Section A: Making a CSBF Loan
3 Borrower, Independent Small Business and Related Borrower
A borrower is a legal entity that carries on or is about to carry on a small business and to whom a CSBF loan has been made. It can be a sole proprietorship, partnership, or a corporation. Regs ss.1(1)
Co-operatives are eligible businesses provided they fulfill the conditions in the definition of "small business" and in particular the following:
- they carry on business in Canada
- their purpose is for profit; and
- they are not engaged in "farming" as outlined in Item 1.2 of this Section.
A trust, whether a personal, private, or social trust, is not a legal entity and, therefore, does not qualify for a CSBF loan.
A holding corporation is not an eligible business under CSBFA. The asset that the holding corporation acquires is not used in the operation of a business but is used by another legal entity who is not the borrower.
3.2 Independent Small Business and Related Borrower
The concepts of related borrower and independent small business were introduced in order to continue to foster small business entrepreneurship and to limit the maximum outstanding loans to related borrowers to $500,000.
Related borrowers (see below) are considered to be operating independent small businesses if the following conditions are met (the independent small business test):
- they are operating separate small businesses at different premises; and
- neither business derives more than 25% of its actual or projected gross revenues from the other
3.2.2 Related Borrower
If an existing borrower and/or potential borrowers are related and cannot pass the independent small business test, they are considered to be one small business and therefore one borrower. In this case, related borrowers are limited to a maximum outstanding loan of $500,000 amongst them, inclusive of any loans already outstanding under the SBLA.
Related borrower refers to any situation in which one borrower:
- controls1, directly or indirectly, the other borrower;
- is controlled, directly or indirectly, by the same person2 or group of persons as the other borrower;
- carries on a small business in partnership with the other borrower;
- shares, for example, administration/management services, equipment, facilities, employees or overhead expenses with the other borrower but not in partnership with the other borrower.
For these situations, the related borrowers are, collectively, eligible to have maximum outstanding loans of up to $500,000. [Regs ss.3(2)
Example: An individual controls three corporations that operate the following businesses within the same premises: a trucking business, a mini-storage business and a fast food restaurant. Because the same individual controls all three corporations, the corporations would be considered related and together eligible for a maximum outstanding loan of $500,000. However, if any of the corporations operates from a different premise and does not derive more than 25% of its revenues from the other corporations, it would be considered an independent small business and eligible for a maximum outstanding loan amount of $500,000. If all three pass the independent small business test, each is eligible for a maximum outstanding loan of $500,000.
It is a question of fact whether borrowers or potential borrowers are related to each other. Where the lender has any doubt, it should contact its head office, regional office or central office for advice.
Apply the independent small business test to determine whether related borrowers are limited to a maximum aggregate outstanding loan of $500,000.
1 Control means the holding of more than 50% of the voting shares in a corporation. (Back to reference)
2 "Person" is used to designate an individual(s), a partnership(s), or a corporation(s).
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