Anna Malazhavaya
on CEBA: the application deadline, allowed spending, forgiveness, the guarantee
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Hello everyone, this is another episode of Yunusov Law YouTube show, and I have a guest today who already appeared on our show and is back by popular demand, Anna Malazhavaya, a tax lawyer here in Toronto. In our previous video, she talked about current developments in federal government's emergency measures, including tax measures related to the COVID emergency. She has an update for us today specifically about the CEBA program and some interesting details about the CEBA program. So without further ado, I want to welcome Anna Malazhavaya. Today. Thank you, Anna, for being here.
Thank you, Pulat, for having me. It's always a pleasure. I appeared twice.
Yes.
If you remember.
It's absolutely correct. So the very first interview that I did was with you, and at that time we did it on Instagram. We did an Instagram Live chat, and we had a lot of people joining. Some people, I know that someone even created an Instagram account just to see see that interview, and you also talked about current COVID-related federal government emergency measures. So today I wanted to talk about the Canadian Emergency Business Account program known as the CEBA program. We know that it was established by the federal government, but it is administered by commercial banks. Can you please share the current status update on CEBA.
Current status is is such that the application— the first, the, the import— I'll start with the important stuff first. The application deadline to apply for CEBA has been extended until October 31st, 2020. Good news. Don't delay too much if you plan to apply. Now is the time. To get your documents in order, talk to your accountant, and submit the application. If you've applied for the program and received your funds already, I'm hoping to discuss how you're allowed to spend your funds and when you should be probably spending your funds. And if you applied for the program and you're still waiting for or you were denied or you're still waiting for some clarification, that's something also we can discuss.
Understood. Very briefly, if I understand it correctly, CEBA is a program that finances some regular expenditures by businesses in Canada when or where a given business was affected by COVID and its revenues declined, correct?
Correct. If you— there is the government website that describes the program and the eligibility requirement, and if you look at the preamble discussing the program in very general details, you'll see that the program was created to assist Canadian businesses with non-deferrable operational expenses during this COVID emergency. That was the goal of the program. That was the purpose that it was supposed to serve. And yes, there are some— it's not perfect, the program as it was designed, but it was designed in a very short period of time. And, you know, it has been a lifeline for many businesses, especially those who They did not get any assistance from their landlords. They relied on CEBA to survive during the last few months.
Understood. So essentially the central feature of CEBA is funding for operational expenses. So CEBA is about spending money. It's about pocket money for businesses. But are there any restrictions on how businesses are allowed to spend this pocket money provided by the federal government?
Yes, there are restrictions, and they are spelled out in your agreement with your bank. So if you want to know how you are allowed to spend your CEBA funds, your $40,000 loan, pull up that agreement and or talk to your lawyer, talk to your advisor, to your accountant, and find that clause that defines the allowable use of CEBA funds. Most likely every bank uses a different CEBA agreement, and but that clause should be relatively similar for all banks. And what it will say is that you're allowed to spend money on non-deferrable operational expenses. At this time, believe it or not, the government website does not provide a lot of guidance as to what those expenses are.
There isn't a lot of guidance, so talk to your bank advisor, maybe they will have an answer for you. Talk to your accountant, but the answer As to what you're allowed to spend CEBA on is in your agreement with the bank.
Just to break down some— sorry, just to break down some relationships and obligations here. CEBA is administered by commercial banks.
Sure.
To receive money under the CEBA program, it is necessary to enter into an agreement with your bank. So the source of obligations for borrowers under CEBA is this agreement, a private contract with a commercial bank. Are there any— is there any relationship when one takes advantage of the CEBA program between the borrower and the federal government? And if yes, what is the source of that relationship, a statute or regulation or maybe a second agreement?
There isn't a second agreement. There isn't a relationship that we're aware of. So the consequence of not using CEBA appropriately would be a breach of that agreement with your bank, a breach of the declaration you provided, and the loss of all the benefits you were entitled to. At this point, we are not aware of any instances where that breach occurred and any situations where someone really suffered the consequences. So it's hard to provide you with practical experience as to what's gonna happen, but if you don't follow the rules, you'll be in breach of the agreement with your bank and the regular breach of contract consequences will follow.
