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Taxation of Government Assistance
Some Low Interest Government Loans are Considered Government Assistance, Affecting SR&ED Expenditures
Income Tax Act s. 127(9), s. 12(1)(x)
Apparently even low-interest repayable loans can be considered "government assistance", as per the definition in S. 127(9) of the Income Tax Act and as confirmed by the Supreme Court of Canada in CAE Inc. v. His Majesty the King SCC 40504 in May 2023.
The low-interest loans provided to CAE Inc. by the government related to scientific development. As a result, the amounts of the loans "had to be subtracted from the amount of qualified SR&ED expenditures for the purposes of CAE's investment tax credit for those taxation years." Of course, they would be able to be added to qualified expenditures in the years in which they are repaid.
An analysis of the case is available from Dentons in the article Low-interest government loan rules as "government assistance": Impact on investment tax credits and tax planning.
The Federal Court of Appeal case is CAE Inc. v. Canada 2022 CAF 178.
The Tax Court case is CAE Inc. v. The Queen 2021 CCI 57
CEBA / CECRA Forgivable Loans - Tax and Accounting Treatment
The COVID-19 financial relief has included the following benefits which include forgivable loans:
See below re timing of Canada Emergency Rent Subsidy (CERS) and Canada Emergency Wage Subsidy (CEWS) taxation, which are not 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:
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
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.
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.
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 September 25, 2021 is included in income on September 25, 2021.
Tax Tip: Get advice from your Chartered Professional Accountant (CPA) on both the accounting and tax treatment to ensure this is done properly!
Revised: October 26, 2023
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