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Breaking down Ottawa’s new measures to help small businesses with COVID-19

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On Friday, Prime Minister Justin Trudeau announced expanded government measures to help small businesses deal with the economic effects of the COVID-19 pandemic, focusing on payroll pressures and cash flow in an effort to prevent further job losses.

“Our hope is that employers who are being pushed towards laying off people because of COVID-19 will think again,” he said at his daily Ottawa press conference. “And for those of you who have already had to lay off workers, we hope you will consider re-hiring them.” 

But Trudeau said details such as which businesses will be eligible for expanded wage subsidies are still being worked out; the government plans to finalize them by Monday. 

Here’s your guide to what’s in Friday’s announcement.

Talking Point

On Friday, the federal government announced a significant expansion of its wage-subsidy program for small businesses, as well as new Ottawa-backed bank-lending programs. Innovation-economy executives say the measures could help prevent major layoffs, but the number of jobs saved will depend on how they’re implemented. Prime Minister Justin Trudeau and Finance Minister Bill Morneau promised those details are coming by Monday.

A bigger share of salaries

The government will now pay a wage subsidy of up to 75 per cent for “qualifying businesses,” Trudeau said, up from the 10 per cent offered last week. The measure will be backdated to March 15, meaning it will apply to the most recent pay period for many firms due to pay employees next week. 

Over the last week, many startup executives and business groups have said the 10 per cent subsidy wasn’t enough to prevent large-scale job losses. Some firms began making cuts, such as Toronto-based Ecobee, a smart-home-device manufacturer, which laid off one-tenth of its workforce on Thursday. “It’s becoming clear we need to do more, much more,” Trudeau acknowledged Friday.

“The wage subsidy will save jobs and make the recovery, when it comes, much easier,” Andrew Graham, CEO of Toronto-based fintech startup Borrowell, told The Logic. But he added that firms will “need to look closely at the details once they’re shared—for example what businesses qualify and how will the program work.”

Ottawa is unlikely to simply apply its plans for the 10 per cent subsidy to the expanded program. Companies were told to take the amount out of the income tax they’d typically deduct from employees’ cheques and pay to the government. But a 75 per cent allowance is greater than the amount they’d usually remit. 

The existing program was also restricted to firms that are normally eligible for the small-business tax deduction—privately held, Canadian-controlled firms with less than $15 million in assets. It capped the payout at $1,375 per worker and $25,000 per company. Asked to specify the limits for the expanded measure, Finance Minister Bill Morneau said the government would provide “more details in the coming days.” 

“It will be important that the mechanics of this subsidy are not too narrow,” Saad Siddiqui, CEO of Toronto-based commerce startup Bonsai, told The Logic. “The definition of qualifying companies will need to account for the range of direct (e.g. lost revenues) and indirect (e.g. tightening VC markets, changes in customers’ willingness to pay) ways COVID-19 is affecting [small- and medium-sized businesses].”

Finance Canada did not immediately respond to The Logic’s questions about how the government will implement the wage subsidy or which firms will be eligible.

Ottawa’s wage subsidy is now in line with the largest measures announced by OECD governments. For example, Denmark is paying up to 75 per cent of staff salaries, to a maximum of $4,790.26 per person per month. Others have implemented tiered programs based on the size of the economic hit a business has taken. The Netherlands is providing a 90 per cent subsidy to firms that have lost all their revenues, 45 per cent to ones that have seen a drop of half, and so on, said Sarah Kaplan, director of the Institute for Gender and the Economy at the University of Toronto’s Rotman School of Management. “If companies have to lay people off and then expend a lot of time and energy in hiring and training new staff later, this will delay the ability of firms to get back on their feet,” she said.

New credit facilities

Banks will issue loans of up to $40,000 to businesses that show they paid between $50,000 and $1 million in total payroll in 2019. The credit will be interest-free for the first year and backstopped by the federal government. Firms that pay off the balance by the end of 2022 will have a quarter of what they borrowed written off.

