Vol. 148, No. 4 — February 12, 2014

Registration

SOR/2014-7 January 29, 2014

CANADA SMALL BUSINESS FINANCING ACT

Regulations Amending the Canada Small Business Financing Regulations

P.C. 2014-17 January 28, 2014

Whereas, pursuant to subsection 14(3) of the Canada Small Business Financing Act (see footnote a), the Minister of Industry has 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 on October 18, 2012 and laid before the House of Commons on October 17, 2012;

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. Subsection 1(3) of the French version of the Canada Small Business Financing Regulations (see footnote 1) is replaced by the following:

(3) Pour l’application du présent règlement, la date à laquelle un prêt a été consenti correspond à la date de la première remise de fonds par le prêteur.

2. Subsection 2(1) of the French version of the Regulations is replaced by the following:

2. (1) Sous réserve du paragraphe (2), tout prêt doit être enregistré dans les trois mois suivant la date à laquelle il a été consenti.

3. (1) Paragraphs 3(1)(h) to ( j) of the Regulations are replaced by the following:

(2) Section 3 of the Regulations is amended by adding the following after subsection (1):

(2) If a loan registration form is transmitted by electronic means, it must include the electronic signature of the lender and contain the information set out in paragraphs (1)(a) to (l) and the following:

(3) For the purposes of subsection (2), “electronic signature” has the same meaning as in subsection 31(1) of the Personal Information Protection and Electronic Documents Act.

(4) A loan registration form must not be transmitted by electronic means unless it is transmitted through a designated secure electronic registration system.

4. (1) Subsection 4(7) of the Regulations is replaced by the following:

(7) With each payment made under subsection (2), the lender must submit a statement that substantiates the basis on which the payment was calculated.

(2) Paragraph 4(8)(a) of the Regulations is replaced by the following:

(3) The portion of subsection 4(10) of the Regulations before paragraph (a) is replaced by the following:

(10) On application by a lender, made within one year after the day on which the loan is made, the Minister must

5. Subsection 5(5) of the Regulations is replaced by the following:

(5) The cost of purchasing or improving the equipment, real property, immovables or leasehold improvements financed by a loan referred to in any of paragraphs (1)(a) to (c) must not include the cost of labour provided by the borrower or the borrower’s employees but may include the cost of labour provided by any subcontractor.

6. The portion of section 8 of the French version of the Regulations before paragraph (a) is replaced by the following:

8. Pour consentir et administrer un prêt, le prêteur doit suivre les mêmes procédures que celles qui s’appliquent à un prêt ordinaire d’un montant équivalent, notamment, avant que le prêt soit consenti :

7. (1) The portion of subsection 9(1) of the Regulations before paragraph (b) is replaced by the following:

9. (1) The borrower must, before the loan is approved, provide to the lender from, subject to subsection (2), an appraiser who is a member of any professional association that is recognized under a federal or provincial law and who is at arm’s length from the borrower, and, in the case of assets described in paragraph (c), from the lender, an appraisal, made at any time within 180 days before the loan is approved, of the value of the assets or services intended to improve the assets, as the case may be, if a borrower uses, or intends to use, all or part of a loan to purchase

(2) Subsection 9(3) of the Regulations is repealed.

8. Subsection 10(1) of the French version of the Regulations is replaced by the following:

10. (1) Au plus tard à la date à laquelle le prêt est consenti, le prêteur et l’emprunteur doivent signer un document dans lequel figurent le montant principal du prêt, le taux d’intérêt applicable, les modalités de remboursement, la fréquence des paiements de principal et d’intérêts et la date d’échéance du premier paiement de principal et d’intérêts.

