Vol. 150, No. 5 — March 9, 2016

Registration

SOR/2016-18 February 19, 2016

CANADA SMALL BUSINESS FINANCING ACT

Regulations Amending the Canada Small Business Financing Regulations

P.C. 2016-66 February 19, 2016

Whereas, pursuant to subsection 14(3) of the Canada Small Business Financing Act (see footnote a), the Minister of Industry caused a copy of the proposed Regulations Amending the Canada Small Business Financing Regulations, substantially in the annexed form, to be laid before the Senate and the House of Commons on July 22, 2015;

Therefore, His Excellency the Governor General in Council, on the recommendation of the Minister of Industry, pursuant to section 14 of the Canada Small Business Financing Act (see footnote b), makes the annexed Regulations Amending the Canada Small Business Financing Regulations.

Regulations Amending the Canada Small Business Financing Regulations

Amendments

1 (1) Paragraphs 3(1)(h) and (i) of the Canada Small Business Financing Regulations (see footnote 1) are replaced by the following:

• (h) the lender’s acknowledgement that, before making the loan, it verified within the branch where the loan was to be made or, if it has no branches, within its organization, that the outstanding loan amount in relation to the borrower does not exceed the applicable limit referred to in paragraph 4(2)(d) of the Act;
• (i) the borrower’s acknowledgement that the outstanding loan amount in relation to the borrower does not exceed the applicable limit referred to in paragraph 4(2)(d) of the Act;

(2) Paragraph 3(1)(l) of the Regulations is repealed.

2 Section 6 of the Regulations is replaced by the following:

6 (1) Any loan referred to in paragraphs 5(1)(a) to (d) may not be made to finance an expenditure or commitment that arose more than 180 days before the day on which the loan is approved or that was previously financed by a term loan.

(2) The maximum loan term is 15 years for a loan referred to in paragraph 5(1)(a) and 10 years for a loan referred to in paragraph 5(1)(b) or (c), beginning on the day on which the first payment of principal and interest is due.

3 Subsection 10(2) of the Regulations is replaced by the following:

(2) The lender and the borrower may, at any time, agree to amend the terms of the loan or, at the end of a loan term, to renew the loan, to an aggregate maximum term of 15 years for a loan referred to in paragraph 5(1)(a) or 10 years for a loan referred to in paragraph 5(1)(b) or (c), beginning on the day on which the first payment of principal and interest is due.

4 Subsection 14(6) of the Regulations is repealed.

5 Paragraph 25(a) of the Regulations is replaced by the following:

• (a) the loan was made to finance a purchase or improvement that does not fall within the scope of a class of loan referred to in subsection 5(1) or that is not permitted under subsection 6(1);

6 Section 25.4 of the Regulations is replaced by the following:

25.4 If the non-compliance was inadvertent with respect to an outstanding loan amount referred to in any of paragraphs 4(2)(b) to (d) of the Act, the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the amount of the principal outstanding on the loan to which the non-compliance does not relate.

7 Section 28.1 of the Regulations is replaced by the following:

28.1 When the loan term is longer than the applicable maximum term specified in subsection 6(2), the Minister must pay the lender the amount of any loss calculated in accordance with subsection 38(7) if the default referred to in section 36 occurs

• (a) in the case of a loan referred to in paragraph 5(1)(a), before the expiry of 15 years after the day on which the first payment of principal and interest is due; and
• (b) in the case of a loan referred to in paragraph 5(1)(b) or (c), before the expiry of 10 years after the day on which the first payment of principal and interest is due.

8 Paragraph 30(1)(a) of the Regulations is replaced by the following:

• (a) the loan term is not longer than the applicable maximum term specified in subsection 6(2); and

9 (1) Paragraph 33(1)(a) of the Regulations is replaced by the following:

• (a) the purchaser is approved by the lender as a borrower in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the applicable limit referred to in any of paragraphs 4(2)(b) to (d) of the Act;

(2) Paragraph 33(2)(a) of the Regulations is replaced by the following:

• (a) the new partner is approved by the lender as a borrower in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the applicable limit referred to in any of paragraphs 4(2)(b) to (d) of the Act;

(3) Paragraph 33(3)(a) of the Regulations is replaced by the following:

• (a) the remaining partners are approved by the lender as borrowers in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the applicable limit referred to in any of paragraphs 4(2)(b) to (d) of the Act;

10 Subsections 38(2) and (3) of the Regulations are replaced by the following:

(2) Regardless of the nature of the default, a lender must submit a claim for loss within 60 months after the day on which the last payment on the loan is received.

