Here's the update for this week on what changes came through the pipeline. The loan application came out today around 2-3 hours ago and I'm sure all of you received notifications but please read the below very carefully and you will understand my perspective on this matter.
SHORT SUMMARY:
This loan is really meant for people that have employees and had been paying employees on payroll during the 2019 year. If you did have employees and did not pay over $50,000 during the year you do not qualify for the loan. If you want to qualify for this loan I wrote a way to do it at the bottom of this email using #TaxTechniques. If you really want the $40,000 interest free loan you can go for it but it will cost you net/net a total of $862.16 more plus the extra red tape and audit exposure goes up. The loan is available until Dec 31st 2020.
I personally think it makes more sense to apply for any loan using BDC or another bank as it's not only cheaper but you can keep the Dividend tax savings we generated during your year-end process. Direct tax savings are better than going through a lot of red tape with the CRA.
Higher Audit Exposure - I just want to caution anyone applying or taking these government Loans/Benefits. There will be a huge spike increase in Audits starting Oct 2020. If you haven't already done so I would recommend signing up for our Audit Defence Program so you are protected during the anticipated audits. All our monthly clients on our monthly plan are already auto registered so no action required. If you are not registered please be reminded that we charge out $250/hour for Audit support. Typical audits last about 10-15 hours. The cost of Enrollment into the Audit program is a flat $500/per year.
DETAILED ANALYSIS:
Canada Emergency Loan $40,000 Interest Free Government Loan
The Canadian government is providing relief to "Eligible" businesses with a $40,000 loan. The loan will be provided through the big Banks (RBC, Scotia, TD, CIBC, BMO etc).
Once you apply using the big banks portals the government will review your enrollment request and once approved the funds will be in your account within 5 days.
The loan is interest free until Jan 1st 2023. After Dec 31st 2020 the balance of the $40,000 line of credit will be converted into a 5 year loan maturing on December 31st 2025. The interest rate after this period will be 5% per annum
If you pay 75% of the balance of the term before Dec 31st 2022 there is a opportunity to have $10,000 of that initial loan of $40,000 be waived so you only have to pay back $30,000
Basic Requirements needed to get this loan are:
You must be the main director/president of the corporation
Have your Banking Card number
Have your Business postal code
Your Company's T4 Summary for 2019. With a $50,000 payroll minimum.
You need to report Box 14 on the application.
Non Eligible Companies
If your company does not have $50,000 in payroll you are not eligible to apply for this loan. If you had $49999.99 as payroll you are not Eligible for this loan. The Government will be vetting each application as there is a 5 day vetting hold/review.
For clients that we usually do Dividends for, the money taken out for the 2019 year does not count towards the $50,000 payroll amount. We do Dividends because it's always more of a tax advantage to do this as it saves you taxes directly.
If we filed your tax return as Dividends declared/paid you are not eligible as we can't go back and change this now. High audit exposure if we do.
If we filed your tax return as Salary declared/paid you are not eligible if the salary on the T4 summary shows less than $50,000.
How to Become Eligible:
In theory if we haven't filed your 2019 tax return we can turn the Loans taken out during the year into a $50,000 salary which will automatically make you eligible for the program. I have to look into this in more detail but I ran the following calculation to understand if it's worth it for someone to do this.
$50,000.00 Payroll will lead to the following Taxable expenses
$2371.50 would be the Employee portion of CPP
$2371.50 would be the Employer portion of CPP
$7772.00 would be the total Income taxes for Federal and Provincial.
$12515.00 would be the total Taxes that would need to be remitted to the CRA
Assuming you could get a loan at Prime + 1% = 2.95% +1% = 3.95% for the $40,000 your total interest cost on such a loan would be $1652.84 over 2 years amortization.
Option A: (I Want this loan now)
If you want to get this loan but don't have $50,000 payroll declared on your company than you would need to do the following:
1) Have your 2019 corporate taxes filed with the T4 summary.
2) Pay yourself $37,485.00 must see the money actually leaving your account. So a payment from your corporation ABC to John Doe's personal bank account would qualify.
3) Pay CRA $12515.00 immediately to avoid further penalties and interest.
4) Pay the CRA penalty for late filing T4 ($250) will come up on NOA after we file.
5) Apply for this loan online
Total cost of applying for this loan is $12515.00 taxes minus the $10,000 loan forgiveness = $2515.00 total actualized cost. This is the true cost of borrowing.
Option B: (I'll get my own Loan with Jag's help)
1) Take Financial Statements and apply through BDC or other banks and go the traditional route. The total interest you would pay over 2 years is $1652.84 total actualized cost of borrowing.
Analysis:
Taking a loan at Prime + 1% = 3.95% would cost $1652.84 over 2 years amortization. So looking at all variables the initial outlook seems like anyone and everyone is eligible for this interest free loan but the way they have structured it seems like it's only really for people who have employees and are on payroll. Anyone that is not on payroll or did not have employees doesn't really make sense for them to apply as the cost of applying is much higher with a lot of red tape.
Option A is better for cash flow purposes only.
Option B is cheaper by $862.16 ($2515 Minus $1652.84 = $862.16) for financial purposes.
Commentary Learning Point
Just because Justin Trudeau makes a program sound super nice on the news doesn't really mean it's that great of a program for everyone. A lot of businesses will not be eligible for this program and those that do want the program will have to pay higher taxes. The system is rigged. I will follow any changes to this program and let you guys know.
Contact your Accountants today click on this link —> https://capexcpa.com/contact
Entrepreneur Thoughts:
Success is Never owned, it's rented, and the Rent is due Everyday. So keep hustling!
Tough Times Never Last but Tough People Do - Dr. Robert Schuller
Thank you for your attention!
- The Capex Team