9. The portion of section 12 of the French version of the Regulations before paragraph (b) is replaced by the following:

12. Le taux d’intérêt annuel maximal à payer pour un prêt — à la date à laquelle il a été consenti, à la date de son renouvellement ou de la modification de sa durée, ou à la date de la signature du document dans lequel figurent les modalités du prêt consenti ou renouvelé, ou la durée modifiée — ne peut dépasser :

10. Subsection 13(1) of the Regulations is amended by striking out “and” at the end of paragraph (b), by adding “and” at the end of paragraph (c) and by adding the following after paragraph (c):

11. The portion of subsection 14(4) of the French version of the Regulations before paragraph (a) is replaced by the following:

(4) Si, dans les trente jours précédant ou suivant la date à laquelle le prêt a été consenti, le prêteur consent à l’emprunteur un ou plusieurs prêts ordinaires à terme pour financer un achat ou une amélioration qui serait admissible à un prêt, le prêteur :

12. Paragraph 19(1)(a) of the Regulations is replaced by the following:

13. The portion of section 25 of the Regulations before paragraph (a) is replaced by the following:

25. If the non-compliance described in any of the following paragraphs was inadvertent, 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 principal outstanding on the loan to which the non-compliance does not relate:

14. (1) The portion of subsection 25.1(1) of the Regulations before paragraph (a) is replaced by the following:

25.1 (1) Despite the fact that the requirements with respect to appraisals set out in section 9 or subsection 16(2) have not been satisfied in respect of a loan, the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of the loan if

(2) Paragraph 25.1(1)(b) of the Regulations is replaced by the following:

(3) Subsection 25.1(3) of the Regulations is replaced by the following:

(3) Despite the fact that the lender has not provided the documentation referred to in paragraph (1)(b), 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 principal outstanding on the loan to which the non-compliance does not relate.

15. The portion of section 25.2 of the French version of the Regulations before paragraph (a) is replaced by the following:

25.2 Bien que le contrat de prêt ne contienne pas toutes les modalités mentionnées à l’article 10, le ministre indemnise le prêteur de la perte résultant du prêt, calculée conformément au paragraphe 38(7), si les conditions suivantes sont remplies :

16. Section 26 of the Regulations is replaced by the following:

25.3 Despite the fact that the primary security taken by the lender is not enforceable, the Minister must pay the lender the amount of any loss resulting from the loan, calculated in accordance with subsection 38(7), on the portion of the amount of principal outstanding on the loan to which the non-compliance relates if

25.4 If the non-compliance was inadvertent with respect to the outstanding loan amount referred to in paragraph 4(2)(b) or (c) 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.

26. (1) Subject to subsection (3), in the case where the requirements with respect to guarantees and suretyships set out in sections 19 to 22 were not satisfied in respect of a loan made before April 1, 2014, the Minister must pay the lender the amount of any loss resulting from the loan, calculated in accordance with subsection 38(7) if

(2) Subject to subsection (3), in the case where the requirements with respect to guarantees and suretyships set out in sections 19 to 22 were inadvertently not satisfied in respect of a loan made after March 31, 2014, the Minister must pay the lender the amount of any loss resulting from the loan, calculated in accordance with subsection 38(7), less the guarantee and suretyship taken but not realized due to the non-compliance.

(3) In the case where the lender has taken a secured personal guarantee or suretyship, the Minister must pay the lender the amount of any loss resulting from the loan calculated in accordance with subsection 38(7) if

17. Subsection 27(1) of the Regulations is amended by striking out “or” at the end of paragraph (c) and by replacing paragraph (d) with the following:

18. Subsection 29(1) of the Regulations is replaced by the following:

29. (1) A lender may assign a loan to another lender at the request of the borrower if the Minister’s liability under subsection 6(2) of the Act in relation to the remaining loans of the transferor does not, as a result of the transfer, exceed the amount already paid by the Minister to the transferor.

19. Section 31 of the Regulations and the heading before it are replaced by the following:

AMALGAMATION OF LENDERS AND OTHER ACTIONS RELATING TO LENDING

31. (1) Before undertaking any of the following actions, the lender must notify the Minister in writing of their intention to undertake the action and of the day on which it is to take effect:

(2) When an action set out in paragraph (1)(a) takes effect, the Minister’s liability under the Act in respect of losses sustained by the amalgamating lenders as a result of loans made by them continues in respect of losses sustained by the new lender as a result of those loans and

(3) When an action set out in any of paragraphs (1)(b) to (d) takes effect, the Minister’s liability under the Act continues in respect of losses sustained by the transferee lender as a result of those loans and

20. Section 32 of the Regulations and the heading before it are repealed.

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

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

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

22. Section 36 of the Regulations is replaced by the following:

36. The outstanding amount of the loan becomes due and payable and the borrower is in default as of the day on which the borrower fails to comply with a material condition of the loan agreement.