(3) The Minister is authorized to extend the 60-month period if the lender requests the extension before that period expires.

11 (1) Subsection 38.1(2) of the Regulations is replaced by the following:

(2) An additional claim for part of the loss arising from any amount paid as a result of a claim submitted under a deemed trust by the Canada Revenue Agency or by any provincial department of revenue may be submitted after the period specified in subsection (1).

(2) The portion of paragraph 38.1(3)(a) of the Regulations before subparagraph (i) is replaced by the following:

• (a) in the case of an additional claim submitted under subsection (1), by documentation that substantiates

(3) The portion of paragraph 38.1(3)(b) of the Regulations before subparagraph (i) is replaced by the following:

• (b) in the case of an additional claim submitted under subsection (2), by documentation that substantiates

Coming into Force

12 These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Background

The Canada Small Business Financing Program (CSBFP) is a loan-loss sharing program, governed by the Canada Small Business Financing Act (CSBFA) and the Canada Small Business Financing Regulations (CSBFR), which allows the Government to fill a market gap by sharing the risk of lending to small and medium-sized enterprises (SMEs) with financial institutions. The program’s main objectives are

• to help new businesses get started and help established firms make improvements and expand;
• to improve access to loans that would not otherwise be available to small businesses; and
• to stimulate economic growth and create jobs for Canadians.

In April 2014, Industry Canada implemented regulatory changes geared toward improving uptake of the program by alleviating some of the main irritants that limit the extent that lenders offer the program to small businesses; however, it is too soon to assess their impact.

Small businesses face greater challenges accessing financing for a variety of reasons, including having little or no credit history, few tangible assets to use as collateral and more volatile sales and earnings. To address these issues, Budget 2015 announced changes to the CSBFP that would allow more SMEs to apply and facilitate more loans for real property. Legislative changes were passed in June 2015 which increased the eligible firm size from $5 million in annual revenue to $10 million, and the maximum loan amount from $500,000 to $1 million. Stakeholders have reacted positively to these changes. However, regulatory changes are still required to increase the loan term, which would allow SMEs to borrow funds over a longer period of time, ensuring that they are not overburdened by higher loan payments. Once completed, these measures are expected to enhance the ability of small businesses across Canada to secure much needed capital, generating economic growth and job creation.

Issues

These amendments to the CSBFR will address five distinct issues:

• 1) Burdensome loan payments: Currently, the maximum term for CSBFP loans is 10 years, although the repayment of the loan can be amortized over a period longer than 10 years (for example a mortgage on a real property may have a term of 10 years and an amortization of 25 years). However, in such a case, Government of Canada coverage through the CSBFP would end after the current maximum 10-year period, and any outstanding balance would need to be converted to a conventional loan. Historically, some lenders have shown a reluctance to amortize CSBFP loans for periods longer than the term of the loan, and in doing so, may overburden borrowers with higher than necessary repayment costs (due to the shorter repayment period). This, in turn, may increase the risk of default.
• 2) Stringent deadlines for making claims: Following default, lenders have a 36-month period within which to submit a claim. Although lenders are able to submit a request for extension, should they fail to do so within the 36-month period, any subsequent claims would be rejected. Lenders have raised concerns that in more complicated claims procedures, the 36-month period may not be long enough to fully realize on assets and the requirement to submit a request for extension creates unnecessary paperwork burden. In addition, should they fail to submit such a request, the Government would reject their claim for purely administrative reasons. This is a particular problem for small lenders, for whom the realization process following default may take longer to conduct than for larger lenders, occasionally pushing them past the 36-month threshold, and thereby requiring them to request an extension.
• 3) Onerous program requirements on “non-arm’s length” leasehold improvements: In instances where the borrower and landlord are not at arm’s length, the CSBFR require that loans for leasehold improvements be secured with a mortgage on the real property of the landlord where the borrower’s business is located. This requirement was originally put in place to try to avoid the situation where the landlord would benefit from leasehold improvements being done to his property by a non-arm’s length third-party. However, the requirement, which is extremely difficult to verify, has proven to be overly prescriptive and administratively burdensome, given the low level of potential risk. In trying to address a very uncommon situation, it also may impede a small business’ ability to access financing, as it is often difficult to obtain permission to secure a mortgage on someone else’s property. In addition, since April 2014, new risk mitigation measures (the ability to take a personal guarantee for the full amount of the loan) are now in place to address the original intention of these Regulations.
• 4) Consequential amendments: Following recent changes to the CSBFA via the Economic Action Plan 2015 Act, No. 1, the CSBFR, which reference the maximum loan amount stipulated in the Act, need to be amended to reflect the new maximum loan amount for real property loans.
• 5) Reference error: When the CSBFR were amended in 2014, a small reference error was made in the “Additional Claims” section which needs to be corrected.

