COVID-19 Relief Government Programs for Individuals and Businesses
If you are like many business owners across Canada and around the world, you’ve likely been affected by COVID-19 over the past year. Impacts stretch from changes in staff and operations to government financial assistance to help businesses stay afloat. As you prepare for year-end, you may be wondering how pandemic relief programs impact your taxes.
Canada Emergency Business Account (CEBA)
One of the first federal COVID-19 support programs for businesses was the Canadian Emergency Business Account (CEBA). CEBA provides up to $60,000 in interest-free loans to small businesses and not-for-profit organizations to cover expenses that are unavoidable and is available through participating financial institutions.
Under this program, applicants can receive up to $20,000 in loan forgiveness if the balance is repaid on or before December 31, 2022 (25% of the first $40,000 and 50% of the next $20,000). If not repaid by this date, the loan can be converted into a three-year term loan with a 5% interest rate.
The forgivable portion of CEBA is taxable to the recipient when the loan is received. Therefore, a business with a December 31, 2020 tax year-end who received a CEBA of $60,000 in 2020, is required to report the forgivable portion of the loan ($20,000) as taxable income in 2020.
If applicable expenses for the loan extend into the next taxation year, the business may choose to defer a portion of the loan intended to cover those future expenses to the subsequent taxation year by making an election to reduce the 2020 expenses. If the taxpayer does not maximize the forgiveness portion of the loan by repaying by the 2022 deadline, a tax deduction will be available.
Canada Emergency Commercial Rent Assistance (CECRA)
The Canada Emergency Commercial Rent Assistance (CECRA) loan, available from April through September 2020, was created to assist small businesses suffering declines in revenue of at least 70% with their commercial rent or lease. CECRA was an interest-free, forgivable loan to commercial property owners to cover 50% of the rent owed by qualifying tenants and expected owners to reduce rents by at least 75%, leaving small businesses with a 25% obligation to the rent specified in their lease.
This program was administered by the Canada Mortgage and Housing Corporation (CMHC). If all terms and conditions of the loan were met, the loan was forgiven to the property owner on December 31, 2020. The 50% of the rent forgiveness is considered taxable when the loan was received from CMHC.
Recipients will need to repay the loan in full if the loan does not qualify for forgiveness and a deduction to taxable income will be allowed when the portion of the loan that was included in income is repaid. This program was replaced by CERS (see below) in October 2020.
Canada Emergency Rent Subsidy (CERS)
In October 2020, the Federal Government introduced a replacement program for CECRA that provides support directly to qualifying tenants and property owners of all sizes, the Canada Emergency Rent Subsidy (CERS). Under the CERS, a subsidy can be claimed against qualifying costs and revenue reductions such as rent payments, certain mortgage interest, property taxes, and property insurance payments.
The program is offered in scheduled four-week qualifying periods starting September 27, 2020 until June 2021.
Under the Income Tax Act, the benefit is considered received and taxable to the participant on the last day of the corresponding qualifying period. December 19, 2020 marks the final qualifying period in 2020. Businesses with a year-end of December 31 must accrue and report CERS benefits claimed in all qualifying periods up to, and including, December 19 as taxable income even if the benefit was not applied for until after the end of the taxation year. If your business applies for the CERS in 2021 for periods ending in October, November, and December of 2020 an adjustment will need to be made to ensure it is accrued in the appropriate tax year.
If you have filed your corporate tax return and did not include COVID-19 support programs, or reported them incorrectly, we strongly recommend that your tax return be amended to include these benefits in the appropriate taxation year. For a review or to arrange your annual filing with McNabb Lucuk LLP, contact us by phone at 780-539-3400, or email [email protected] or [email protected]