Guidelines

Section A: Making a CSBF Loan

5 Eligible Amount of the Loan

All of the following must be considered in determining the amount of the CSBF loan.

5.1 Eligible Expenditures

• 90% Limit: The lender can finance up to 90% of the purchase cost of eligible assets. Regs ss.5(5)
• Trade in: Lenders may use the gross cost of the asset (as if there had been no trade in) to calculate the eligible cost.
• Transportation and installation: Freight and installation, related to the asset being financed, may be included.
• Non refundable taxes: Non-refundable taxes or customs duties may be included as part of the eligible cost of an asset. Eligible cost must not include any refundable items (GST, HST, PST or other). The lender is responsible for ensuring only non-refundable taxes, etc. are included in the amount financed. Regs ss.5(6).
• 180-day rule: When determining the total cost of a project, a lender may include expenditures or commitments made within 180 days prior to the date on which the loan is approved. A non-refundable deposit constitutes both a commitment and expenditure. If an asset is leased under a lease contract that provides an option to purchase the asset, the commitment date is the date the option is exercised.
  Regs ss.6(a); Bulletin – April 2006

  Example 1: A borrower makes a $1,000 non-refundable deposit on a piece of eligible equipment on January 6, the date of the invoice.

  1. The total purchase price is eligible only for a loan approved within 180 days from January 6, that is, July 5.
  2. However, if the $1,000 deposit was made outside the 180 days preceding the loan approval date, only those expenditures made within the 180 days are eligible for financing.

  Example 2: A borrower makes a $1,000 refundable deposit on a piece of eligible equipment. The offer to purchase is conditional upon some condition being met. The key date is the date the contract (offer to purchase, conditional sale contract) becomes irrevocable (i.e., when the condition is met).

  1. The total amount of the purchase is eligible as long as the date that the condition is met (i.e., the offer to purchase becomes irrevocable) is within the 180 days preceding the loan approval date.
  2. If the date the condition is met is outside the 180 days but there are expenditures made within the 180 days preceding the loan approval date, only those expenditures made within the 180 days are eligible

  Example 3: A borrower completely pays for a piece of eligible equipment and the date the expenditure is made is outside the 180 days preceding the loan approval date. The contract had no conditions attached. Because the date the payment is made is both a commitment and expenditure and these fall outside the 180 days, the total purchase price is ineligible

• Decontamination costs: Decontamination costs of real property or immovables are eligible provided:
  • they are made in conjunction with the purchase of real property or immovables that are necessary for the operation of the business
  • they are required under a federal or provincial law;
  • the decontamination plan is disclosed to the lender on or before the day on which the first disbursement of the loan funds is made for the CSBF loan; and
  • the CSBF loan is secured by a first mortgage on the real property or immovables. Regs ss.5(3)

Note: Costs related to the asset financed by the CSBF loan must be reduced by the amount of grants, discount, refunds and reimbursement or any type of applicable credits directly related to the asset.

5.2 Ineligible Expenditures

• Borrower's labour: The cost attributed to the borrower's labour (including employees and shareholders and directors of a corporate borrower) is not an eligible expenditure. Regs ss.5(5)
• Pre-existing term loan: Expenditures or commitments currently or previously financed by the borrower on a term loan are ineligible. The Directorate defines a term loan as any loan with regularly scheduled payments. Bridge financing and a line of credit are not considered term loans. Regs ss.6(a)
• Shares: In the acquisition of shares, the loan is being advanced to a shareholder for the sole purpose of acquiring shares in the corporate entity. Funds are not being advanced to the corporate entity to purchase assets. The CSBF loan is, therefore, being used not to finance an acquisition of assets, but to acquire of shares. The acquisition of shares is not eligible for financing.
• Exchange or barter: Since the asset was already acquired and paid for by an exchange of goods or services, the CSBF loan cannot be used to generate funds for either of the parties involved. The only exception to this rule pertains to trade-ins which serve as partial payment during the acquisition of an asset financed by a CSBF loan.

5.3 Proof of Purchase and Proof of Payment

Eligible expenditures must be supported by proof of purchase (invoices, purchase agreements, etc.). In the event a claim for loss is submitted, proof of purchase and proof of payment documentation must be included as follows:
Regs par.38(4)(a); Bulletin – August 1999

• Cancelled cheque: A cleared cheque, payable to the supplier and accompanied by the invoice, is the preferred proof of payment.
• Debit/Credit Card, Line of Credit: (except from the supplier of the asset): Payment by debit or credit card or through a line of credit is also acceptable. No proof is required to demonstrate that the borrower subsequently paid off the credit card or the line of credit.
• Cash payment: A supplier's invoice stamped "PAID", indicating "IN CASH", or a printed invoice indicating the payment has been made in cash, can be accepted for an amount less than $500.00. The lender must ensure that the stamp was affixed by the supplier, not the borrower.
• Sales contract: Formal executed sales contracts in respect of acquisitions of real property or going concerns, for example, generally make reference to the purchase price paid and contain a section referring to the payment and indicating "receipt whereof is hereby acknowledged." Such an attestation by a lawyer or notary is sufficient proof of payment.
• Attestation: A receipt or an attestation by the supplier to the effect that the invoice has been paid is acceptable. Where the loan disbursement is effected by a lawyer or notary, the CSBFP Directorate accepts a photocopy of the Deed of Sale or Trust Statement confirming that the vendor has been paid.