Objectives

These amendments are part of a proposal, which in addition to the expansion of the term of the loan from 10 to 15 years, also include an increase to the maximum amount of loanable funds for real property and an expansion of program eligibility. Overall, these regulatory amendments are expected to

• give borrowers the option to take loans out for real property over a longer period of time, thereby reducing loan payment amounts; and
• reduce administrative burden associated with claims submissions.

Description

To meet the two objectives stated above, the proposed regulatory amendments to the CSBFR would be required:

• 1) Extending the term of CSBFP loans for real property from 10 to 15 years.
• The text in paragraph 6(b) and subsection 10(2) would need to be amended to allow for a maximum loan term of 15 years for real property loans, while maintaining the maximum 10-year term for all equipment and leasehold improvement loans.
• 2) Extending the claim submission deadline from 36 to 60 months.
• The “36 months” in subsection 38(3) would need to be replaced by “60 months.” As well, subsection 38(2) would need to be replaced by “Regardless of the nature of the default, a lender must submit a claim for loss within 60 months after the day on which the last payment on the loan is received.”
• 3) Simplify leasehold improvement loans where the borrower and landlord are not at arm’s length.
• Repealing the current requirement to secure a mortgage on leasehold improvement loans when the borrower and landlord are not at arm’s length would require deleting subsection 14(6).
• 4) Amending the CSBFR to reflect recent changes to the CSBFA with respect to the maximum loan amount for real property.
• Sections of the CSBFR currently refer to paragraph 4(2)(c), which specifies the maximum outstanding loan amount on CSBFP loans. The Regulations do not explicitly indicate the maximum loan amount; rather, they rely on the Act to do so. Due to recent changes to the CSBFA, enacted in June 2015, the CSBFR would need to be revised to refer to paragraph 4(2)(d), which increases the maximum outstanding loan amount from $500,000 to $1 million for any loans made after the day on which the changes to the CSBFA come into force.
• 5) Correcting an existing reference error.
• Section 38.1, which was redrafted for as part of the 2014 amendments, outlines the situations (and required documentation) under which lenders may submit additional claims. One subsection outlines the procedures for normal additional claims and a second subsection outlines procedures for claims resulting under a deemed trust by the Canada Revenue Agency. The subsection which speaks to normal additional claims incorrectly references actions which take place under a deemed trust claim, and vice versa. This amendment will correct the references contained in this section of the Regulations.

Benefits and costs

The only regulatory amendments in this proposal that are expected to have financial considerations are extending the term on real property loans from 10 to 15 years, and reducing administrative burden [see items 2) and 3) below]. All other amendments are editorial.

Small businesses would have net increased cash flow between the base and regulated scenarios. This would allow these firms to reinvest in their businesses, which would generate additional federal tax remittances, additional salaries and wages paid to new employees, and additional direct and indirect GDP impacts on the economy. The amount of these impacts could not be monetized with accuracy.

Total quantifiable net benefits amount to $2.97 million in present value terms from 2015–2016 to 2033–2034. Total quantifiable benefits amount to $39.09 million in present value terms. Total quantifiable costs amount to $36.12 million in present value terms. Many of these costs and benefits amount to transfers within the economy, thus counterbalancing each other in the overall economy (e.g. administrative fees paid by borrowers and collected by Government, and interest paid by borrowers and collected by lenders and capital markets).