23. Paragraph 37(4)(a) of the Regulations is replaced by the following:

24. Subparagraph 38(4)(a)(i) of the Regulations is replaced by the following:

25. The Regulations are amended by adding the following after section 38:

ADDITIONAL CLAIMS PROCEDURE

38.1 (1) If the Minister has paid the lender the amount of any loss, calculated in accordance with subsection 38(7), the lender may, within the applicable period set out below, submit an additional claim for part of the previously unclaimed loss if the failure to respect the deadline for claiming that part of the loss was inadvertent:

(2) Despite subsection (1), 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 time period specified in subsection (1).

(3) An additional claim for part of the loss must be certified by the lender and be accompanied

26. (1) Subsection 39(2) of the English version of the Regulations is replaced by the following:

(2) The Minister must pay the interim claim as if the lender had fully implemented the compromise settlement or fully realized the guarantee or suretyship at the time the interim claim is submitted.

(2) Subsection 39(5) of the English version of the Regulations is replaced by the following:

(5) If, after the interim claim is paid, the lender, by fully implementing the compromise settlement or fully realizing the guarantee or suretyship, recovers less than 100% of the compromise settlement, guarantee or suretyship, the lender may submit a final claim under section 38 for the difference.

27. Section 40 of the Regulations is amended by adding the following after subsection (2):

(3) The payment made to the Minister under subsection (2) is to be taken into account in determining the losses sustained by the lender on loans made after March 31, 2009 when calculating the Minister’s limit of liability with respect to the lender under subsection 6(2) of the Act.

28. The French version of the Regulations is amended by replacing “la date de l’octroi du prêt” with “la date à laquelle le prêt a été consenti” in the following provisions:

COMING INTO FORCE

29. (1) These Regulations, except for subsection 3(2), come into force on April 1, 2014.

(2) Subsection 3(2) comes into force on the day on which these Regulations are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issues: The Canada Small Business Financing Program (CSBFP) is a loan-loss sharing program, governed by the Canada Small Business Financing Act (CSBF Act) and the Canada Small Business Financing Regulations, which allows the Government to fill a market gap by sharing the risk of lending to small businesses with financial institutions.

During the past 10 years, the number of CSBFP loans made to small businesses has declined by over 55% (30% by value). Lenders’ use of the program to make loans to small businesses is declining due to the high level of administrative burden and lack of profitability of loans associated with the program. In order to ensure the long-term viability of the program, maintain the program’s relevance, and ensure continued access to financing for small businesses, measures to modernize the CSBFP are necessary.

Description: The fundamental goal of the proposed package is to enhance the availability of financing to small businesses, particularly start-ups. New efforts to strengthen the partnership with the lending community and other stakeholders will encourage uptake and increase program awareness among businesses. This proposal also contains modest measures to contain the program costs and maintain fiscal responsibility.

Financial institutions that offer the CSBFP have repeatedly stated that the additional administrative requirements to issue Canada Small Business Financing (CSBF) loans, and limits on what fees and interest rates can be charged to small business borrowers, act as major deterrents to using the program. In order to enhance small business access to financing through CSBFP loans, these impediments must be alleviated.