Right, so there is no word that CRA enforces anything here or any other government agency polices the CEBA program. There is nothing like that, correct?
I, I don't know of any specific program in place, but because the federal government guarantees these loans and I, I do think that the CRA will be actively involved in making sure that that the, the contracts with the banks are complied with. How it's gonna happen, we don't know yet.
But essentially the government delegated this program to commercial banks, and its primary role is as the source of funding. Would that be a correct view of the situation?
True.
All right. Okay, so do you have any information that the government had any input into those commercial agreements with the banks? Or if— I'm sure that the banks entered into their own agreements with the government when they joined the program, right? We can safely assume that. Although I don't have any information about it, but it's very unlikely that something else happened, right? So do you have any information that the government dictated the terms that the banks need to put into those agreements that CEBA borrowers will have to sign?
Some terms will— I'm uncertain were dictated by the government. And those terms are the amount of the loan, the fact that it's interest-free, how it should be used, meaning non-deferrable operational expenses, the provision that allows for debt forgiveness if the loan is repaid, if $30,000 of the loan or 75% of the loan is repaid before December 31st, 2022, 25% of the loan is forgiven. Those are the terms that were dictated by the government as part of the program. Some other terms may be bank-specific. And in fact, we do know that some banks use packages, CEBA packages, that are quite different from other banks. RBC is a perfect example. So if you're an RBC client who received the CEBA funds from RBC, I would strongly encourage you to review your agreement and maybe talk to your bank advisor or your accountant about when you should be borrowing and spending your CEBA funds.
Thank you, Anna, and I want to remind the viewers that the purpose of this video is to alert you to issues, not to give you any advice in your particular situation. It's really important to consult professional after watching this video, your own professional, if you have any questions. The reason I was so interested in the government's part in drafting these agreements or setting up these commercial banks agreements with CEBA borrowers is because obviously, see, the CEBA program is a policy initiative and it— the government has some policy goals. And you listed a few provisions, a few terms of the CEBA program or any agreement with a commercial bank under the CEBA program that obviously has the flavor of policy goals, such as for example, no interest, right, or forgiveness and things like that.
So I'm really curious about the provisions of these agreements that regulate spending of CEBA money. And I'm trying to establish what policy objectives the government had when it dictated or influenced that term. Can you speculate a little bit on that?
I can only speculate. I wasn't privy to development of the program. So again, the spirit of the program is to provide a lifeline to businesses in the emergency situation, to provide the businesses with funding when other funding may not be available during COVID So if you're really struggling to pay your rent, to pay your utilities, to pay your insurance, these are the CEBA funds to help you survive. That was supposed to be the goal of the program. But as we know, there is no requirement for a business to be really financially affected to be eligible for CEBA. So businesses who are doing extremely well nowadays, let's say online businesses who are living the life, or businesses who are selling masks or sanitizers, they're having the best year of their life.
They too can be eligible for CEBA. So don't ask me how, whether it was really a way to save, you know, struggling businesses, or whether it was just an injection into the economy and just free money for everyone so that to keep the wheels of the economy rolling. I'm not an economist, I don't know, but the fact that you don't need to be financially suffering to receive CEBA, that I think is interesting in its own.
Right. I want to dig in deeper into the allowed expenses. And I want you to explain the difference between eligible non-deferrable expenses and allowable CEBA expenses under the agreements with the commercial banks.
Good question. I take it that you're looking at my blog post as you read the definition. This I, I this post was inspired by the two extremes I see among my clients and tax professionals that I work with. So the two extremes are the following. On the one extreme, I see people who spend CEBA as if it was their birthday money. They go on trips using CEBA Funds, they take advantage of Labor Day sales at malls. They are living the life. This is wrong, as we just discussed. That's against your contract. You're not allowed to do that. That's one extreme. And the other extreme are people who are very by the book, and before they make any purchase, before they make any purchase, they call their accountant and they say, I want to, for example, buy inventory.