Of all of the regulatory amendments presented in this proposal, only three are expected to have financial implications on stakeholders

• 1) Extending the term of CSBFP loans for real property from 10 to 15 years;
• 2) Extending the claim submission deadline from 36 to 60 months; and
• 3) Simplifying leasehold improvement loans where the borrower and landlord are not at arm’s length.

The detailed cost-benefit analysis, including all calculations and assumptions is available upon request.

Cost-Benefit Statement (see note *)	Base Year	Second Year	Midpoint	Final Year	Total (nominal)	Total (PV) (see note **)	Annual Average (see note ***)
	2015–2016	2016–2017	2024–2025	2033–2034			(2015–2016 to 2033–2034)
A. Quantified impacts (in millions of Canadian dollars, 2015 price level)
Benefits
Government of Canada	$0.01	$0.04	$1.29	$0.09	$14.50	$7.31	$0.76
Lenders	$0.01	$0.06	$2.08	$0.14	$23.22	$11.17	$1.22
Canadian capital markets	$0.01	$0.11	$3.57	$0.24	$39.81	$20.07	$2.10
Total benefits	$0.03	$0.22	$6.94	$0.48	$77.53	$39.09	$4.08
Costs
Government of Canada	–$0.03	–$0.45	$0.23	$0.00	–$2.20	–$2.12	–$0.12
Lenders	–$0.02	–$0.10	$0.01	–$0.05	–$0.97	–$0.67	–$0.05
Borrowers	$0.02	$0.21	$6.92	$0.45	$77.18	$38.91	$4.06
Total costs	–$0.03	–$0.34	$7.17	$0.39	$74.01	$36.12	$3.90
Total net benefits	$0.06	$0.55	–$0.23	$0.08	$3.52	$2.97	$0.19
B. Quantified impacts (in non-dollars)	It is expected that the regulated scenario would result in approximately 10–15 fewer defaults on loans than the base scenario over the 2015–2016 to 2033–2034 period. Consequentially, these businesses, which would not have otherwise been in operation, would generate additional federal tax remittances, additional salaries and wages paid to new employees, and additional direct and indirect GDP impacts to the economy. The amount of this impact could not be monetized with accuracy.
C. Qualitative impacts	Small businesses would have net increased cash flow between the base and regulated scenarios. This would allow these firms to reinvest in their business, which would generate additional federal tax remittances, additional salaries and wages paid to new employees, and additional direct and indirect GDP impacts to the economy. The amount of this impact could not be monetized with accuracy.

• Note *
  Numbers may not add-up due to rounding.
• Note **
  Present value uses an annual discount rate of 7%.
• Note ***
  Annual average values are based on total costs over the entire life of the loans.

The table above conveys the incremental difference between:

• (a) The costs and benefits that would be incurred if this proposal were approved, otherwise stated as the regulated scenario; and
• (b) The costs and benefits that would be incurred if this proposal were not approved, otherwise known as the base scenario.

The analysis was broken down by stakeholders to better define the expected outcomes of the proposal. Stakeholders that may be impacted include the Government of Canada, lenders, borrowers and Canadian capital markets.

For the purpose of these calculations, a 5-year lending period was used for each scenario, with the term of the loan per year being 10 years in the base scenario, and 15 years in the regulated scenario. In both scenarios, lenders make an additional $88 million real property loans to borrowers as a result of the legislative change that increases the maximum loan amount from $500,000 to $1 million.

Lending levels, interest rates, registration fees, rates on administration fees, discount rates, Industry Canada’s share of losses on loans, and lenders’ share of losses on loans were assumed to be the same across both scenarios. The lending period and default rate change across scenarios.

A) Quantified impacts (dollar terms)

Base scenario

Under the base scenario, lenders would make an additional $88 million in CSBFP real property loans with a maximum coverage period of 10 years. It was assumed that the same amount of loans (in number and value) would be made in each fiscal year for five years (from 2015–2016 to 2019–2020), until Government coverage on the last cohort of loans would expire in 2028–2029.

