COVID-19 is having a significant impact on Canadian businesses. The following are some strategies we are discussing with our clients:
Business Credit Availability Program
The Government of Canada has announced the establishment of the $10-billion Business Credit Availability Program (BCAP) that will allow the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) to provide additional liquidity to Canadian businesses.
Business Development Bank of Canada
Through the BCAP program BDC will provide working capital loans of up to $2 million to creditworthy borrowers. BCAP loans will be granted to borrowers whose requirements are greater than what they are able to obtain from their existing financial institution. BCAP loans will have a three (3) year term. No payments of principal will be required for the first year the loan. After the first year, 40% of the principal will be payable over the following two (2) years at 20% per year. The remaining 60% of the principal will be payable at the end of the term. BCAP loans will have an interest rate equal to the Variable BDC Base Rate less 1.75% (3.30% at present).
Additional details are expected to be announced in the coming days; however, at present it is expected that BCAP loans will be secured against the assets of the business, and that BDC security will be subordinated to existing loans from the borrower’s financial institution. Personal guarantees from the shareholders or principals may also be required. Standard banking fees are expected to apply (e.g., loan application fees and annual administration fees). It is also anticipated that borrowers will be responsible for BDC legal fees in connection with the preparation of documents in the amount of $500 per loan. There will be restrictions on using the proceeds of BCAP loans to refinance existing debt.
Businesses seeking BDC support through BCAP should contact the financial institutions with whom they have a pre-existing relationship. The application process will require borrowers to complete BDC’s loan application form and submit statements of personal affairs for each owner. Borrowers should also be prepared to provide an organizational chart showing how each owner’s interest in the business is held, the financial statements for the most recently completed three (3) financial years of the business, interim financial statements if the year-end financial statements are older than three (3) months, and projections and/or cash flow forecasts. In addition, business should be prepared to discuss: (a) their anticipated activity level over the next six (6) months, (b) key carrying costs for the next six (6) months, (c) whether existing available credit (including the BCAP loan) will cover cash needs for the next six (6) months, and (d) key customers and suppliers and their respective payment terms.
Further information is expected to be posted to the BDC dedicated hub outlining their programs for businesses impacted by COVID-19.
Export Development Canada
Details regarding EDC’s role in BCAP are still emerging. EDC continues to offer a number of solutions aimed at assisting business manage risk, secure financing and maximize working capital; however, at this stage it is unclear how BCAP will augment or facilitate access to these solutions. It is most likely that EDC support will be aimed at exporters, in line with their overall mandate. Further information is expected to be posted to the EDC website outlining their programs for businesses impacted by COVID-19.
BDC COVID-19 Working Capital Financing
Business Development Bank of Canada (BDC) has announced a special loan program to provide creditworthy Canadian business with up to $100,000 working capital financing required as a result of the economic impacts of COVID-19.
Loans will be amortized on a straight-line basis over five (5) years at an interest rate equal to the Variable BDC Base Rate – 1.75% (presently 3.30%). No payments of principal will be required for the initial six (6) months of the loan and there will be no processing, stand-by, cancellation or prepayment fees; however, an annual loan administration fee of $150 will be applicable. In addition, there will be no annual financial reporting requirements and shareholders will not be required to grant security over personal assets (security may be required against business assets).
In order to be eligible, borrowers must have been generating revenues for at least 24 months, have commercial operations in Canada, and have Canadians involved in the decision-making process in Canada. Bars, lounges or similar establishments; gaming operations (casinos, bingo halls, racetracks, on-line gaming sites, etc.); pawnshops, rent-to-own firms, pay day loan companies, cheque discounting centres or similar quasi-financial institutions are not eligible.
Interested borrowers may apply online.
Further information is expected to be posted to the BDC dedicated hub outlining their programs for businesses impacted by COVID-19.
