Can't Pay Back Your CEBA Loan? You're Not Alone

The COVID-19 pandemic caused disruptions of all kinds for individual Canadians and their businesses, who are still seeing the impact. Disruption was also felt at the government level, and our government struggled to deal with the financial fallout caused by lock-downs. One of the primary stimulus measures the government ended up using for Canadian small businesses was the Canada Emergency Business Account (CEBA). The CEBA program offered interest-free loans of up to $60,000 to small businesses. According to the government’s website 898,271 small businesses and not-for-profits took advantage of this and were granted a total of over $49 billion in loans.

COVID-19 stimulus programs were often administered in haste by government employees pulled from an assortment of departments who were charged with sacrificing perfection for speed to help keep food on tables. Now that the dust has settled, however, many CEBA borrowers, some of whom likely wouldn’t have qualified for loans in any other scenario, are finding that they’re under stress due to an inability to re-pay these loans. In some cases, the business has sadly failed. In other cases, the financial health of the company will take far longer to repair than the timelines currently required for re-payment (the deadline is currently January 18, 2024 to get the partial loan forgiveness, and otherwise payment in full [with interest] by the end of 2026).

Although the government has backed the loans (so the banks didn’t have to take any risk when administering them), the banks are currently responsible for attempting to collect the amounts owing. But with no “skin in the game” and no clear rules regarding what steps they have to take to try to collect, it remains to be seen how aggressively banks will pursue collecting these loans. One assumes that eventually the government will step in and try to recover their loss when the bank is unable to collect, but there has been no communication about when that might occur and how it will be administered. Either way, if the business is closed and there are no remaining assets in the business, neither the bank nor the government will be able to collect the debt from the company. Naturally, in this case business owners want to know what part, if any, of the outstanding debt they might be personally liable for.

The terms of the CEBA loans were set by each of the individual financial institutions that distributed the funds – usually the company’s existing bank – so there is no one-size-fits-all answer. Generally speaking, if the business was operated by the individual as a sole proprietor, they’re personally liable for this debt. However, if the business was operated by a corporation, we haven’t yet seen any cases where the bank required an individual to personally guarantee a CEBA loan issued to it (unless perhaps the corporation had another secured loan with that bank and the document stated that the same terms applied to the CEBA loan). Therefore, it seems in most cases the bank cannot pursue the individual.

When it comes to the government's exposure, so far we’ve seen no indication that the government will take the position that an individual such as a director could be on the hook for a defaulted corporate CEBA loan. However, there certainly is precedent for that sort of thing. For example, directors are legally personally liable for certain tax debt that the government can’t collect from a corporation. But this is due to specific legislation, and we are not aware of any such legislation in the case of CEBA loans. That said, one can't help but wonder if there is an argument to be made that an owner or director or officer of a corporation is liable for re-payment of the debt if in the government's view the loan was improperly applied for, or the funds were not used for the specified purpose.

If you’re starting to get the impression that all of the above is a long way of saying “I don’t know” when it comes to the question of how an unpaid CEBA loan will impact you, you’re not wrong. There is a lot of uncertainty around how banks and the government will handle unpaid CEBA loans. For now, we can't say that there is no risk that there could eventually be some personal fallout for unpaid corporate CEBA loans. In that case, some owners of failed businesses have advised us that they are considering personally paying the required balance before the deadline to get the partial forgiveness, even if this means taking out a personal loan to do so. However, most business owners we speak with either can't afford to do so or have determined that the risk of personal liability is low, and are therefore adopting a wait and see approach.

We understand that having an unpaid CEBA loan hanging over you causes stress. It is always advisable to consult a professional to clarify where you’re at and get a handle on what your options are in such a situation. However, with no clear communication from the government and no precedent for the CEBA loan situation, it may be difficult to obtain clear guidance at this stage. We will continue to research this topic, and if we are able to offer more clear information, we will update this blog.

Charla Smith & Company Ltd. is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly provide advice to individuals who are dealing with business debt. If you would like advice on options for dealing with your business's debts, contact us for a free, no-commitment consultation.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.