The government finalized term sheets for the program with financial institutions on Thursday, said a government source who requested anonymity because they were not authorized to speak publicly.

Last week, the Council of Canadian Innovators (CCI) called for a similar program, under which banks, credit unions and fintech platforms would provide low-interest credit to existing clients for about four years, with the government covering any defaults. “We are pleased that they listened,” said CCI vice-chair John Ruffolo, who described the proposal to Small Business Minister Mary Ng on a conference call. “This will be a huge stabilizing force.”

“The government’s decision to inject short-term liquidity to our [small- and medium-sized businesses] through government-backed loans is critical for Canada’s long-term economic recovery, because expanded wage subsidies alone … aren’t enough to keep Canadian companies afloat,” said Benjamin Bergen, CCI’s executive director.

But the program will also “increase the debt burden of these businesses in the longer term and therefore may still lead them to go out of business,” Kaplan noted. Save Small Business, an advocacy campaign launched earlier this week, issued a similar warning, asking Ottawa instead to fund landlords so they could waive the first $10,000 of commercial rents for the next three months.

Federal policymakers have already tried to free up money for banks to lend. On March 13, the Office of the Superintendent of Financial Institutions reduced the amount of capital that financial institutions are required to hold in reserve, which it estimated would create “in excess of $300 billion of additional lending capacity by the major banks.” 

Ottawa’s agencies backstops 

Companies will be able to get up to $6.25 million in credit from their existing private-sector financial institutions under a new program with the Business Development Bank of Canada (BDC), which will pay up to $5 million of the loan. Export Development Bank of Canada will also guarantee operating credit and cash-flow loans of up to $6.25 million. The programs are capped at $20 billion each. 

Some tech executives expressed concern about the government’s distribution method. “If only ‘financial institutions’ can lend this money, it cuts out many of the thousands of fintechs who are providing loans in alternative ways,” said Sue Britton, CEO of the FinTech Growth Syndicate, a sector consultancy. She said cutting in non-bank providers, particularly online platforms, “would ensure that Canadians across the country, many of whom are sheltering in place, have access to the critical financial assistance.”

The new programs are on top of the $10 billion for the two agencies that Morneau announced on March 13, in one of the government’s first business-focused responses to COVID-19. 

Some small business owners have expressed concerns that the BDC’s implementation of the program makes it difficult to qualify, because it is focused on lending to existing clients and its existing criteria for creditworthiness don’t take into account software firms’ business models. The agency has said it plans to expand eligibility. 

In a Thursday letter to Ng, the Canadian Venture Capital and Private Equity Association called for the BDC to match VC funding up to $2 million in convertible loan notes for startups trying to raise amid the COVID-19 downturn. 

The government’s emergency legislation in response to COVID-19, which took effect Wednesday after a whistlestop passage through Parliament, gives Morneau the power to increase BDC and EDC’s capital until September 30.

Tax time delayed

Companies will also be allowed to defer sales-tax remittances and duties owed on imports to the government until June, a measure Trudeau called “the equivalent of giving $30 billion in interest-free loans to businesses.” Those payments would typically be due next week, at the end of the month or quarter.

Vanessa Serra Iarocci, president of Toronto-based retailer McCarthy Uniforms, said companies will reallocate the deferred tax to paying workers and investing in innovative crisis-response solutions. She hasn’t had to lay off anyone in her 128-employee team, but is operating close to a break-even point. “The objective of being a business has changed in the last [two] weeks,” she told The Logic. “No one is going to be conducting a profit-margin analysis this week. It’s about surviving.”

But Kaplan said June may be too short a timeline. “It looks increasingly likely that the economy will be disrupted through the summer and perhaps, if there is a rebound of COVID later, into the [fall],” she said. “The government should be thinking about measures that take us through the end of 2020.”

Ottawa has already deferred income-tax collection until September 1.

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