The Government of Canada would receive $26.0 million in revenue resulting from a 1.25% administration fee on outstanding loan balances. As well, the Government of Canada would incur $17.6 million in expenses resulting from paying claims on defaulted loans. (see footnote 3) Under this scenario, it was assumed that the rate at which borrowers defaulted on real property loans was 4%. This was based on current loan default rates.

Lenders would earn $41.2 million in net interest charges on outstanding loans balances. These interest charges are the result of lenders receiving a 6% return on outstanding loan balances, 3% of which is the cost of borrowing from capital markets, 1.25% of which is paid to the Government of Canada in the form of fees, leaving lenders with net revenue of 1.75%. In addition, lenders would incur $3.1 million in expenses resulting from their 15% share of losses on defaulted loans.

Canadian capital markets would earn $70.7 million in net interest charges on outstanding loans balances borrowed by financial institutions. This is generated by financial institutions borrowing funds (which in turn are lent to borrowers) from capital markets at a rate of 3%.

Borrowers would pay $137.9 million in interest charges on the loans over the 10-year life of the loans.

Regulated scenario

Under the regulated scenario, lenders would make an additional $88 million in real property loans with a loan coverage period of 15 years. It was assumed that the same amount of loans (in number and value) would be made in each fiscal year for five years (from 2015–2016 to 2019–2020), until Government coverage on the last cohort of loans would expire in 2033–2034.

The Government of Canada would receive $40.5 million in administration fees. This amount is higher than the base scenario because the amortization period is longer, and the outstanding loan balances would be higher over an extended period of time. As well, the Government of Canada would incur $15.4 million in expenses resulting from paying claims on defaulted loans. Under this scenario, it was assumed that the rate at which borrowers defaulted on loans was 3.5% which is lower than the base scenario because borrowers would be amortizing loans over 15 years, thus decreasing loan payments and reducing financial pressure, thereby decreasing the chance of default.

Lenders would earn $64.4 million in net interest charges on outstanding loans balances. This amount is higher than the base scenario because the amortization period is longer and the outstanding loan balances would be higher over an extended period of time. In addition, lenders would incur $2.7 million in expenses resulting from their 15% share of losses on defaulted loans. This is lower than the base scenario, similar to Government of Canada expenses, as a result of lower expected defaulted loans. Finally, lenders would save $0.6 million as a result of reduced administrative burden from not having to request extensions on claims and not having to arrange mortgages on leasehold improvement loans where the borrower and landlord are not at arm’s length.

Borrowers would pay $215.4 million in interest charges on the loans over the entire 15-year life of the loans. This amount is higher than the base scenario because borrowers would pay more interest charges on higher outstanding loan balances over a longer period of time. Effectively, higher costs would result from the borrowing of funds over an extended period of time, compared to the base scenario. Additionally, borrowers would save $0.3 million as a result of reduced administrative burden from not having to apply for mortgages on leasehold improvement loans when they are closely associated with the landlord.

B) Quantified impacts (non-dollar terms)

There will be approximately 10 to 15 surviving borrowers as a result of increased cash flow, and fewer defaults on loans. These businesses would have a positive impact on the Canadian economy, including additional federal tax remittances, additional salaries and wages paid to new employees, and additional direct and indirect GDP impacts to the economy, the extent to which could not be monetized with accuracy.

C) Qualitative impacts

Borrowers would have increased cash flow as a result of smaller loan payments over a longer period of time and fewer defaults on loans. Potentially, this additional cash flow could result in the growth of these firms, which would have a positive impact on job creation, federal tax remittances, and GDP. The amount of this impact could not be monetized with accuracy.

“One-for-One” Rule

The “One-for-One” Rule applies to some, but not all, of these amendments. More specifically, it is expected that there would be a small reduction in administrative burden for lenders as a result of extending the claim submission deadline from 36 to 60 months. Additionally, lenders and borrowers would experience a small reduction in administrative burden if the requirement to secure a mortgage on loans for “non-arm’s length” leasehold improvements is repealed. The administrative burden estimates in this section are categorized as an “out” — a cost savings for stakeholders. None of the remaining proposed amendments to the CSBFR are expected to result in any change in administrative burden.

