‘It excludes people’ — why some small businesses say Ottawa’s COVID-19 loan program is no help

While Prime Minister Justin Trudeau announced changes Wednesday to broaden the criteria for access to the Canadian Emergency Wage Subsidy program many businesses owners are focused on another issue. 

Some small businesses desperate to access the government’s loan program known as the Canada Emergency Business Account  (or CEBA) will not qualify for help under the program’s criteria, according to experts.

“Absolutely it excludes people,” says Anna Malazhavaya, a tax lawyer with Toronto based Advotax Law.

“If you don’t get these loans and you can’t qualify, says Alex Ghani, an accountant with CPA Solutions in Toronto, “you’re in some serious trouble if your rent is due and you’re given no relief for that.”

Malazhavaya, Ghani and others are worried that the program is not fair to business owners who operate as sole proprietors with a small staff and low payroll expenses. They also note that small business owners who do not take a salary for payment because of how their businesses are set up, are not eligible for the program.

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

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

Canada has more than 1.1 million small businesses, employing about 8.3 million people and contributing roughly 40 per cent of Canada’s entire economic output, according to the latest numbers from Statistics Canada.

Given just over half of the country’s small businesses have only 1 to 4 workers, the relatively small $40,000 CEBA loan could be highly attractive.

The Canadian Federation of Independent Business thinks the program is an important tool to help “flatten the curve on small business failure,” but in a statement CFIB executive vice-president Laura Jones said she’s worried “people are falling through government eligibility cracks.”

The payroll problem

One of the problems is that the loans require businesses to have paid out at least $50,000 in salaries last year. That could exclude some self-employed people and other sole proprietors.

The CFIB is calling on the government to eliminate the payroll test and make it accessible to more businesses, for that exact reason.

Ghani believes that requirement will hurt many businesses suffering the consequences of COVID-19.

“The biggest concern I find is the sole proprietor or the unincorporated individual who gets no access,” says Ghani.

The issue here is sole proprietors earn and declare business income as opposed to salary, and they may not have any employees on the payroll or a very small payroll.

Even if they could get the government’s wage subsidy, that does not help pay other operating expenses.

One of the biggest problems with the loan program is that it punishes businesses that don’t have enough salary costs, and instead distribute income through dividend income or sole proprietorships. (Advatax Law)

Malazhavaya analyzed what types of businesses qualify for each government support program in the chart above, explaining the rules as of the time of publication. She says the program is not also fair to individuals who have incorporated their business, but pay themselves through dividends instead of a salary.

Consultants, engineers, and shopkeepers are examples of business owners that can incorporate and pay themselves with dividends.

On top of excluding individuals who pay themselves in business income or dividends,

Malazhavaya also thinks the minimum payroll requirement should be eliminated.  

“If we target small businesses with the CEBA loan program, why do we have this lower limit of $50,000 payroll?” she asks.

Operators of small stores, coffee shops, daycares, florists, seasonal businesses and others often work in the business themselves with few staff or just a single assistant.

For many that means their salary expenses are too low to qualify for a CEBA loan.

Yet, in the midst of the pandemic, many of these same businesses have been forced to close and are left with little or no income to cover operational expenses that are still accumulating, even if some costs are being deferred.

It doesn’t sit well with Malazhavaya that businesses like daycares, florists and coffee shops who need the CEBA loan can’t be enrolled.

“A lot of times those are the types of businesses who get hit the hardest during a crisis.”

As businesses are getting more and more desperate for relief funding, federal officials and the banks have agreed on most of the core elements of the CEBA program, according to The Globe and Mail.

While a key issue that remains to be resolved is how fast money can be doled out to those who apply, here are four businesses who do not qualify for CEBA loans.

Peak Physio and Sports Rehab in Toronto just opened in September of last year and had yet to break even when forced to close by the pandemic.

Revenue is now at “pretty much zero,” says Co-Owner Joanna Habbous. “Definitely the $40,000 loan interest free would be a huge help.”  

She and her partners would use it to help cover expenses that are more than $11,000 a month (including the rent the trio personally guaranteed). 

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

Peak Physio doesn’t qualify for the loan because its sole salaried employee made less than $50,000 last year. (Joanna Habbous)

Edmonton’s Tammy Deren, owner of The Photography Studio, is excluded from CEBA  as a self proprietor with no payroll. 

Deren collects business income from renting her three studio spaces out to other photographers and video producers, and for events. 

Her business came to a standstill when social distancing orders forced her to close. 

“It breaks my heart to have to shut something down that so much creativity thrived in, mere weeks ago.”  

If she could qualify for CEBA Deren could pay her rent and other costs. 

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

Tammy Deren says her photography studio will have no choice but to close its doors unless she finds a way to keep it afloat by May 1. (Moments in Digital)

300 kilometres down the highway from Deren in Calgary, Jeff Mottle is anxious about his business. 

He founded  CG Architect almost 20 years ago.   

It’s an online magazine and resource hub for architects and designers who specialize in 3-D illustrations.  

He’s seen tough times before but COVID-19 has taken his revenue “completely to zero.”

Mottle can’t access the CEBA program because he takes dividends from his company’s revenue and cannot show a $50,000 payroll.

Prior to the pandemic, Jeff began a relaunch of  his site, hiring web developers, writers and consultants. He spent much reserve funds and still owes tens of thousands for the work. 

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

COVID-19 has taken architect Jeff Mottle’s revenue completely to zero. (Alessandro Michelazzi)

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

Aplayr is an online platform to help tech start-ups hire and manage sales people, especially when they are rapidly scaling up. 

Co-founder Bocar Dia says COVID-19 hit the business hard and fast. as customers hit pause and hiring freezes took hold in the tech sector.

 “For the next six months, any revenue plans we had are out the window.”

Aplayr can’t access CEBA because it was only incorporated in December last year. 

Dia and his partner have raised money and are putting in sweat equity and capital.

‘For the next six months, any revenue plans we had are out the window,’ tech entrepreneur Bocar Dia says. (Thanyarat photography)

They’re not taking any salary and have no payroll though they have hired multiple contractors for projects.  

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

Otherwise, one stark option is “shut down operations and see what happens.”

‘We need businesses to survive’

When the Prime Minister announced the changes to the CEWS program, he spoke of the broad intent of government aid.

“If our economy is to get through this, we need businesses to survive and workers to get paid.”

Small businesses not qualified for the CEBA loans hope changes are coming in time to help them. Tax lawyer Malazhavaya says all these legitimate small businesses pay taxes and contirbute to society and the economy so the way someone structured their business should not be a barrier to accessing an emergency loan program.

“I’m talking businesses who are about to go bankrupt because they can’t pay their rent,” says Malazhavaya “that employer subsidy is not going to help them. What they need is a loan.”

Ghani agrees. “They should open it up,” he says, “You know, don’t limit them, they need their help. Right now they’re struggling, your entire economy shut down.”

Dia adds small businesses are at the centre of the big picture.

“These are the times where, you know, you should rely on your creative people the most and also support them the most, because these are the guys that are going to be … driving the economy once it restarts.”

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