Using my CEBA funds. Am I allowed to do so? And their accountants sometimes go on CEBA website and they look for expenses, expenses, expenses, and the, the, the, the only term that uses the word expenses on the website is eligible non-deferrable expenses. So naturally the accountants study the definition of the term, which is very narrow, very restrictive, and and they advise the client based on that definition. So no inventory— the answer to my question would be then, no, you cannot use the CEBA to buy inventory, the accountant would say. And that is wrong. That is wrong. And this is because eligible non-deferrable expenses is a definition used for something Very different entirely. Eligible non-deferrable expenses is some— is a term used to determine whether or not you qualify for CEBA using non-deferrable expenses treatment.
So if you received your CEBA money already, forget about eligible non-deferrable expenses. That's not relevant to you anymore. Do not look at it and do not confuse your clients. So what you should be looking at is your agreement with the bank, and your agreement with the bank will have a specific clause as to how you're allowed to spend your CEBA funds. And, you know, non-deferrable operational expenses include inventory. So you are allowed to spend your CEBA on inventory. Go ahead and grow your business, develop your business. We gotta survive a tough winter. Is ahead of us.
Yes, absolutely. No one knows what to expect this winter. Do you know anything about any extensions of the CEBA program to this winter?
Well, in terms of extensions, in terms of the application deadline, no, I'm not aware that the application deadline will be extended. In terms of when and how CEBA funds can be used. That again is an interesting issue that we see among friends and clients and tax professionals, is the difference between different agreements. So if you are an RBC client, again, if you're an RBC client, you special. You have to read your agreement and you have to understand what it says. And what it says in very general terms is that you get a line of credit in during your 2020 calendar year. Line of credit is something— is $40,000 available to you to borrow. So go ahead and borrow it, right?
If you don't borrow the funds from your line of credit if your line of credit balance is— I'm making it up— you know, $20,000 or $25,000 on December 31st, 2020, that's all the CEBA funds you're gonna get if you're an RBC client. So if you didn't borrow, if you didn't withdraw those funds from your line of credit with RBC from your $40,000 available to you, on January 1st, 2021, your line of credit gets converted into a regular term loan, and that's it. No more CEBA for you. So if you only borrowed $25,000 in 2020, no more CEBA for you. You don't get to borrow any more in 2021. If, however, if you, if you're a client of a different bank What you probably saw is that $40,000 was deposited into your operational account.
You didn't have a line of credit. You had your operational account. One day you just saw $40,000 dropped into your operational account and you get to spend it when you need it. And I take it for the struggling businesses, the answer is obvious. They spend it right away. They need to survive. For other businesses, they may choose to defer those funds until next winter when we don't know what's going to happen and have them available to them. But that option, like I said, will not be available to RBC clients. If RBC clients don't withdraw CEBA funds from their lines of credits this year, that's it, they won't have those funds. And likewise, the debt forgiveness amount also is calculated based on that based on that balance as of December 31st, 2020.
So for RBC clients, if they don't withdraw the funds from line of credits, their forgiveness amount will be calculated as 25% of their balance as of December 31st, 2020, and it may be less than $10,000, whereas for all of the other banks, clients of most other banks, it will be 25% of $40,000. So they get $10,000 maximum debt forgiveness. So something to consider.
We are now in the CEBA honeymoon period from a litigator's perspective, from a commercial litigator's perspective, right? It's the time when money is flowing in and the biggest issue is being qualified for this money. But all honeymoons end and the time will come when businesses will have to pay the money back, right? And for commercial litigators, debt collection is an important issue and there are several aspects to this issue and I want to loop back to my question about the government's role in this relationship established under CEBA, the relationship between the bank and the borrower. So we know that governments, and I mean both the federal government and the provincial government, can get all kinds of breaks in debt collection.
Both in the area of bankruptcy law, for example, right? So debts to the CRA may survive bankruptcy or something like that. Governments get breaks in terms of priority when they register securities on assets and things like that, right? So there are different areas of commercial law where government has priority or immunity or special status. It's really curious that government here appears to simply have— to have simply handed off this program to commercial banks. And I'm curious, is there any— is there anything you can say about collecting CEBA when it's due. Do you have any information, or maybe you can speculate about whether only commercial banks will be stuck with those debts, or with collecting those debts?
Will they have any incentive to collect those debts if they are guaranteed by the federal government? And if the federal government is going to be the ultimate payer, then how can the federal government collect these debts? If it doesn't have a relationship with the borrowers, it looks like?