The total present value annualized average administrative cost savings for program stakeholders with respect to these amendments would amount to an “out” of $19,087. (see footnote 4)

Cost estimates were obtained by contacting six of the CSBFP’s lenders: Royal Bank of Canada, Toronto- Dominion Bank, Bank of Montreal, Scotia Bank, Desjardins and Assiniboine Credit Union. These financial institutions account for over 80% of total lending under the CSBFP, both in terms of value and number of loans.

Extending the claim submission deadline from 36 to 60 months

It was assumed that extending the claim period from 36 months to 60 months would result in no extensions requested by lenders, as 60 months would be a reasonable amount of time for lenders to perform all duties related to submitting a claim on defaulted loans. Lenders confirmed that, on average, this process currently requires 23.75 minutes (or 0.4 hours), and is generally performed by administrative support staff, account managers and lawyers. Removing this work from lenders would result in a reduction of 35 requested extensions across all lenders, which was the number of requested extensions for claims in 2014–2015. It was assumed that the same number of extensions would be requested each year on an ongoing basis if this amendment was not approved. This requirement would not impact borrowers. Extending the claim submission deadline from 36 to 60 months is expected to save an average of $728 per year (see footnote 5) across all lenders.

Repealing the requirement of a mortgage on loans for “non-arm’s length” leasehold improvements

It was assumed that borrowers and lenders would spend an equal amount of time obtaining and administering the mortgage. Lenders indicated that administration of a typical mortgage of this nature requires 1.75 hours and is performed by a combination of administrative support staff, account managers and lawyers. Due to the broad range of occupations of borrowers, the Canadian average wage was used to calculate their administrative burden with respect to this activity. Repealing this requirement would result in a reduction of 153 mortgages, which was the number or “non-arm’s length” mortgages on leasehold improvement properties that were made in 2014–2015. It was assumed that the same number of mortgages would be needed each year on an ongoing basis if this amendment was not approved. Removing this requirement would save an average of $13,931 (see footnote 6) per year across all lenders and $8,724 (see footnote 7) across all borrowers.

Small business lens

The small business lens does not apply to this proposal, as these amendments will not result in any additional mandatory costs to small business. Any additional costs resulting from interest payments on longer loan terms would be voluntary on the part of borrowers, and not a requirement of the CSBFP.

Consultation

In the last two years, Industry Canada has been active in consulting small businesses and lenders on issues related to the CSBFP and the specific regulatory amendments contained in this proposal.

These amendments were tabled on July 22, 2015, in both houses of Parliament, as required by the Canada Small Business Financing Act. No feedback was received.

Lenders

In 2014, Industry Canada contracted a third party to conduct a Lender Awareness and Satisfaction Survey. The survey included 17 key informant interviews with representatives from eight banks, four credit unions and caisses populaires, and the Credit Union Central of Canada. These representatives included government liaisons, program experts, and risk managers. The following highlights some general findings from those interviews.

• Most institutions agreed that administrative burden could be further reduced and that doing so would likely increase program use.
• Both large banks and credit unions suggested increasing the term of government coverage (exclusively for real estate) from 10 years to between 15 and 20 years.
• Key informants indicated that the eligibility criteria could be improved by allowing for coverage on expenses such as working capital and inventory, in addition to increasing the revenue cap of $5,000,000.
• Lenders asked that the 36-month deadline for claims be examined, as it goes against their normal timelines for realizing assets on defaults, which can take longer than 36 months.

Lenders were also consulted when Industry Canada conducted an evaluation of the CSBFP in 2014. The evaluation included key informant interviews that asked the question: To what extent is the program’s regulatory and legislative framework conducive to use by lenders and borrowers? Some key points that were raised by lenders include the following:

• There are a number of regulatory requirements that are not aligned with the operating environment of lenders.
• The CSBFP’s lack of profitability and heavy administrative burden coupled with claims issues (e.g. only having 36 months to make a claim following the default of a loan) are irritants for lenders that dissuade program uptake and therefore limit its availability to small businesses.

