Briefing binder created for the Deputy Minister of Finance on the occasion of his appearance before the Standing Committee on Public Accounts on December 9, 2024 on the Auditor General of Canada's report 8, entitled “Canada Emergency Business Account” - part 9

Ineligible CEBA Loan Holders

Issue

Based on post-payment verifications done by CRA and EDC, approximately 50,500 CEBA loans went to ineligible recipients. The OAG as part of its audit of the CEBA program believes that a significantly higher number of loan recipients were ineligible.

Key points

• Ineligible loan holders are those that received CEBA loans but subsequently failed to demonstrate that they met CEBA eligibility criteria.
• In 2021, a remediation and reclassification process was launched to provide all identified ineligible loan holders an opportunity to demonstrate their eligibility. For example, they could correct their business number (a common error) or upload additional documents.
• After the remediation and reclassification process, the total number of ineligible loan holders was approximately 50,500, representing a value of $2 billion in loans. These are the loans that were identified as ineligible prior to the OAG audit.
• Of the $3.5 billion in loans identified by the OAG as potentially ineligible, approximately $2 billion had been previously identified as ineligible, and nearly $1 billion worth of ineligible loans have been fully or partially repaid.
• Borrowers of ineligible CEBA loans had to repay their loans, in full, on December 31, 2023. As of October 31, 2024, approximately 40% of ineligibles loans identified by EDC had been fully repaid, with approximately 30,300 ineligible loans outstanding, representing a value of $1.1 billion. Of these 30,300 ineligible loans, approximately 11,000 had made partial repayments.
• The Department will work with EDC to consider appropriate follow-up actions to the OAG finding that there may be more ineligible CEBA loan holders.

Anticipated Questions and Answers

1. How many ineligible CEBA loans are outstanding?

As of October 31, 2024, there are approximately 30,300 ineligible loans outstanding representing $1.1 billion, based on the work that EDC has done to date to identify ineligible loan recipients.

It is important to recognize that the outstanding $1.1 billion are all loans and are due back to the government. Since all these loans are ineligible, they are not allowed any forgiveness and will be repaid to some extent. For example, of these 30,300 ineligible loans, approximately 11,000 have made partial repayments, representing $113 million.

2. Can you explain why such a large number of ineligible applicants received CEBA loans?

Right at the onset of the pandemic, to ensure small businesses had access to much needed support, eligibility checks were conducted after the funding was released. As soon as possible, a pre-funding validation process was established, including a website for uploading documentary evidence of eligible expenses and pre-funding checks applicable to payroll stream applicants such as for duplicate business numbers.

All applicants to the non-deferrable expenses stream had pre-funding checks as this stream was introduced in June 2020. The verifications of eligibility in the non-deferrable expense stream involved the review of over a million documents, which was a substantial effort. However, the Department will work with EDC to consider appropriate follow-up actions to the OAG finding that there may be more ineligible CEBA loan holders.

3. Were ineligible CEBA loan holders offered a chance to demonstrate their eligibility?

Yes, two major processes were launched in mid-2021 for ineligible loan holders to demonstrate their eligibility. Financial institutions offered this opportunity to all ineligible loan holders.

1. Remediation process: to change/correct the Business Number associated with a CEBA loan, which was a common error
2. Reclassification: to allow loan holders that originally applied under the Payroll Stream in CEBA 1.0/2.0, and were deemed ineligible under those streams, to requalify under the Non-Deferrable Expenses Stream criteria

EDC, as the program administrator, would be able to provide more information on the eligibility demonstration process for ineligible CEBA loan holders.

4. Does Finance Canada believe that the OAG audit report is correct in suggesting that there are more ineligibles than were previously identified?

Finance Canada does not dispute the fact that there may be more ineligibles than previously identified. However, it is unclear from the sample examined by the OAG whether a significant portion of loan recipients were ultimately ineligible. Some loan holders may be eligible but had simply submitted incorrect or incomplete information as part of their application, and if given a chance to submit additional information would be found to have been eligible.

5. EDC representative (M. Lavery) mentioned that they partially agreed with recommendation 8.4 as they were waiting for FIN policy guidance. Can you expand on that?

