Ottawa could lose more than $5 billion in pandemic loans to small businesses

Export Development Canada headquarters in Ottawa, February 14, 2019.Justin Tang/The Globe and the Mail

Ottawa may not be able to recover $5 billion or more of the $49 billion in emergency loans it gave to small businesses during the pandemic lockdowns, according to a government forecast.

The task of hunting down business owners to collect the mountain of debt created during the pandemic’s most acute phase, when many were struggling to survive widespread shutdowns, was recently handed over to Canada’s Internal Revenue Service by the federal government.

Ottawa announced the Canada Emergency Business Account (CEBA) lending program on April 9, 2020 and transferred more than $49 billion to nearly 900,000 businesses. Each loan is valued up to $60,000 and is interest-free and partially forgivable if the balance is repaid by December 31, 2023.

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However, the scheme had no mechanism to seek out and collect those who failed to repay, and a government intelligence document obtained by The Globe and Mail under the Access to Information Act estimated that loans totaling $5 Billions of possible dollars could be particularly difficult to get back.

It says there may be 100,000 borrowers to be hunted down: 40,000 who shouldn’t have received funds; 50,000 who fail to meet the repayment deadline to claim the forgivable portion; and 10,000 that do not repay in full by December 31, 2025.

The estimate of 100,000 is preliminary and “actual numbers could be higher,” said the July 15, 2021 information note prepared by her staff for Mairead Lavery, the chief executive officer of Export Development Canada (EDC).

EDC, a Crown company, managed the loan program in partnership with financial institutions.

CEBA was the first pandemic assistance the government introduced for small businesses. It was quickly developed and implemented to help many businesses get through the first uncertain months. However, some companies were not eligible and Ottawa tweaked the program several times leading up to the June 30, 2021 application deadline.

After that deadline passed, more than a year after the program was launched, the government’s focus shifted to a new concern: what to do with entrepreneurs who have failed to repay their loans.

“The CEBA program does not have an integrated collections solution,” said the informational note, which also states that the eligibility requirements of the loan did not include consideration of the recipient’s creditworthiness.

The information note states that neither EDC nor the financial institutions would be able to conduct collections.

“EDC does not have the in-house expertise or capacity to collect or enforce thousands of CEBA loans,” the statement said.

“When the CEBA arrangements were negotiated between Export Development Canada (EDC) and the Financial Institutions (FIs), it was agreed that FIs would not undertake full collection efforts and only have a limited duty of care (e.g. two recovery attempts). ”

Mathieu Labrèche, spokesman for the Canadian Bankers Association, said it was appropriate for the government to lead the collection effort as it guarantees the loans and is therefore the real lender.

The briefing note outlines two guiding principles for collections: Fairness, by attempting to minimize undue hardship on borrowers, such as: B. offering repayment plans; and prudence, balancing collection costs against expected benefits to maximize net recovery.

The government has considered various options for the survey, which have been redacted.

In April, the federal cabinet issued an executive order directing the CRA to collect the outstanding loans.

EDC and Mary Ng’s office. The minister responsible for small businesses declined to comment on the story.

Dan Kelly, president of the Canadian Federation of Independent Business, which campaigns for Ottawa on behalf of its 95,000 members, said the government should take action against borrowers who have received money fraudulently.

But he said he has urged Ottawa not to be too aggressive with other collections as some small businesses have incurred hundreds of thousands of dollars in debt during the lockdown.

“I was hoping that the government … would drop plans to pursue these deals,” he said. “It would be disappointing if that weren’t the case.”

However, he believes that loan recipients will be highly motivated to meet the December 31, 2023 repayment deadline as this is the only way to partially forgive the loan.

“I have a strong belief that most business owners who are able to do so will pay the unforgivable part in full so they can keep the $10,000 or $20,000,” Kelly said.

According to the government’s 2021 Annual Financial Report, the most recent available, Ottawa had $45 billion in outstanding CEBA loans and is expected to spend $13 billion on loan forgiveness.

The Auditor-General of Canada noted at the time that outstanding loans would be recorded as assets in the government’s financial statements and that the value of those assets would decline as the loans were written off. “This asset impairment increases the annual deficit,” the Auditor-General’s report said.

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