Borrowers

In the fall of 2014, a series of roundtable discussions on small business financing was conducted by Industry Canada. These roundtables consisted of a diverse cross-section of small businesses that encompassed the characteristics of firms that tend to experience difficulty obtaining financing (e.g. start-ups, young owners, women-owned firms, and firms in certain industry sectors).

The following provides a general overview of the discussions, broadly summarizing the views and experiences of participants. The discussions centered on the themes of financing in general, including issues specific to the CSBFP. The following points outline the key messages raised:

• Many businesses indicated that the $500,000 maximum for real property loans is insufficient given that current market prices often range from $1M to $5M depending on the size of space and location.
• Participants indicated that most lenders amortized CSBFP real property loans for a maximum of 10 years — the maximum length of government coverage under the program. Accordingly, extending the maximum length of government coverage for these loans may result in longer amortizations, thereby helping to reduce the carrying costs to businesses.
• Increasing the current revenue cap under the CSBFP (from $5M to $10M) would benefit growing businesses that can quickly exceed the current threshold but still experience financing difficulties.
• A lack of cash flow was identified as an issue that can be detrimental to the ability of start-ups to take advantage of growth opportunities.

Borrowers were also consulted as part of the evaluation of the CSBFP. They were asked to what extent is the program’s regulatory and legislative framework conducive to use by lenders and borrowers. While borrowers took the opportunity to comment on many aspects of the CSBFP, the only comment pertaining to this package of legislative/regulatory amendments was that most borrowers thought that the maximum loan amount of $500,000 was about right, while 17% thought that it should be increased.

Rationale

Budget 2015 announced changes to the CSBFP that would help facilitate small businesses’ access to financing for the purchase of real property by increasing the maximum amount and term of the loans. Legislative changes were enacted in June 2015, which increased the maximum loan amount for real property from $500,000 to $1 million. This regulatory package will allow SMEs to pay this larger loan amount over a longer period of time, mitigating the risk of default. In addition, to address stakeholders’ concerns with respect to administrative burden, this package also includes a few minor additional changes to the Regulations.

• 1) Extending the term of CSBFP loans from 10 to 15 years: In light of the announced increase to the maximum loan amount (from $500,000 to $1,000,000) and the higher payments which may result for some borrowers, the lending term for real property loans should be extended to 15 years to help ensure that borrowers are not overburdened, financially. Although lenders have always been able to amortize loans for periods longer than the maximum 10-year term, some lenders have shown a reluctance to amortize CSBFP loans for periods longer than the term of the loan. Extending the term from 10 to 15 years would result in lower loan payments for borrowers, reducing cash flow pressures and providing them with greater flexibility to grow their business.
• 2) Extending the claim submission deadline from 36 to 60 months and defining the commencement of the claim period: An analysis of claims submission times found that nearly all claims are received within 60 months of default, although the average claim submission time is 13 months — indicating that lenders still make best efforts to be repaid as quickly as possible. Increasing the 36-month period to submit a claim to 60 months would allow lenders more time to submit a claim for loss, and reduce administrative burden. There are no cost/benefit implications associated with this change; however, it is expected that it will make the CSBFP more appealing to lenders.
• Moreover, an amendment would be made to define and clarify the beginning of the claim period. Linking the claim period for all loans to the date on which the last payment was received under the terms of the loan would streamline procedures, ensure consistent interpretation across the country and limit the number of administrative rejections.
• 3) Repealing the requirement of a mortgage on loans for “non-arm’s length” leasehold improvements: In April 2014, amendments to the CSBFR were implemented that allowed lenders to levy a personal guarantee on any loan, including leasehold improvements, in an amount up to 100% of the loan. As a result, the risk associated with landlords potentially benefiting from leasehold improvements from a non-arm’s length party has become minimal. Additionally, this requirement, which is extremely difficult to verify, has proven to be overly prescriptive and administratively burdensome. In trying to address an uncommon situation, it also can impede some small businesses’ ability to access financing, as it is often difficult to obtain permission to secure a mortgage on someone else’s property. Repealing this requirement would reduce red tape for borrowers and lenders.
• 4) Consequential amendments and a reference error: Some additional changes in the CSBFR are required as a result of changes to the maximum loan amount under the CSBFA that were enacted with the Economic Action Plan 2015 Act, No. 1. In addition, an existing reference error needs to be corrected in the CSBFR.

