ARCHIVED—Canada Small Business Financing Act: Capital Leasing Pilot Project Summative Review Report

4. Overview of the Canada Small Business Financing Act and the Capital Leasing Pilot Project

In October 1994, the House of Commons Standing Committee on Industry recommended that the Small Business Loans Act be broadened to include a loss-sharing program to capital leases. When it was adopted in 1998, the CSBFA provided the authority to establish a five-year pilot project to test the feasibility of extending the CSBFA-type loss sharing program to capital leasing for equipment.

In designing the pilot project, Industry Canada worked closely with the lease financing industry, primarily through the Canadian Finance and Leasing Association (CFLA); conducted research on the core program and the leasing industry; and explored how changes to project parameters may affect lessor and lessee behaviour. The department attempted to find the right balance between the needs of small businesses, lessors and the government. The pilot project was designed to follow the same general parameters as the core loans program (see Appendix A for a listing of the main parameters), with changes as required to respond to the nature of leases versus loans (e.g. how interest rates are calculated). Certain aspects were also adjusted to take account of the differences in regulatory oversight of the leasing and banking industries (e.g. lessor designation rules are more prescriptive than lender designation rules). Lessors under the pilot project are required to apply the same due diligence requirements as they do for conventional capital leases.

It was expected that pilot project activity levels would be $2.1 billion over the five years (35,000 capital leases). At the time the pilot project was being designed, the leasing industry and small businesses indicated a gap in the marketplace given that approximately 25 percent of all capital leasing applications were rejected and that these rejections were, in large part, related to firms with less than two years of experience and those seeking leases of less than $100,000 (compared with 2004 data indicating a 4 percent rejection rate). Industry Canada also estimated that, at a minimum, 40 lessors would participate in the pilot project.

Industry Canada was mandated to undertake a review of the pilot project prior to its expiry and based on the findings make recommendations to the Minister of Industry on whether capital leasing for equipment should become a permanent part of the core CSBFA program.

The pilot project was officially launched on April 1, 2002 and will expire March 31, 2007. Significant awareness-building activities were undertaken at its launch to encourage participation, including information kits, workshops and information sessions, followed up by a letter of invitation to participate in 2004 in an effort to encourage more lessors to participate.

Eligible Lessors

The definition of a lessor under the CLPP was also developed in consultation with the lease finance industry, primarily through the CFLA, to permit a broad range of leasing companies to participate in the pilot project and to ensure a simple but secure process to approve or designate organizations as lessors under the pilot project. It would include most leasing companies or lease funders and any other financially sound organization with at least five years of experience in capital leasing in Canada.^{Footnote 5}

Eligible Small Businesses

The CLPP is available to for-profit small businesses with gross annual revenues of less than $5 million (it is not available for farming or charitable organizations).

Loss-Sharing Ratio

The CLPP is a partnership between the federal government and the lessors, with the federal government covering 85 percent of eligible losses on registered leases. Lessors administer the leases, applying their normal due diligence practices, and are responsible for 15 percent of any loss.

Contingent Liability

The contingent liability of the Crown to CLPP lessors was capped according to a declining-share formula based on the value of capital leases that each lessor registered under the pilot project. As at September 30, 2006, contingent liability was $12.6 million (3 percent of the $400 million maximum aggregate contingent liability established for the pilot project).

Footnotes

Footnote 5

The definition is as follows:

1. member of the Canadian Payments Association (CPA);
2. member of a central cooperative credit society that is a member of the CPA;
3. leasing company or lease funder operating in Canada and that maintains:
   1. a rating of "BBB" or better issued by a Canadian bond-rating agency; or
   2. participation in a securitization program approved by a Canadian bond-rating agency; and
4. any other organization designated by the Minister (based on the Lessor Designation Policy (LDP)). Key requirements of the LDP include the company providing 5 years of audited financial statements and a minimum of $1 million in assets.

Return to footnote 5 referrer