COVID-19 Update - CEBA Edition

Part of our COVID-19 series (view more)

This post contains information we shared with our clients on October 16, 2023. Please note that the content of this post may be out of date by the time you’re reading this. If you’re an Origami client, please contact your CPA if you have any questions.

On September 14, 2023 the Government of Canada (GOC) announced extended repayment deadlines for the Canada Emergency Business Account (CEBA) loan extended to Canadian small businesses during the height of COVID-19 restrictions in 2020. The repayment deadline to qualify for partial loan forgiveness has been extended by a couple of weeks, from December 31 to January 18. The Government also offered an additional three months to March 28, 2024 if you make a refinancing application with the bank that provided you with your CEBA loan by January 18.

If you want to qualify for the full $20,000 in forgiveness ($10,000 if you didn’t apply for the CEBA extension) and won't have the funds on hand to pay back the $40,000 by January 18, the best course is to contact the bank that issued the CEBA loan now to negotiate another loan to pay it back.

The interest rate on any such loan would have to be extremely high to outweigh the up to $20,000 in forgiveness, especially given that the up to $60,000 outstanding will automatically be converted into a non-amortizing term loan requiring full repayment by December 31, 2026 at a 5% interest rate. What is a non-amortizing term loan you may ask? Great question! Essentially a non-amortizing term loan is a loan with an interest only minimum payment that is entirely due at the end of its term. Borrowers can choose to pay more than the minimum payment at any time and should do so if they want to limit the amount of interest they are charged.

Does it make sense to refinance if you can’t repay the CEBA by January 18?

Given what we know right now? Absolutely, yes it does.

As discussed above, in the event that the $40,000 is not paid back or in the process of being refinanced with the bank who extended you the CEBA by January 18 ($30,000 if you did not take the extension) the CEBA balance, currently subject to a zero percent interest rate, will be converted to a 3 year term loan with a 5% interest rate.

The equal monthly payments to settle a converted CEBA balance of $60,000 would be $1,798, totalling $64,737 over 36 months.
Interest only payments of $250 per month followed by a balloon payment of $60,000 at the end of 2026 would total $69,000 over 36 months.
For a point of reference the monthly payments to settle $40,000 borrowed at standard credit card rates (currently 21% in Canada) would be $1,507, totaling $54,252 over 36 months.

We would never recommend refinancing any debts at credit card rates, at least as a first, second, or third option. In this particular case however, due to the magnitude of the debt forgiveness granted upon repayment, the borrower would be thousands of dollars better off to refinance at credit card rates than to let the loan be converted at its full amount.

What if you can’t obtain enough financing to fully repay the CEBA?

In the event that you can’t refinance the full amount of CEBA outstanding you still should still seek financing to repay all that you can, as forgiveness will be granted on a proportionate basis. On the first $40,000, original CEBA amount, borrowed, $0.25 will be forgiven for every dollar repaid. For the $20,000 CEBA extension, $0.50 will be forgiven for every dollar repaid. Payments will be applied to and forgiveness calculated on the original amount before the extension rate of forgiveness is used.

Here's a great resource on the CEBA: https://ceba-cuec.ca/ceba-faq/

Should you refinance at a variable or fixed rate?

As for what way to go variable or fixed. We can only say that historically, on average, people have paid less interest by going the variable route. However, as recent experience has shown your mileage may vary. People negotiating a mortgage in early 2020 would have been far better off going the fixed route rather than the variable route.

If we knew whether or not today looks more like the average experience than the 2020 experience, we’d abandon our accounting practice and make billions trading bonds. The truth is that we have no idea and your own tolerance for risk (variable being risky and fixed being relatively more conservative) should guide your decision making.