Can a CSBFP Loan Pay for the Building or Leasehold Improvements in Alberta?

If you are buying a business in Alberta, the premises are often the biggest piece of the price. You may be buying the building, or you may be taking over leased space that needs a fit-out before you can open under your own name. Either way, you want to know whether government-backed financing can help.

The Canada Small Business Financing Program (CSBFP) is one option. It has real limits, and a few common deal structures fall outside it. This article walks through what it can pay for on the premises side, where the caps sit, and what to check before you rely on it.

This article covers the law of Alberta.

What a CSBFP term loan can pay for

The program separates term loans from lines of credit, and the difference matters for premises. Term loans can cover commercial real property, new or used equipment, leasehold improvements, intangible assets, working capital and the registration fee.

• Commercial real property: the building or land, where you are buying it.
• Leasehold improvements: changes you make to leased space.
• Equipment, new or used.
• Intangible assets, such as the non-physical value in the business you are buying.
• Working capital and the registration fee.

Lines of credit are narrower. They can cover working capital and the registration fee, so they are not a way to fund the building or the fit-out.

Buying an existing business: the cap on the loan

The program can finance the eligible assets of an existing business. Financing is capped at the lower of the purchase price or the appraised value of those assets. If you agree to pay more than the appraisal, the gap is not covered by the program.

There are also overall limits. The maximum financing is $1.15 million in total, made up of up to $1 million in term loans and up to $150,000 in lines of credit. The borrower and lender negotiate the actual amount, so these figures are ceilings, not an entitlement.

Rate caps and fees

The program caps the interest a lender can charge. Variable-rate term loans can be at most prime plus 3%, fixed-rate term loans at most the lender's single-family residential mortgage rate plus 3%, and lines of credit at most prime plus 5%.

The registration fee is 2% of the total loan amount, and it can be financed as part of the loan. Lender fees such as set-up and renewal fees are charged separately and cannot be financed under the program. Plan to pay those from your own funds.

Deal structures that fall outside the program

Some buyers build a deal around this financing and then find it does not fit. The program does not finance share purchases or assets acquired by a holding company, so a share purchase of an Alberta company cannot be funded this way.

Eligibility is also generally limited to businesses with gross revenues of $10 million or less, and farming businesses are excluded.

• Is the deal an asset purchase rather than a share purchase?
• Is the buyer the operating entity, not a holding company?
• Is the business's gross revenue $10 million or less?
• Is it something other than a farming business?
• Is the loan sized to the lower of price or appraised value?

GST on the premises and the fit-out

Financing is only part of the cost picture. Without a going-concern election, each property and service in a business sale is treated as a separate supply, so GST of 5% in Alberta can apply to the taxable parts. Alberta has no provincial sales tax.

A valid election under section 167 of the Excise Tax Act can remove tax on the supplies under the agreement, but not everything. Tax is still payable on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property. The election is also not available where the supplier is a registrant and the buyer is not. If you are buying a building or taking over a lease, budget for possible GST and ask an accountant or lawyer how it applies to your deal.

What to do next

Program terms can change, so check the date on the current Innovation, Science and Economic Development Canada information page before you rely on any limit, fee or rate cap in this article. Then take these steps.

• Confirm with your lender how it would treat the building or the leasehold improvements.
• Ask whether the deal is structured as an asset purchase and whether a holding company is involved.
• Get an appraisal early, since the loan is capped by the lower of price and appraised value.
• Budget separately for lender fees and possible GST.
• Have a lawyer or accountant review the purchase agreement and the GST election before you sign.

Frequently asked questions