These amendments were born out of extensive consultations with borrowers and lenders and are expected to face little to no negative feedback. If approved, they will modernize the CSBFP by aligning it with the CSBFA, enhance borrower access to real property loans at a reasonable cost, and significantly reduce administrative burden for program stakeholders in the amount of $19,087. (see footnote 8)

Implementation, enforcement and service standards

Industry Canada has been and will continue to work with all CSBFP lenders to ensure a smooth introduction of these changes — this includes early communication and consultation on any revised forms, guidelines and how-to guides. Industry Canada continues to work with lenders to ensure that they have all the necessary administrative tools to prepare for implementation. These amendments will come into force in the winter of 2016.

These amendments will not alter existing compliance and enforcement mechanisms under the Act or the Regulations. Industry Canada conducts compliance reviews during the claims-processing procedure by analyzing the information that the financial institution provided to justify the amount of its claim. In these reviews, Industry Canada verifies whether the loan met the conditions of the program (size of the business, activity, type of asset financed, interest rate, terms of the loan, etc.) and whether the financial institution collected the necessary collateral to secure the loan before submitting its claim. An internal audit, performed by Industry Canada’s Audit and Evaluation Branch in early 2013, found that the program’s governance, risk management and internal control processes support the delivery of the program’s mandate and priorities.

In addition, compliance and enforcement provisions contained in the enabling legislation provide for audit and examination of lenders’ books and records of account on reasonable notice (21 days) and require lenders to cooperate and assist the Minister of Industry, as required. If a lender fails to cooperate, the Minister of Industry may deny liability for any payment otherwise due to the lender. The Regulations provide for fines and/or imprisonment (up to $500,000 and/or five years for indictable offences; $50,000 and/or six months for summary conviction) for a variety of offences under the CSBFA, including the making of false statements in applications and the disposition of assets or use of proceeds of loans with fraudulent intent.

Industry Canada strives for excellence in the service provided to financial institutions and small businesses and has committed to meeting service standards with respect to language of service, response to enquiries, availability, loan registration, claims for loss and client satisfaction. These service standards are available at www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02297.html. These regulatory amendments would have no impact on service standards.

Performance measurement and evaluation

The evaluation of the CSBFP is guided by a performance measurement strategy, which was most recently revised in 2014. Over the course of each five-year lending period, a number of research studies are conducted to assess various facets of the program in order to provide the necessary evidence that is required to complete the evaluation.

The CSBFA requires a comprehensive review report to be completed and laid before each House of Parliament every five years. The review is largely based on the findings of the evaluation report, and helps Industry Canada to monitor and assess the operational and financial performance of the program. This includes the program’s relevance and challenges faced in meeting the financing needs of small businesses, and any changes that may be required to maintain and improve the program. The most recent review of operations from 2009 to 2014 was tabled in April 2015 and can be found at http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la03256.html.

The Canada Small Business Financing Act also requires the tabling of an Annual Report on the administration of the program for each fiscal year. This report contains various statistics and information about the use and operations of the program. The 2013–2014 annual report was tabled on April 1, 2015, and can be found at http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la03257.html.

Contact

Nathalie Poirier-Mizon
Director
Small Business Financing Directorate
Industry Canada
235 Queen Street
Ottawa, Ontario
K1A 0H5
Telephone: 343-291-1755
Fax: 343-291-1837
Email: nathalie.poirier-mizon@canada.ca

• Footnote a
  S.C. 1998, c. 36
• Footnote b
  S.C. 1998, c. 36
• Footnote 1
  SOR/99-141
• Footnote 2
  Total annualized average in constant 2012 dollars.
• Footnote 3
  The Minister’s share of losses on defaulted loans is 85%, while lenders incur the remaining 15%.
• Footnote 4
  Expressed in 2012 dollars.
• Footnote 5
  Expressed in nominal terms (2015 dollars).
• Footnote 6
  Expressed in nominal terms (2015 dollars).
• Footnote 7
  Expressed in nominal terms (2015 dollars).
• Footnote 8
  Total present value annualized average (2012 dollars).