Additional Available Credit
The Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada responsible for regulating and supervising federally regulated financial institutions, announced it is lowering the Domestic Stability Buffer by 1.25% (from 2.25% to 1.00%). Changes to the Domestic Stability Buffer impact the amount of capital required to be held by certain financially regulated financial institutions to protect against risks to the financial system. It is estimated that lowering the Domestic Stability Buffer will allow Canada’s financial institutions to inject $300 billion of additional lending in to the Canadian economy.
The Government of Canada and OSFI have made clear that such additional lending capacity is to be used by financial institutions to support Canadian businesses and households. While the full impact of lowering the Domestic Stability Buffer will take time to manifest itself in the lending practices of financial institutions, Bank of Montreal, CIBC, National Bank of Canada, Royal Bank of Canada, Scotiabank and the Toronto-Dominion Bank are all offering payment deferrals for mortgages and the opportunity for relief on other credit products.
Businesses facing financial challenges as a result of COVID-19 are encouraged to contact their financial institution for more information.
Temporary Wage Subsidy for Employers
The Government of Canada has announced the Temporary Wage Subsidy for Employers. The Temporary Wage Subsidy for Employers is a three (3) month measure to assist eligible employers by reducing the amount of payroll deductions required to be remitted to the Canada Revenue Agency (CRA).
Eligible employers must be: (a) a non-profit organization, registered charity, or a Canadian-controlled private corporation (CCPC); and (b) have an existing business number and payroll program account with the CRA as of March 18, 2020. CCPCs are only eligible for the subsidy if their taxable capital employed in Canada for the preceding taxation year, calculated on an associated group basis, is less than $15 million.
In order to qualify for the subsidy, eligible employers must pay salary, bonuses or other remuneration to an employee between March 18, 2020 and June 20, 2020. The subsidy is 10% of the remuneration paid between March 18, 2020 and June 20, 2020, up to $1,375 per employee to a maximum of $25,000 per employer. For example, an eligible employer with ten (10) employees can receive a maximum subsidy of $13,750 depending on the remuneration paid between March 18, 2020 and June 20, 2020. An important note is that associated CCPCs (i.e., CCPCs controlled by the same person or group of related persons) will not be required to share the maximum subsidy of $25,000 per employer. In other words, if a family of companies consists of different eligible employers each with their own payroll account, each eligible employer within the family would be entitled to a wage subsidy of up to $25,000.
Once an eligible employer has calculated the subsidy to which it is entitled, it may reduce its remittance of federal, provincial, or territorial income tax by the amount of the subsidy commencing the first remittance period that includes remuneration paid between March 18, 2020, and June 20, 2020. Employers are not permitted to reduce the remittance of Canada Pension Plan contributions or Employment Insurance premiums. If the deducted income taxes do not offset the value of the subsidy in a specific period, eligible employers can reduce future remittances, including remittances that fall outside of the application period (i.e., after June 20, 2020). The subsidy will be considered taxable income in the year it is received.
Further information concerning the Temporary Wage Subsidy for Employers can be found here.
Extensions to Tax-Filing and Payment Deadlines
The Government of Canada announced that the deadline for businesses to pay any income tax amounts owing or due after March 18, 2020 and before September 1, 2020 has been extended to September 1, 2020. This relief will apply to monthly instalments and year-end tax balances due under Part I of the Income Tax Act. As a result of these measures, businesses will not be assessed any penalties or interest if the balance due is paid by September 1, 2020. In addition to the foregoing, the Canada Revenue Agency (CRA) has announced that it will postpone the initiation of post assessment GST/HST or Income Tax audits for the next month for small or medium businesses. For the majority of businesses, the CRA will temporarily suspend audit interaction with taxpayers and representatives.
Temporary Lay-offs
Numerous employers are considering temporary layoffs of employees as a result of the impacts of COVID-19. Ontario employment standards legislation permits employers to temporary layoff employees for a limited period of time without terminating the employment relationship. An in‑depth analysis of issues employers should consider when contemplating temporary layoffs of employees is available on our website.
