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‘They Should Open It’: Why Some Small Businesses Have Been Excluded From COVID-19 Emergency Lending Program

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As Prime Minister Justin Trudeau announced changes on Wednesday to expand the criteria for accessing the Canadian emergency wage subsidy, many business owners are focusing on another issue.

Some small businesses desperate to access the government loan program known as the Canada Business Emergency Account (CEBA) will not be eligible for assistance under the program’s criteria, experts say.

“Absolutely, it excludes people,” said Anna Malazhavaya, tax lawyer in Toronto Advotax Law.

Alex Ghani, accountant at CPA Solutions in Toronto, said some companies will struggle to weather the pandemic without the help of such programs.

“If you don’t get these loans and you can’t qualify, you’re in serious trouble – if your rent is due and you aren’t relieved for it.”

More than half of small businesses have 4 or fewer employees

Malazhavaya, Ghani, and others are concerned that the program may not be fair to business owners who operate as sole proprietors with a small workforce and low salary costs. They also say that small business owners who do not receive a salary because of the way their business is set up are not eligible for the program.

the CEBA loan program was first announced on March 27 and is intended to support small businesses struggling with the financial impact of COVID-19.

The $ 25 billion program offers government guaranteed loans of up to $ 40,000, interest-free until the end of 2022, administered by banks.

Canada has over 1.1 million small businesses, employs about 8.3 million people and contributes about 40 percent of Canada’s total economic output, according to the latest figures from Statistics Canada.

Given that just over half of the country’s small businesses have only one to four workers, the relatively modest $ 40,000 CEBA loan could have a significant impact.

The Canadian Federation of Independent Business thinks the program is an important tool in helping “flatten the failure curve for small businesses,” but in a statement, CFIB Executive Vice President Laura Jones said said she feared “people would fall through the cracks of government eligibility.”

The payroll problem

One of the problems is that the loans require companies to pay at least $ 50,000 in wages last year. This could exclude certain self-employed workers and other sole proprietors.

CFIB calls on the government to eliminate the payroll test and make it accessible to more companies, for this exact reason.

Ghani says this requirement will hurt many businesses suffering from the consequences of COVID-19.

“The biggest concern I find is the sole proprietor or the unincorporated person who doesn’t have access,” he said.

The problem here is that sole proprietorships earn and report business income as opposed to salary, and they may not have any employees on the payroll or have a very small payroll.

Even if they could get the government wage subsidy, it would not help with other operating expenses.

One of the biggest problems with the loan program is that it punishes companies that do not have enough wage costs and instead distributes the income in the form of dividends or sole proprietorships. (Advotax law)

Malazhavaya analyzed the types of businesses eligible for each government support program in the table above, explaining the rules at the time of publication. She says the program is also not fair to people who have incorporated their businesses but pay themselves through dividends instead of a salary.

Consultants, engineers, and traders are examples of business owners who can incorporate and pay themselves dividends.

For the next six months, all the income plans we had are out the window– Bocar Dia

Malazhavaya says the minimum wage bill requirement should also be eliminated.

“If we are targeting small businesses with the CEBA loan program, why do we have this lower limit of $ 50,000 in payroll? she said.

Some of the hardest hit don’t qualify

Operators of small shops, cafes, daycare centers, florists, seasonal businesses and the like often work in the business themselves with few staff or a single assistant.

For many, this means their salary expenses are too low to be eligible for a CEBA loan.

Yet, in the midst of the pandemic, many of those same businesses have been forced to shut down and find themselves with little to no revenue to cover operational expenses that are still piling up, even though some costs are being deferred.

It is not suitable for Malazhavaya that businesses such as day care centers, florists and cafes that need the CEBA loan cannot be registered.

“Often these are the types of businesses that are hit hardest during a crisis,” she said.

As companies increasingly desperately seek relief funds, federal officials and banks have agreed on most of the essential elements of the CEBA program, according to the Globe and Mail.

Case studies in crisis

A key question that remains to be resolved is how quickly the money can be distributed to those who request it.

