The Small Business Financing Program: A Limited Time Offer

By Wraggett, Cathy | CMA - the Management Accounting Magazine, June 1992 | Go to article overview

The Small Business Financing Program: A Limited Time Offer


Wraggett, Cathy, CMA - the Management Accounting Magazine


The Small Business Financing Program, released as part of the February 25, 1992 Budget, contains a potentially life-saving measure for Canadian businesses in financial difficulty. The program reintroduces the small business development bond ("SBDB") and the small business bond ("SBB") programs. Where SBDBs or SBBs are issued as an alternative to conventional borrowings, a significant improvement in cash flow to both the borrower and the lender may result. Implementation of either an SBDB or SBB is relatively simple, requiring only that an election be filed with Revenue Canada. The offer is, however, available only for a limited time; you must act before January 1, 1993 in order to take advantage of these proposals.

Who qualifies

Financing with a principal amount of up to $500,000 for a term of not more than five years can be issued in the form of an SBDB or an SBB, provided the borrower carries on business in Canada and is either a Canadian-controlled private corporation, an individual or a partnership. The obligations must be issued as part of a proposal or arrangement with creditors under the Bankruptcy Act, at a time when the assets of the business are under the control of a receiver, or at a time when the business is experiencing "financial difficulty" and the SBDB or SBB is issued as replacement financing for existing financing that is in default or is potentially in default.

Legislation will not be introduced to determine when a borrower is in financial difficulty. Revenue Canada will likely follow its previous guidelines, as stated in IT-507, in determining financial difficulty. These require that the debt to be replaced with the SBDB or SBB must be in default or in potential default due to a general inability to pay; certain related parties must not be in a position to provide further financing; and the borrower must be unable to obtain other forms of financing from unrelated parties, such as banks.

How the program works

Interest paid on an SBDB or an SBB will be regarded as a dividend such that the borrower loses the ability to deduct the interest expense. While this may be of little consequence to a borrower in financial difficulty, the savings to the corporate lender may be significant, since the interest earned on the obligation will not be taxable. …

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