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CEBA / CECRA Forgivable Loans - Tax and Accounting Treatment TaxTips.ca
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Federal Budget ->  COVID-19 Financial Relief  ->   Taxation of and Accounting for Forgivable Loans

Forgivable Loans - Tax and Accounting Treatment

The COVID-19 financial relief has included the following benefits which include forgivable loans:

bulletCanada Emergency Commercial Rent Assistance (CECRA) - 100% forgivable, and
bulletCanada Emergency Business Account (CEBA) - 25% forgivable of first $40,000 plus 50% forgivable of next $20,000.

See below re timing of Canada Emergency Rent Subsidy (CERS) and Canada Emergency Wage Subsidy (CEWS) taxation, which are not forgivable loans.

Taxation of Forgivable Loans

The CECRA and the forgivable portion of CEBA are taxable when received (ITA s. 12(1)(x)), but if and when repaid, are deductible when repaid (ITA s. 20(1)(hh)).  This is confirmed by Canada Revenue Agency (CRA) in Technical Interpretation 2020-0861461E5 Tax Treatment of Loan Forgiveness under CEBA.

This means that the 25% (up to $10,000) forgivable portion of CEBA and 100% of CECRA will be taxable in 2020.  If any of the forgivable portion is repaid, because requirements were not met, then this can be deducted in the taxation year when the amount is repaid.

Other resources on this topic:

bulletCRA/CPA October 26, 2020 webinar:  CRA confirmed that the forgivable portion of the CEBA loan is taxable when received.
bullet CIBC document by Jamie Golombek et al Relief measures for business: Canada's COVID-19 response plan (pdf)
bullet October 1, 2020 Globe and Mail article

As noted in the CPA information on the CEBA forgivable portion of loan, "A taxpayer can elect under Subsection 12(2.2) not to include the forgivable amount in its income by reducing its outlay or expenses in respect of which the loan is received by the same amount. The election can be made by sending a signed letter to CRA by the due date for the corporate tax return covering the period in which the expenditure was made." Since the outlays for the $40,000 loan have to be made in 2020, this would only be of assistance to a taxpayer with a year end prior to December 31st.  If the taxpayer has a September 30th year end and doesn't use the funds until after that in 2020, then this election could move a portion of the forgivable loan income inclusion to the next taxation year.

Canada Revenue Agency (CRA) References

Technical Interpretation 2020-0861461E5 Tax Treatment of Loan Forgiveness under CEBA

Income Tax Audit Manual - Compliance Programs Branch (CPB) Inducement Payments

IT-273R2 Government Assistance - Amounts included in Income Under Paragraph 12(1)(x).  And yes, the 25% forgivable portion of the loan is government assistance, costing taxpayers an estimated $9.3 billion, according to the Parliamentary Budget Officer.

Note: The fact that these items are taxable does not affect revenue for the Canada Emergency Wage Subsidy (CEWS) calculation.  The definition of "qualifying revenue" for CEWS allows the exclusion of funding received from government sources, for its current reference periods and all of its prior reference periods.

Accounting Treatment

The accounting treatment of the government assistance is similar to the tax treatment shown above.

For corporations using Accounting Standards for Private Enterprises (ASPE), ASPE section 3800 regarding government assistance, assistance for non-capital items can either be shown as revenue, as a deduction from expenses, or may be netted against expenses.  If a portion of the assistance relates to expenses in a future accounting period, then that portion could be recognized in the future accounting period.

For private corporations, see the EY information Understanding ASPE Sections 3800 and 3805, Government Assistance and Investment Tax Credits.

For corporations using International Financial Reporting Standards (IFRS), the accounting treatment is the same as with ASPE.  See BDO IAS 20 Government Grants.

Don't forget - only the 25% forgivable portion of the CEBA will be deducted from expenses.

When are CERS and CEWS Included in Income?

They are included immediately before the end of the qualifying period to which they relate, not when the funds are received, as per s. 125.7(3) of the Income Tax Act.  This means that a subsidy received for the 4 weeks ending October 24, 2020 is included in income on October 24, 2020.  See our Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy articles.

Tax Tip:  Get advice from your Chartered Professional Accountant (CPA) on both the accounting and tax treatment to ensure this is done properly!

Revised: March 03, 2021

 

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