CEBA Loan tax implication rules

Under The Canada Emergency Business Account, a number of business received the $40K loans of which up to $10K is forgivable if the loan is repaid by December 31, 2022.

Paragraph 12(1)(x) of the Income Tax Act (“ITA”) requires any government assistance to be included in income by virtue of subparagraph 12(1)(x)(iv).  The inclusion of the potential forgivable amount is requiredregardless if it is actually forgiven. Therefore the $10K would be included in the computation of income for tax purposes for the year in which the loan was received.

This income inclusion will be reported as an add-back to net income for accounting purposes to arrive at net income for tax purposes. This would be done by a corporate taxpayer on the T2S(1) schedule. The add-back would be the forgivable portion or $10K.

If the forgivable amount is not forgiven, because the taxpayer does not repay the loan bye December 31, 2022, then the taxpayer may claim a deduction in the year of repayment of the loan for the previousamount  includedin income. This deduction is pursuant to paragraph 20(1)(hh) of the ITA.

An election is available for the year of the income inclusion (ie., the year the loan was received) under subsection 12(2.2) of the ITA to reduce non-capital expenses that are incurred either in the year the loan is received or in the following taxation year. If the expenses are incurred in the 2021 year, then the election may be filed for that year.  Effectively these expenses are reduced by the amount of the otherwise income inclusion.  The net effect is the same unless there is a timing issue in that the expenses are incurred in the following taxation year. It appears that one would paper file with CRA this plain paper election with the relevant details or upload it through the online process.

The simple way to deal with this would be to just to add the forgivable amount to net income for tax purposes for the year the loan was received, which effectively gives you the same result except it would be for the year the loan was received, even though say some or all of the expenses were not incurred until 2021.

You also should examine the accounting entries that reflect this loan. If the $10K is forgiven, there would be a credit balance in the loan account at the end of the term. This would be cleared to the income statement as other income,butremember to claim for tax purposes a deduction for this amount because for tax purposes the inclusion was reported in the year the loan was received.

Reference may be made to CRA Technical 2020-0862931C6 12(1)(x) and CEBA.