Finance Canada was not aware of the ineligibility issues identified by the OAG. Finance Canada will work with EDC to consider appropriate follow-up actions.

This work will include examining legal implications and options to recoup loan forgiveness from these potentially ineligible CEBA loan holders.  We will provide advice to the Minister of Finance, however we understand that a policy decision would eventually be required before EDC undertakes work to identify the full population of ineligible recipients.

6. What actions does Finance Canada expect to take in respect of the ineligible loan holders identified by the OAG?

Finance Canada will work with EDC to consider appropriate follow-up actions. It is not possible to speculate, at this juncture, on which actions may be considered.

7. As the policy lead, was Finance Canada aware of the ineligibility issues found by the OAG, in particular with regards to the NDE stream?

Finance Canada was not aware of the ineligibility issues identified by the OAG. However, we would note that it is not clear to what extent the small number of loans verified by the OAG are actually ineligible or whether those results would apply to the broader population. Finance Canada will work with EDC to consider appropriate follow-up actions.

8. How would Finance Canada qualify EDC's implementation of eligibility checks?

The Department is supportive of the OAG's recommendation to work with EDC to consider appropriate follow-up actions.

Background

The CEBA application process followed one of two streams:

1. the Payroll Stream (applicants with employment income paid in the 2019 calendar year between $20,000 and $1,500,000) or
2. the Non-Deferrable Expense (NDE) Stream (applicants with 20,000 or less in total employment income paid in the 2019 calendar year).

Initially, CEBA was launched with only the Payroll Stream. To get funding out quickly, in the midst of an evolving pandemic, eligibility validations were conducted post-funding.

In June 2020, pre-funding eligibility checks were implemented alongside the Non-Deferrable Expense Stream. This stream allowed businesses with very low payroll expenses to apply based on other expenses.

Remediation and Reclassification

In order to address ineligible loan holders, two major processes were launched in mid-2021: 

• Remediation: to change/correct the Business Number associated with a CEBA loan, a common error
• Reclassification: to allow loan holders that originally applied under the Payroll Stream in CEBA 1.0/2.0, and were deemed ineligible under those streams, to requalify under the Non-Deferrable Expenses Stream criteria

Through remediation and reclassification efforts, applicants were invited to apply to the processes, leading to many successfully resolved anomalies. Resolved anomalies also enabled previously ineligible loan holders to receive the expansion loan.

The ineligible population after the remediation and reclassification process was approximately 50,500 loans, representing ~$2 billion. Additionally, the approval systems, through pre-funding validations, prevented billions in being disbursed to ineligible applicants.

As of October 31, 2024, there are ~30,300 ineligible loans outstanding representing ~$1.1 billion. Of the ~30,300 outstanding ineligible loans, ~11,000 have had partial repayments, representing ~$113 million.

OAG Audit Findings

As part of the audit, the OAG evaluated a sample of applications in the NDE stream and found that some loans should have been determined to be ineligible. The OAG has recommended, in paragraph 24, that EDC and Finance Canada explore the extent of ineligible loan holders and develop options to recoup loan forgiveness from these recipients.

Through its sample analysis, the OAG has identified some businesses that received a CEBA loan based on an incomplete or ineligible application. However, it is possible that, given the opportunity, these businesses would be able to prove that they were eligible. The Department agrees that it is worth undertaking work to determine the extent to which there are additional ineligible loan holders, and has committed as part of its recommendation response to analyzing and evaluating options for recouping the loan forgiveness from this population, to the extent possible.

OAG Sampling Analysis

The payroll stream had a total of approximately 763,000 recipients. EDC identified 50,970 ineligible recipients, and the OAG identified 40 additional ineligible recipients. This resulted in an estimate of 51,010 ineligible recipients for the payroll stream.

The non‑deferrable expenses stream had a total of approximately 135,000 recipients. The OAG representative sampling of 52 recipients resulted in an estimate of up to 26,150 ineligible recipients for the non‑deferrable expenses stream.

The OAG estimates that there were 77,160 ineligible recipients from the two streams combined, or an estimated 9 per cent of total recipients, which would amount to approximately $3.5 billion in total loan value. Of this $3.5 billion in ineligible funding, $2 billion had been previously identified as ineligible, and $1.1 billion has been repaid as of October 31, 2024.