Guidelines

Section A: Making a CSBF Loan

4 Loan Classes

There are four classes of CSBF loan:

• Real property or immovables
• Leasehold improvements
• Equipment
• Registration fees

Regs ss.5(1)]

Where a lender finances two or more classes of assets (e.g., equipment and leasehold improvements) involving the same project and the same loan, it is only necessary to submit one loan registration form rather than a loan registration form for each class of asset. As well, where there is cost overrun, the loan amount can be increased without completing a new registration form. In this way, the lender's reporting, administration fee calculation and claim submission would be on one loan rather than on multiple loans.
[Bulletin – October 2008]

The assets financed must be used for the operation of the small business.

4.1 Real Property or Immovables¹

This type of loan is made when:

• the borrower is or will become the owner of real property or immovables, and;
• the loan will finance the purchase and/or improvement² of the real property or immovables [Regs par.5(1)(a)

Loans to finance real property or immovables are subject to certain limitations:

• The 50% rule: Lenders can finance up to 90% of the eligible cost of real property or immovables, provided the borrower is using, or will be using, at least 50% of the area for the operation of the business within 90 days after the final disbursement under the loan agreement. The 50% threshold is determined using either the proportion of the land or building required by a borrower's eligible operations. The area in excess of the operational area is not subject to the 3-year rule (see below) and can be leased.
  Regs par.5(2)(a); Bulletin – September 1999

  Example: A borrower wants to purchase a business that is located on a parcel of land that includes a building. The borrower will be using at least 50% of the land area, but only 10% of the square footage of the building for its business. In this case the 50% rule would be applied to the land. Alternatively, if the borrower intended to use 50% or more of the building and only 10% of the land, the 50% rule would be applied to the building.

  Any subsequent improvements, whether for the benefit of the entire building (i.e. the roof, foundation, or a central heating system) or within the walls of the operational area being used by the business, are eligible to be financed by a CSBF loan and the 50% rule will not apply. However, any improvements made to the portion of the premises not used for the operation of the business are ineligible.

  Note that the 50% rule does not apply to the construction of real property or immovables. In such situations, only the portion necessary for the operation of the business is eligible for a CSBF loan. Bulletin – September 1999

• The 3 year rule: The rule requires that, at the time the CSBF loan is made, it is not the intention of the borrower to sell, lease or sub lease the operational area for which the loan is made, for the next three years. That is, unless, in the case of lease or sub-lease, the business is defined by Statistics Canada's Standard Industrial Classification, 1980 as one of:

  • mini storage, "479 Other Storage and Warehousing Industries";
  • health care, "86 Health and Social Services Industries"; or
  • hospitality "91 and 92 Accommodation, Food, and Beverage Services Industries".

  Regs par.5(2) (b); Regs ss.5(4)]

  Where a borrower is operating more than one small business, only the business or businesses operating in one of the three (above) specified industries is eligible to finance premises for leasing purposes.

  Example: A doctor who has a medical practice may wish to purchase a building for the purpose of leasing space to physiotherapists. The building purchase would not be eligible because the doctor merely wishes to purchase the building to lease to other businesses, thereby, resulting in the doctor being, for the purpose of the building transaction, in the business of leasing commercial property rather than the health care industry. The doctor's small business that is purchasing the building would, however, be eligible to apply for a loan to purchase equipment the business requires to carry on its operations.

  If the doctor above wished to purchase a building for the operation of a nursing home that met the definition of a small business, the doctor could be eligible for a CSBF loan because the business of operating a nursing home falls within Statistics Canada's Standard Industrial Classification, 1980, category 86 – Health and Social Services Industries. Bulletin – April 2001

  Where the relationship between the borrower and the end user of the premises is that of a licensor and licensee, and the usage of the premises is under a contractual licensing agreement, as opposed to a lease or rental agreement, the financing of the purchase and improvement of premises, is eligible.

  Example: A business that provides office services such as conference rooms, secretarial work, photocopying, etc. and that makes office space available on a short term basis (by the hour, by the day, by the week), would be eligible to obtain a loan to purchase premises or do improvements to premises if the end user of the premises (the licensee), has the right to occupy the premises under a contractual licensing agreement.

4.2 Leasehold Improvement

This type of loan is made when:

• the borrower is or will become the tenant of real property or immovables; and
• the leasehold improvements are being made for the borrower; or
• leasehold improvements made for a tenant by the owner of real property or immovables or by a franchisor, pursuant to a contract between the tenant and the owner or the franchisor; or
• existing leasehold improvements are being purchased from a tenant (the vendor). The CSBFP Directorate defines "existing leasehold improvements" as leasehold improvements belonging to a business carrying on operations at the leased premises prior to the purchase by the borrower.

