Covid-19 Business Subsidies from a Family Law Perspective

Author: Patrick McCabe, CBV

Canada’s government response to Covid-19 related business closures in March and April 2020 was swift: businesses were extended interest-free, partially forgivable loans in the form of the Canada Emergency Business Account (“CEBA”) and were extended subsidies intended to retain employees and staff in the form of the Canada Emergency Wage Subsidy (“CEWS”) i. As of January 12, 2022, nearly 900,000 small businesses received CEBA and as of July 3, 2022 there were a total of 4,069,480 approved applications for CEWS. The total dollar value of approved CEWS is in excess of $100 billion.

The CEBA and CEWS programs present unique implications and considerations in regards to family law. Matters with a separation date in 2021 or after will have to deal with the effects of CEBA and CEWS both on an individual’s income and an individual’s share value in a private company.

Shortly after the uncertainty of the early months of Covid-19, many industries returned to normalized operations and business revenues were not dramatically affected in 2020 or 2021. It wasn’t unusual that a company’s revenues in 2020 and 2021 were higher than before the pandemic. Those in the legal profession and associated litigation support services are well-aware that Covid-19 effectively ‘accelerated’ the adoption of remote-work and the use of digital services in the industry.

Experts have recently noted two important conclusions regarding personal income in 2020 and the effects of CEWS extended to businesses:
1) Canadians’ after-tax income surged in 2020 with help from Covid-19 benefits ii
2) CEWS ‘dramatically over-insured businesses’ and ‘subsidized wages for all workers at affected businesses, rather than simply those whose jobs were at risk of being lost.’ iii

Examples
CEBA and CEWS have had a profound impact on business performance in 2020 and 2021.

Consider a company that in 2020 generated a level of revenue similar to pre-pandemic levels. Having applied for and received CEWS, the company’s resulting net income was higher in 2020 than it was prior to the pandemic. A shareholder of the company now likely has a higher level of available income for support than previous years. The question becomes – was it a one-time anomaly or an indication of a higher level of income moving forward.

From a valuation perspective, a similar question arises. The first inclination may be to make a normalizing adjustment to the company’s earnings as the one-time spike in earnings represents an anomaly. However, it is prudent to take a more discerning approach before jumping to a normalization adjustment.

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CEBA offered companies interest-free loans up to $60,000 with up to $20,000 being forgivable. A company may have decided to use CEBA funds to increase its marketing budget or research and development budget in 2020. It is possible that the increased spending resulted in an increase to the company’s revenues that will be reflected moving forward and not as a one-time event.

The company also could have used the funds from CEWS to increase its sales and business development staff. As a result, the company may have signed new service contracts that will result in increased revenue moving forward.

In a few years there will be more information and data to determine if 2020 and 2021 were anomalies or if company performances were affected on an ongoing basis. Much like March 2020, there is currently a lot of uncertainty regarding the Canadian economy moving forward. Valuators and legal professionals will have to make sound decisions regarding the effects of Covid-19 business subsidies on company income and value.

i https://www.canada.ca/en/department-finance/news/2022/01/government-extends-loan-forgiveness- repayment-deadline-for-the-canada-emergency-business-account.html
https://www.canada.ca/en/revenue-agency/services/wage-rent-subsidies/emergency-wage-subsidy/cews- statistics.html
ii https://www.theglobeandmail.com/canada/article-canada-census-income-covid-benefits/
iii https://www.ctvnews.ca/business/covid-benefits-too-generous-with-canadian-businesses-stringent-with- workers-experts-1.6016826