Bulletin – October 2006

Questions and Clarifications

1. Amalgamation of borrowers

Is the $250,000 maximum loan limit in sub-section 4(2) of the Canada Small Business Financing Act (CSBFA) contravened if the aggregate balance outstanding of all CSBFA loans previously made to the small businesses that amalgamate exceeds $250,000?

The Small Business Loans Act (SBLA) provided that such an aggregate did not contravene the requirement of the $250,000 maximum loan amount per borrower. However, there is no similar provision in the CSBFA and Regulations.

Sub-section 4(2) of the CSBFA states that a borrower's eligibility and the $250,000 limit must be established at the time the loan is made. The Minister is liable to pay a lender any eligible loss provided the requirements in the Act and the Regulations have been satisfied at the time of the registration of that loan (section 5 of the CSBFA). Therefore, if at the time of an amalgamation, the aggregate balance outstanding of all CSBFA and/or SBLA loans previously made to any of the small businesses that amalgamate exceeds $250,000, the loans held by the new legal entity resulting from the amalgamation continue to be eligible and in compliance with the CSBF and SBL Acts and Regulations.

2. Deemed trust claims in the realization of security for CSBFA/SBLA loans and conventional loans

Are the assets taken as security for a conventional loan subject to the deemed trusts created for the collection of tax debts representing source deductions, GST and provincial sales tax?

Example: A lender makes a CSBF loan secured by a general security agreement and a conventional loan secured by a savings certificate. Subsequently, the borrower ceases to carry on business. The lender sells the business assets and applies the proceeds to the CSBF loan and applies the savings certificate to the conventional loan. The lender receives deemed trust claims from provincial sales taxes and from the Canada Revenue Agency for source deductions.

The lender submits a claim for its losses under CSBFA and claims the full amount of the deemed trust claims it had paid out. The lender is of the opinion that there should be no sharing of the deemed trust claims between the realization of the assets and the savings certificate.

In such a situation, the proceeds resulting from the liquidation of the savings certificate used as security is subject to the deemed trusts created by the Income Tax Act, The Employment Insurance Act, and any Act respecting provincial sales tax. Consequently, these deemed trust claims must be shared proportionately by the security realized on the CSBFA loan and any other conventional loan made to the borrower.

3. Transfer of loans between borrowers

The transfer of a loan between borrowers enables a purchaser to assume responsibility for an outstanding CSBF loan and the original borrower may be released of its obligation (Item 8, Section B Guidelines).

The question has been raised : is the transferee borrower required to meet the requirements of the "small business" definition under the CSBF Regulations?

In paragraph 33(1)(a) of the CSBF Regulations, where a loan is being transferred between borrowers, the lender must approve the purchaser of the assets as a borrower. Such a borrower must carry on a small business (subsection 1(1) CSBF Regulations) and, thus, the business must meet all of the requirements under the definition of small business in section 2 of the CSBFA: the business must be carried on in Canada for profit, its annual gross revenues must not exceed $5 million and cannot be in farming or be a charitable or religious organization.

If you have any comments on the points raised by these questions and clarifications, please feel free to contact us.