Include Those Who Flourish

On April 4 and on April 6 2020, I published a case study about Salaried Sally, Proprietor Peter and Dividend David. I will use the examples from the case study in this article too.

I concluded that similar businesses may have drastically different access to the COVID-19 support only because of their businesses' organization structure, something that should not matter at all.

This problem of "lucky" Salaried Sally and "unlucky" Proprietor Peter and Dividend David is very pronounced within the CEBA program. Sally is eligible for CEBA because she paid herself salary in 2019, whereas Peter and David are not.

Here are some additional examples of absurd results produced by current eligibility criteria:

The following businesses are NOT eligible for CEBA because they did not pay $20,000 payroll in 2019:

- Equipment Ed is a beauty salon owner. He employs one employee and paid her $19,000 salary in 2019. Because Ed is a sole proprietor, he reports his own income as business income. His equipment lease cost is $4,000 monthly, but the beauty salon is closed because of the pandemic. Ed is not eligible for CEBA.

- Renting Rhonda is a gift shop owner. She operates through a corporation and paid her part-time shop assistant $19,000/year in salary in 2019. She paid dividends to herself in 2019. Her monthly shop rent in Toronto is $6,000/month, but the shop is closed. Rhonda is not eligible for CEBA.

- Start-Up Sam operates through a corporation. He opened a cafe in midtown Toronto in November of 2019. Even though by March of 2020 Sam employed 8 people, his 2019 payroll was less than $20,000. Sam's rent is $11,000/month, but the sales dropped 80% as only take-out orders are allowed. Sam is not eligible for CEBA.

At the same time, the following businesses may be eligible for CEBA because they paid between $20,000 and $1,500,000 in salaries in 2019:

- Toilet Paper Ted is a manufacturing expert. He advises manufacturers of paper goods on the best production practices. He operates through a corporation and pays himself a salary. He does not employ others. He works from his home office and his non-deferrable business expenses are modest. Ted's expertise is in a very high demand and his 2020 financial results are fantastic so far. Ted is eligible for CEBA.

- Millionaire Miles runs a successful professional practice through a corporation. He employs 14 employees and paid a total of $900,000 in salaries in 2019. He also paid $600,000/year in dividends to himself in 2019. His annual gross revenues are generally $2,000,000/year. As his revenues dropped by 30%, Miles is eligible for the 75% Wage Subsidy to help him pay the salaries for 3 months. Miles is also eligible for the CEBA loan.

What is Wrong with CEBA?

Most major banks began accepting applications for CEBA on April 9, 2020.

As of April 10, 2020, the only known eligibility criteria for the loan is the size of the 2019 payroll, which makes little sense.

According to the government's announcement, CEBA was supposed to help small businesses who are struggling. Instead, it excludes the smallest, most vulnerable businesses, but includes midsize businesses or small businesses who are doing relatively well.

The term of the CEBA loan requires a specific use of the funds: i.e. funding of non-deferrable operational expenses, including payroll, rent, insurance and others. Yet, only one type of the non-deferrable operational expenses - the 2019 payroll - is used in the eligibility criteria.

Coming back to the examples above, operational expenses are ignored. This is why Equipment Ed and Renting Rhonda are not eligible.

Current payroll expenses are ignored. This is why Start Up Sam is not eligible.

Financial impact is ignored. This is why Ed, Rhonda and Sam are not eligible (but Toilet Paper Ted is eligible).

Proportionality to revenues is ignored. This is why Millionaire Miles is eligible.

How to Fix CEBA?

In our view, the eligibility criteria of CEBA loans should be extended as follows:

- the current $20,000 payroll criteria should be replaced with a corresponding non-deferrable operational expenses criteria. Businesses who have high payroll expenses can benefit from the Wage Subsidy, whereas businesses with other operational expenses currently have no support;

- owner/managers should receive the same access to CEBA regardless of their business structure. If Sally's 2019 salary counts towards her CEBA eligibility, so should David's 2019 dividends and Peter's business income in 2019;

- start-ups should have their own eligibly criteria that are not tied to the 2019 results (perhaps, using the model adopted for the 75% Wage Subsidy Rules);

- financial impact on the business should be considered (perhaps, using the model adopted for the 75% Wage Subsidy Rules); and

- proportionality to revenues should be considered. The CEBA funds can serve as a life jacket for Rhonda's business, but may have very little effect on Miles'. Businesses like Miles' may need help too, but CEBA is the wrong program for him.

Final Thoughts

The case study examples may sound made up but they are not. Ever since I published the COVID-19 Support case study, and especially after the CBC story on CEBA and my 640 Toronto interview, over a hundred small business owners reached out to me to share their stories, to ask for help, to thank me for being their voice. Their stories are heartbreaking.

The CEBA eligibility is a hot topic among tax practitioners too. Accountants struggle with requests from clients asking to amend their 2019 T4s retroactively so they can qualify for CEBA. How do you explain to clients like Peter why he is not eligible for the loan, but his neighbour Sally is? This is another sign that the current eligibility criteria are flawed and must be fixed.

Some wonder, where did the $40,000 amount come from? Why is it a one-size-fits-all amount? Some small businesses will only need $10,000 loan to survive (as one business owner wrote to me in an email), while others need $100,000. As the banks assess individual credit worthiness of the applicants, can they assess their financing needs too? They have programs that determine your credit card limit, why not use them for the CEBA limit?

Needless to say, I am cognizant of the time pressure the government was/is facing in developing the rules. While it may be impossible to custom make a financing solution for every small business in the country, a number of changes to the CEBA eligibility criteria can and should be made.

As always, I welcome any critique or comments from my clients, fellow tax community members, and followers.

To follow our COVID-19 updates, please subscribe to our tax blog and social media posts.

Nothing in this article constitutes legal advice and no solicitor-client relationship is created. If you require legal advice pertaining to your specific situation, please contact our tax lawyer. This post is only as current as its publishing date indicates, but the relevant rules change constantly.


Mar 11, 2021

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You will be aware that recently the government expanded the CEBA loan program to allow existing borrowers to borrow an additional $20,000, of which only $10,000 needs to be repaid by Dec 31, 2022. But it appears they took some of your advice by adding a section in the terms that was not present in the original terms.

In the CEBA Amending Agreement with TD Canada Trust, here is section 9:

You have received a loan under the Program. You have otherwise not previously used the Program and have not used the COVID Indigenous SMEs Initiative or the Regional Relief and Recovery Fund and will not apply for support under the Program at any other financial institution or for support…


I understand this 25% of the forgiven loan is up to $10,000 not necessarily we will get the full 25% of loan forgiven.

CRA will look into and calculate how much to forgive depends on all non-deferrable expenses incur over the years.

So if you pay back at the end of the year 2020 and if your non-deferrable expenses is not much, so CRA only forgive may be 10% of the loan, but if you pay back at the end of Dec. 2022 you will have more non-deferrable expenses incur then the percentage to forgive will be more e.g. 15%, 20% or 25% and we do not know how CRA calculate the percentage to forgive the loan. How to file…


Nevine Gulamhusein
Nevine Gulamhusein
Jul 15, 2020

Could I qualify for CEBA to set up a new business? I have been working as an aesthetician but with Covid am unable to work in the salon. I would like to purchase a property which I could use as my work station. I do not have business income but I have earned as much to warrant setting up my own practice.

Please provide your comment. Thank you. NEVINE

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