Here are examples of four businesses that are not eligible for CEBA loans:

Peak Physio and sports rehabilitation in Toronto just opened in September last year and had yet to break even when it was forced to close by the pandemic.

Revenues are now “close to zero,” said co-owner Joanna Habbous. “Certainly the $ 40,000 interest free loan would be of great help.”

Joanna Habbous of Peak Physio and Rehab in Toronto says her business is not eligible for the CEBA loan because her only salaried employee earned less than $ 50,000 last year. (Joanna Habbous)

She and her partners would use it to cover expenses of over $ 11,000 per month (including rent that the trio personally guaranteed).

The problem: the owners are all entrepreneurs, and they cannot access the CEBA because Peak’s only salaried staff member did not earn $ 50,000 in 2019.

Forced to close

Tammy Deren of Edmonton, owner of The Photographer Studio, is excluded from the CEBA as a self-employed person without payroll.

Deren earns commercial income by renting out his three studios to other photographers and video producers, and for events.

Her business came to a halt when physical distancing orders forced it to shut down.

Tammy Deren says her photography studio will have no choice but to shut down unless she finds a way to keep it afloat by May 1. (Digital moments)

“It breaks my heart to have to shut down something in which so much creativity flourished just a few weeks ago,” said Deren.

If she could qualify for the CEBA, Deren could pay her rent and other fees, she says.

“I paid my April 1 overhead, but I will most likely have to close my doors if nothing happens before May 1,” she said.

“Survive by the skin of my teeth”

300 kilometers on the highway from Deren to Calgary, Jeff Mottle is worried about his business.

He founded CG architect almost 20 years ago.

This is an online magazine and resource center for architects and designers specializing in 3D illustrations.

He’s already had tough times, but COVID-19 has brought his income “completely to zero”.

COVID-19 has completely reduced the income of business owner Jeff Mottle to zero. (Alexandre Michelazzi)

Mottle cannot access the CEBA program because he takes dividends on his business income and cannot show a payroll of $ 50,000.

Ahead of the pandemic, Mottle launched a relaunch of its site, hiring web developers, copywriters and consultants. He has spent a large chunk of his reserve funds and still owes tens of thousands of dollars for the work.

Mottle says a $ 40,000 interest-free loan “could be the difference between surviving the skin of my teeth and sinking.”

A start-up left behind

In Vancouver, a tiny tech start-up faces another version of the payroll problem.

Player is an online platform to help tech start-ups hire and manage salespeople, especially when they are growing rapidly.

Co-founder Bocar Dia says COVID-19 has hit the company hard and quickly as customers have taken a break and the hiring freeze has taken hold in the tech sector.

“For the next six months, any income plans we had are lost sight of,” said tech entrepreneur Bocar Dia. (Photograph by Thanyarat)

“For the next six months, all the income plans we had are lost.”

Aplayr cannot access the CEBA because it was only constituted in December of last year.

Dia and her partner have raised funds and are investing equity and capital.

They do not receive any salary and have no payroll although they have hired several contractors for projects.

For Dia, a loan of $ 40,000 could help them “frankly, survive as a business.”

Otherwise, a difficult option is to “stop operations and see what happens”.

“We need businesses to survive”

When the Prime Minister announced the changes to the SSUC program, he spoke about the general intent of government assistance.

“For our economy to survive, we need businesses to survive and workers to be paid.”

Small businesses not qualified for CEBA loans hope changes will come in time to help them.

Tax lawyer Malazhavaya claims that all of these legitimate small businesses pay taxes and contribute to society and the economy, so the way a person has structured their business shouldn’t be a barrier to accessing a business. emergency loan program.

“I’m talking about businesses that are on the verge of bankruptcy because they can’t pay their rent,” she said. “This employer subsidy is not going to help them. What they need is a loan.”

Ghani agrees. “They should open it up. You know, don’t limit them. They need their help. Right now they’re struggling.”

Dia says saving these small businesses is now helping Canada build a vibrant economy in the future.

“These are the times when, you know, you should rely on your creatives the most and also support them the most, because these are the guys who are going to be… leading the economy once it reboots.”