5.4 Appraisal

5.4.1 Situations Requiring Appraisals

A lender must obtain an appraisal of the market value of the asset, where the borrower:

• Purchases an asset from a person not at arm's length.

  The concept of a party not at arm's length from the borrower is described in section 251 of the Income Tax Act (see Section D of these Guidelines) as persons related by blood, marriage, or adoption (includes father, mother, brother, sister, common law couples) and any situation involving different degrees of control by these persons in businesses where control is a question of fact, not only as a defined percentage.

  If a person, not at arm's length from the borrower, sells the borrower an asset, which it previously purchased from a vendor at arm's length to the borrower, no appraisal is required. Such a transaction must be supported by proof of cost of the assets showing that the price the borrower paid does not exceed the amount that the not at arm's length vendor paid to the original vendor and; the purchase from the original vendor has taken place within 180 days of the date the loan is approved.

• Purchases all or substantially all of the assets of a going concern.

  The term "going concern" is defined as a business that has carried on operations at any time within 60 days prior to purchase or, in the case of a small business that operates on a seasonal basis, during the season prior to purchase. Regs ss.1(1)

  In assessing whether a sale involves "substantially all" of the assets of a going concern, lenders should consider the percentage of total assets being sold, whether the transaction would fundamentally change the nature of the business, and whether the vendor can continue its normal business activities without the assets that are being sold. If the purchaser will carry on the business being sold with the same assets that is the subject of the purchase agreement (e.g., equipment, leasehold improvements, inventory, client lists, telephone etc.), then the sale of such business will be considered that of a going concern. This may apply even if the subject of the sale is only one branch or one location of the vendor.

  The following are also deemed to be purchases of a going concern: a franchisor selling a franchise under its control, and a franchisee selling its franchise business to a new franchisee at arm's length. Bulletin – July 1999

  The Purchase and Sale Agreement of a going concern is for the purchase of specified assets of the vendor (e.g., real property, equipment, leasehold improvements, inventory, goodwill, interest in a franchise, telephone, etc.). The Agreement should set out the allocation of the purchase price for each of the assets. In the absence of such allocation, the lender must provide substantiating documentation setting out such allocation (e.g., the purchaser's opening financial statement, election filed with Canada Revenue Agency etc.). A value set out in an appraisal of the asset(s) will not be accepted as the allocation for the asset(s).

• Purchases, from the lender or its representative, an asset that is or was used to secure a conventional loan.
• Purchases, from a person who is not at arm's length, services to improve an asset and where the estimated cost of the services will represent all or substantially all of the estimated value of the improved assets. This includes services for labour supplied by a person who is not at arm's length from the borrower. Regs s.9; Bulletin – July 1999

5.4.2 Determining Eligible Cost

Where an appraisal is required, the eligible cost will be the lesser of:

• the cost of purchasing or improving the asset, and;
• the appraised value of the asset or improved asset.

Regs ss.9(4)

If the appraisal indicates the value of the assets is within a range of values:

• the purchase cost of the asset will be considered the eligible cost, if the purchase cost is within or below the range value in the appraisal, and;
• the maximum value of the range will be considered the eligible cost, if the purchase cost exceeds the maximum value in the appraisal.

5.4.3 Other Appraisal Requirements

The appraisal must be:

• received by the lender before the loan is approved. If a loan is approved conditional on obtaining an appraisal, the approval date will be the date upon which a valid appraisal is provided. Regs ss.9(1) and (2)
• made not more than 180 days before the CSBF loan approval date. In the event the appraisal is made more than the 180 days, the CSBFP Directorate may accept an update to the appraisal from the same appraiser provided the update is made within 180 days from the date of loan approval, and Regs ss.9(1) and (3)
• made by an appraiser who is a member of a professional association (there are no exceptions where the loan relates to real property or immovables) or Regs ss.9(1) and (2) and (3)
• in the case of an equipment loan or a leasehold improvement loan, where there is no professional association with members qualified to make such an appraisal:
  • for an equipment loan, an appraisal can be made by a supplier of similar equipment, auctioneer, or expert in the field, who is at arm's length from the borrower, is acceptable;
  • for a leasehold improvements loan, an appraisal can be made by a general construction contractor, a construction estimator, an engineer, an architect, a contractor of that specific leasehold improvement (e.g., a plumber, bricklayer etc.), construction consultant and interior designer is acceptable.
  Regs ss.9(2); Bulletin – July 1999

The CSBFP Directorate does not consider the following to be appraisals:

• the book value of the assets, or
• the value assessed by a municipality or other level of government for tax purposes.

Note:

• In all cases, the appraiser must be impartial and at arm's length from the borrower. Where the assets are being sold to the borrower by the lender, the appraiser must also be at arm's length from the lender. Regs ss.9(3)
• Appraisal costs are the responsibility of the borrower. They cannot be included in the CSBF loan or debited to the loan account.