'They should open it up': Why some small businesses have been shut out of COVID-19 emergency loan program

Some small businesses desperate to access the federal government's emergency COVID-19 loan program say that $40,000 could save their business, but they don't qualify under the government's rules.

Health clinics, sole proprietors and tiny tech start ups among those who can't qualify for loans

Anna Malazhavaya, a tax lawyer with Toronto based Advotax Law says the CEBA loan program's rules make it hard for many legitimate businesses to qualify. (Alina Rahkman)

While Prime Minister Justin Trudeau announced changes Wednesday to broaden the criteria for access to the Canadian emergency wage subsidy, many business owners are focused on another issue. 

Some small businesses desperate to access the government's loan program known as the Canada emergency business account (CEBA) will not qualify for help under the program's criteria, according to experts.

"Absolutely, it excludes people," said Anna Malazhavaya, a tax lawyer with Toronto-based Advotax Law.

Alex Ghani, an accountant with CPA Solutions in Toronto, said some businesses 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 some serious trouble — if your rent is due and you're given no relief for that."

More than half of small businesses have 4 or fewer employees

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 say 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 27 and is intended to support small businesses struggling with the financial impact of COVID-19.

The $25 billion program offers government-backed loans of up to $40,000, interest-free until the end of 2022, administered by 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 one to four workers, the relatively small $40,000 CEBA loan could have a significant impact.

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 says 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," he said.

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 have a very small payroll.

Even if they could get the government's wage subsidy, that does not help with 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. (Advotax 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 also not 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 who can incorporate and pay themselves with dividends.

For the next six months, any revenue plans we had are out the window- Bocar Dia

Malazhavaya says the minimum payroll requirement should also be eliminated. 

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

Some of the hardest-hit don't qualify

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 such as 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," she said.

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.

Case studies in crisis

A key issue that remains to be resolved is how fast money can be doled out to those who apply.

Here are examples of four businesses that 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," said co-owner Joanna Habbous. "Definitely, the $40,000 loan interest-free would be a huge help." 

Joanna Habbous of Peak Physio and Rehab in Toronto says her business doesn't qualify for the CEBA loan because its sole salaried employee made less than $50,000 last year. (Joanna Habbous)

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.

Forced to close

Edmonton's Tammy Deren, owner of The Photographer Studio, is excluded from CEBA as a self-employed 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 physical distancing orders forced her to close. 

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)

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

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

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

'Surviving by the skin of my teeth'

Three hundred 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."

COVID-19 has taken business owner Jeff Mottle's revenue completely to zero. (Alessandro Michelazzi)

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, Mottle began a relaunch of his site, hiring web developers, writers and consultants. He spent much 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 by the skin of my teeth and going under."

Start-up left out

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,' tech entrepreneur Bocar Dia says. (Thanyarat Photography)

"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.

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 contribute 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," she said. "That 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 now helps Canada secure a dynamic economy in the future.

"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."


James Dunne

Producer, CBC News Business

James Dunne researches, produces and writes stories for the CBC News business unit. Based in Toronto, he's covered business for about 15 years starting with local news, before moving on to the show Venture and co-creating the series Fortune Hunters. His work for those programs won awards at the New York Festivals and Columbus International Film and Animation Festival. James has a master's degree in public policy and administration and has also worked on special projects as well as the World at Six on CBC Radio One. Contact James at

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