Good question. I thought about it myself. Bill C-14 that was enacted in April of 2020, that's the bill that provided the government with the right to guarantee the loans provided by private banks. That was the right that was used to in order to administer CEBA. In terms of collecting and priority and incentives for the bank to truly try to collect when they know that somebody else guaranteed the loan, that's a very good question. I don't know the answer to it. What I do know is that from speaking to my bankruptcy colleagues, they have seen already bankruptcies. Already we see bankruptcies where people defaulted after receiving CEBA loans. So if it's a problem in the summer of 2020, I do think it'll be an even bigger problem in the summer of 2021, 2022.
I don't know what to say.
Yes, my guess would be that the government inserted some kind of collection or enforcement clauses in its agreements with commercial banks where commercial banks undertook to collect those debts. And my theory why the government delegated everything to commercial banks in the first place, I guess it's similar to why insurance companies delegate selling insurance to insurance brokers, right? They already have the network of agents and branches, and the government doesn't want to, to deal with the small potatoes, right, of processing applications. And it's pretty expensive, and banks probably are equipped to do it well. So I'm curious about the compensation arrangement that banks have with the government, and it will be really interesting to see those agreements between the banks and the government.
But also, everybody should check that legislation, bill— what, which one is it?
Bill C-14?
Bill C-14.
April 12th, 2020?
Yeah, there must be something there in that legislation also.
No, no, no, no.
So it was a purely fiscal—
I'm curious to see those agreements between the government and the bank. I was not privy to those.
Right. So that bill, that legislation was a purely fiscal measure that simply allocated the money to the government and authorized the government to start this program, right?
It was just the authorization, no allocation of money. It was, remember, April 2020. It was an emergency situation. Everyone was in shock. And to add to your point about why the CRA, the government needed help in administering these programs is because they have— they are administering the, the wage subsidy program, which is a huge program, and they're, they're doing a very good job at it. From what I hear, it's well set up, it's well administered. So, and to, to add to your point, they just thought that it wasn't practical for them to add CEBA and CECRA to their workload in April of 2020 when their CRA employees were at home like the rest of us and they were struggling to come up with something urgently because bills had to be paid right away, right?
So we didn't have time to design something perfect.
Right. Well, this was a very interesting update. You know, I'm sure some of of our viewers also want to know more about you and your practice. This is the third time you spoke to our viewers, and every time you spoke, it was on some very technical topic, yet very interesting topic. How about sharing a little bit about yourself and telling us about, about your practice, Anna?
I am the founder and the owner of Advotaxi. Law. It's a tax law firm in West Toronto. Our office is next to Sherway Gardens Mall. If you're ever at the mall, stop by for coffee. We help people with any kinds of tax problems, tax planning, which is becoming very interesting nowadays with all the fluctuations we see on the market, and also tax litigation. Any issues you have with the decision the CRA made on your behalf will be happy to review it for you and help you dispute it if it was wrong. So anything tax.
I know that you're a senior lawyer, right? So I also wanted, I wanted to hear a little bit, you're more senior than me and I wanted to hear a little bit about your your path and the things you did and where you came from on Bay Street and where you were trained, the law school, if you can, like a short recap of your career path, that would be fantastic.
My first law degree is from Belarus, Belarusian State University Minsk. Then I came to Canada in 2004, where I, where I liked doing my law degree so much I did another law degree, this time at Osgoode, at your law school, Pulat. I graduated in 2007 and then spent some time, 7 years, on Bay Street at their tax and trust group. Doing some really interesting, exciting, high-profile, you know, deals on the front page of newspapers type of deals.
When you say there, you mean Cassels, right?
Cassels,
yes, Cassels, because I don't think the viewers heard that.
Okay, so Cassels Brock was trained by, I think, one of the most brilliant tax lawyers in the country, and after After Cassels, I worked for another firm, a tax boutique firm in downtown Toronto for 5 years, and then I started my own practice, which is a 10-minute drive from my house, and loving it so far.
That's great. It's fantastic to know you and to consider myself your friend and colleague. I'm really thankful for this opportunity to speak with you every once in a while. And to learn so much from you, Anna. Thank you so much for sharing your time with us, with me and our viewers today.
Thank you for having me. It's always a pleasure.