Additional Sources of Financing
Business seeking additional financing beyond traditional loans and lines of credit granted by financial institutions may wish to consider these other available sources of capital:
- Receivables Financing: Receivable financing allows businesses to borrow against accounts receivable owing from customers. Based on payment history, lender may lend up to 90% of the value of customer invoices within one (1) business day of the invoice being generated. Receivables financing is typically available to business that sell to other businesses and have low customer returns and disputed invoices. Fees and interest rates for receivable financing facilities are higher than conventional business loans.
- Receivables Factoring: Receivable factoring is similar to receivable financing in that it is based on accounts receivable owing from customers. The principal difference between receivable financing and receivable factoring is that with the former the borrower retains control and responsibility for collection of accounts receivable and the lender takes an assignment of such receivables as security for the loan. With receivables factoring, the factoring company purchases accounts receivable and is responsible for their collection. Receivables factoring is typically structured such that the factoring company pays a percentage of the account receivable upfront and then the balance, less their fees, once the amount is collected from the customer. Receivable factoring may be employed where the accounts receivable have been outstanding for longer periods of time and would not be eligible for receivable financing. Fees for receivable factoring tend to be higher than receivables financing.
- Equipment Loans: Businesses requiring additional capital to financing the purchase of equipment may be able to seek financing from equipment manufacturers or third party lessors. While equipment loans must be used to acquire the specific equipment for which the loan is advanced, they can nonetheless assist by making available cash that would have otherwise been used for equipment purchases. Equipment loans are secured against the equipment being purchased and typically have interest rates that are higher than those rates offered by traditional lenders.
- Merchant Cash Advances: Merchant cash advances enable businesses that accept credit or debit card advances to obtain an advance against the funds that regularly flow through the business’ merchant account. Merchant cash advances are typically based on monthly revenue and daily credit and debit card receipts. Rates on a merchant cash advances are higher than conventional business loans, but may be available to businesses that do not qualify for a business loan, but have a stable inflow of credit and debit card payments.
Force Majeure Clauses
Force majeure clauses are provisions in commercial agreements that excuse non-performance by a party due to circumstances beyond its control. Even where a commercial agreement does not contain a force majeure clause, a party may be able to rely on the doctrine of frustration for relief. An in-depth analysis of the impact of COVID-19 on contractual obligations is available on our website.
Insurance Coverage Issues
Business interruption insurance is intended to pay for loss of business income and additional expenses in the event a business suffers a loss due to unexpected events. Business interruption insurance may be “named perils” or “all risk” (also known as a comprehensive policy). A name perils policy provides coverage only for specific events listed in the policy, such as flood, earthquake or fire. In contrast, an all risks policy provides coverage for all events other than events specifically excluded from the policy. All risk policies are more expensive than named perils policies due to the greater scope in coverage provided.
However, even where coverage is written on an all risk basis, business interruption policies do not typically provide coverage for business interruption due to a pandemic such as COVID-19 as most policies only provide coverage where there is a direct physical loss of or damage to the covered property. For example, if a covered cause (e.g., a fire) resulted in damage to a manufacturing facility causing production to shut down, the coverage would cover the lost income until the damage is repaired and production can be restored; however, there would not be coverage where there was no direct physical loss of or damage to the manufacturing facility. Notwithstanding the above, insured businesses should carefully review their policy and consider whether coverage is available and should consult with legal counsel should they have any questions as policies can vary in their language.
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The foregoing has been prepared for clients of Pallett Valo LLP. While every effort has been made to ensure accuracy, the information contained herein should not be relied on as legal advice; specific advice should be obtained in each individual case. No responsibility for any loss occasioned to any person acting or refraining from action as a result of material herein is accepted by the authors or Pallett Valo LLP. If advice concerning specific circumstances is required, we would be pleased to be of assistance. Pallett Valo LLP will, upon request, provide this information in an accessible format. © 2020 Pallett Valo LLP. All rights reserved.