Regs par.5(1)(b)

The purchase of existing improvements to real property or immovables, where the vendor is a tenant, is eligible, whereas the purchase of existing improvements to real property or immovables, where the vendor is the owner of that real property or immovable, is not eligible.

4.3 Equipment

An asset falls into this class if the loan is made for the purchase, capitalized installation costs, or improvement of equipment (includes construction, renovation, modernization and installation). This class includes the purchase or development of computer software, the purchase of navigational vessels, major repairs (if capitalized), and any equipment used for rental purposes (e.g. videos), as long as they are or will be classified as capital assets and the borrower is in the equipment rental business. Regs ss.5 (1)(c)

4.3.1 Computer software and website development:

Computer software includes:

• off-the-shelf software;
• custom-made software;
• a custom-made computer software system; and
• on-site computer software development

For website development, the following outlines the eligible and ineligible costs:

The computer software and web development costs are eligible provided that the computer software, improvements to the software, or the web site:

• are designed and developed by a specialized contractor/vendor, and;
• the work is pursuant to a contract that specifies the cost, defines specific and measurable characteristics with performances to be delivered, and;
• is scheduled to be operational within one year from executing the contract, and;
• will result in the borrower acquiring ownership or a licence for the use of the computer software or system.

4.4 Registration Fee

All or part of the 2% registration fee may be financed as part of a CSBF loan. It is calculated on the total loan made to finance real property or immovables, leasehold improvements, and/or equipment and must be clearly indicated as a separate class of loan on the line "CSBF Loan Fee Financed" in the Loan Registration form. The $500,000 and $350,000 loan maximums each include the registration fee, if financed. Regs ss.4(1); Regs par.5(1)(d)

Where a loan is made to finance equipment and real property, the registration fee is calculated on the amount of each asset and is taken into consideration in determining not only the $500,000 maximum loan amount but also the maximum of $350,000 for equipment. Therefore, a lender cannot finance the maximum of $350,000 plus the registration fee. The following example illustrates how the financing of the registration fee is factored in the determination of the maximum loan amount:

Table 1

* If the registration fee is financed, this amount is reduced to $340,000 so that the total amount of the loan, including the financing of the registration fee is within the $350,000 maximum loan amount. (Back to reference)
Real Property financed	Equipment financed	Leasehold improvements financed	Registration fee financed	Total loan
$400,000			$8,000	$408,000
	$200,000	$140,000	$6,800	$346,800
$150,000	$340,000		$6,800 ($340,000 x 2%) $3,000 ($150,000 x 2%)	$499,800
$150,000	$350,000 * $340,000 is eligible		6,800 ($340,000* x 2%) 3,000 ($150,000 x 2%)	$499,800

4.5 Examples of Eligible and Ineligible Items for a CSBF loan

The following lists are not exhaustive. When in doubt, lenders should contact their head office, regional office or their central office for advice.

Eligible

• Water supplies and drainage systems
• Display cases
• Moulds used for production
• Dies and jigs
• Landscaping
• Paving of parking areas
• Access sidewalks
• Fences
• Wood lot (timber must be capitalized)
• Architectural, engineering and design fees related to the project being financed with the loan
• An undivided share³ of an eligible asset that is required for the operation of a commercial business (e.g., a 60% share in a building or equipment) where the owners of the asset are or will be operating businesses independent of each other. The financing must be made to the entity carrying on the small business, not to another entity created specifically to own and manage the asset.

Ineligible

• Working capital
• Improvements to a family dwelling for non commercial purposes
• Purchase of shares in a corporation
• Permits & licenses used in the operation of eligible assets
• Franchise fees
• Feasibility studies
• Professional fees (e.g., legal, accounting and appraisal)
• Survey costs
• Building permits
• Vehicles for personal use
• Supplies (e.g., paper, staplers, pens, uniforms, erasers, menus, photocopies)
• Intangibles (e.g., research/ development costs, prepaid expenses, goodwill)
• Improvements to real property or immovables, where the vendor as the owner of that real property or immovable is selling those improvements
• Labour costs of the borrower, its employees, shareholders and directors of a corporate borrower. Regs ss.5(5)

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¹ Throughout these Guidelines, the term "real property" is used in the context of the Common Law while the term "immovables" is used in the context of the Civil Code of Quebec. (Back to reference)

² Improvement includes construction, renovation and modernization of the asset.
Regs ss.1(1) (Back to reference)

³ An undivided share is a full share in an asset, a share that is not separated into parts. In the case of real property or immovables, a person owning property as a tenant in common would have an undivided share of the property. (Back to reference)