As the corporate income tax filing deadline approaches for corporations with a December 31 year end, businesses that received the Canada Emergency Business Account (CEBA) Loan in 2020, should be aware of the tax implications of the forgivable portion of the loan.

The CEBA was launched on April 9, 2020 to support businesses through the COVID-19 pandemic. Business could qualify for CEBA loans on the following terms:

• If a business borrowed $40,000 or less and the business fully repays the outstanding loan (other than the amount available to be forgiven) on or before December 31, 2022, then 25% of the loan (up to $10,000) will be forgiven

• If a business borrowed more than $40,000 up to $60,000, and the business fully repays the outstanding balance of the loan (other than the amount available to be forgiven) on or before December 31, 2022, then a single tranche of loan forgiveness, up to $20,000, will be provided based on the following blended rate:

• 25% on the first $40,000; plus
• 50% on amounts above $40,000 and up to $60,000.

If the business does not fully repay the outstanding balance of the loan (other than the amount available to be forgiven) then no forgiveness will be provided.

It is important to note that the forgivable portion of the loan is to be included in the taxpayer’s income in the year the loan is received pursuant to paragraph 12(1)(x) of the Income Tax Act (the “ITA”), unless the taxpayer elects under subsection 12(2.2) of the ITA to reduce the amount of an outlay or expense that is made or incurred by the taxpayer. This was recently confirmed by the CRA in Technical Interpretation 2020-0861461E5.

An election under subsection 12(2.2) is made by means of a signed letter accompanying the applicable income tax return which includes the following: (a) the subsection under which the election is being made; (b) the elected amount; and (c) the amount of assistance and the date it was received.  Generally, this election must be filed on or before the date that the taxpayers income tax return is due to be filed for the year the loan is received or the following year if the outlay or expense is made or incurred in the following year.