A corporation received a $40,000 loan under the Canada Emergency Business Account (“CEBA”) program in its taxation year ending December 31, 2020, and used the proceeds to pay salary expenses incurred in that year or, alternatively, the following year. The loan (which initially is non-interest-bearing) might be repaid as required (i.e., 75% by December 31, 2022, so that $10,000 is forgiven), or might not be repaid until thereafter, in which case, the outstanding balance of the loan is converted into a three-year term loan at an annual interest rate of 5%. In describing the consequences, CRA indicated:
- The financial institution making the loan would reasonably be viewed as a person described in s. 12(1)(x)(i), and the forgivable portion of the loan would be included in income for the corporation’s taxation year ended December 31, 2020 under s. 12(1)(z)(iv) as assistance in the form of a forgivable loan in respect of an outlay or expense (the salaries).
- The corporation, to avoid the s. 12(1)(x) income inclusion, could file the s. 12(2.2) election with its income tax return for its 2020 taxation year to reduce the amount of non-deferrable operating expenses (“whether deductible or not”) incurred in that year, the subsequent year or a prior year.
- Where the intent of the parties (the corporation and the financial institution) is that any amount repaid by the corporation will be applied first in repayment of the portion of the loan that was initially forgivable, the corporation could claim a deduction under s. 20(1)(hh) with respect to the amount reimbursed in the taxation year in which the reimbursement is made, up to the amount included in its income pursuant to s. 12(1)(x).
- If the intent of the parties is unclear in that regard, the deduction under s. 20(1)(hh) would be equal to that proportion of the amount reimbursed in the taxation year that the portion of the loan that was initially forgivable is of the outstanding balance of the loan as at January 1st, 2023, due to the fungible character of the borrowed money. Under this approach, the total amount of the deduction under paragraph 20(1)(hh) will be equal to the amount of the income included under s. 12(1)(x) when the borrowing of $40,000 is fully reimbursed.