In response to these concerns, lenders will be allowed to charge conventional fees at a rate of no more than what they charge for conventional loans of the same amount. The maximum allowable interest rate remains unchanged at prime plus 3%. Administrative burden will be reduced for small business borrowers and lenders by reducing the amount of proof of purchase paperwork required while still meeting accountability requirements. In order to accomplish this, the maximum financing limit will be deregulated, thus eliminating the requirement for lenders to prove that this maximum was not exceeded, and aligning requirements with conventional lending practices. Lenders often finance amounts less than the maximum percentage of assets allowed and it is not expected that this practice will change. Also, the regulatory amendments allow for an unsecured personal guarantee to be taken for the full amount of the loan. This is a key fraud prevention tool and provides an incentive to borrowers to make best efforts to pay off the loan. Finally, in the case of a default where security is not enforceable, provided the lender presents proof that they acted diligently by doing a site inspection, the Minister will share in the loss with the lender. A number of other minor miscellaneous technical amendments are also being enacted in order to ensure that the program is operating effectively and efficiently.

Cost-benefit statement: Industry Canada estimates increased program uptake of $60 million in new loans per year, bringing the total to $1,010 million up from $950 million in the base case scenario, where no regulatory changes are made. Increased use of the program will result in approximately 465 additional loans per year, bringing the total number of loans to 7 855 each year.

The proposal is estimated to result in a total net benefit of $109.7 million from 2013–14 to 2022–23. Total benefits are estimated to be $211.0 million while total costs are forecast to be $101.3 million. Overall, the benefits would exceed costs at a ratio of 2:1.

An increase in lending to small businesses is in turn expected to improve business viability, as demonstrated through higher sales revenue growth, increased probability of survival and higher growth in business investment for the incremental number of firms that received loans. Additionally, an average of 430 full-time equivalent (FTE) jobs are expected to be created or retained for a one-year period and it is estimated that approximately 25 firms will stay in business for one more year than they would have otherwise. Total benefits to Canadian businesses are expected to be $129.9 million over 10 years while costs are expected to be $57.4 million, resulting in a costbenefit ratio of greater than 2.3:1. Costs to borrowers are expected to modestly increase due to the allowance of lending fees and additional fees paid to Industry Canada due to increased lending.

Over the 10-year period, costs to financial institutions are expected to be $6.8 million and benefits are expected to be $37.4 million, or a net benefit of $30.6 million. During this same period, as a result of increased lending, Industry Canada is expected to receive additional remittances from fees of $20.0 million while costs are expected to amount to $37.1 million, resulting in a net cost of $17.1 million.

“One-for-One” Rule and small business lens: As the regulatory amendments to the Canada Small Business Financing Regulations reduce the administrative burden on Canadian financial institutions and small business borrowers, the “One-for-One” Rule applies. These amendments are considered an “OUT” under the Rule. Overall, the regulatory amendments to the CSBFP are estimated to reduce administrative burden for all businesses by $422,066 each year.

Domestic and international coordination and cooperation: The CSBFP reviews comparable domestic and international programs to ensure that the needs of Canadian small businesses are being met.

Background

The Canada Small Business Financing Program (CSBFP) is a loan-loss sharing program, governed by the Canada Small Business Financing Act and the Canada Small Business Financing Regulations, which allows the Government to fill a market gap by sharing the risk of lending to small businesses with financial institutions. Industry Canada administers the CSBFP, registers loans, collects fees and pays lenders eligible portions of losses on defaulted loans. Lenders are responsible for all credit decisions such as approving the loans, disbursing their own funds, registering the loans with Industry Canada, administering the loans and, in the event of default, realizing on the security. During the last third-party evaluation in 2010, the CSBFP was found to be fundamentally sound but recommendations suggested it could be improved through modernization and parameter changes.

Issues

During the past 10 years, the number of small businesses accessing financing through the program has declined by over 55% and the total value of loans has declined by 30%. Lenders’ use of the program is decreasing due to the high level of administrative burden and lack of profitability. In order to ensure the long-term viability of the program, maintain the program’s relevance, and ensure continued access to financing for small businesses, measures to modernize the CSBFP are necessary. The challenge is to recalibrate the program parameters in a way that enables lenders to use the CSBFP as a viable product and enables small businesses to access affordable financing that they would not otherwise receive while continuing to mitigate the risks to the Government.

Objectives

The program’s purpose is to increase the availability of asset-based financing for the establishment, expansion, modernization and improvement of small businesses, while offsetting the costs to taxpayers.

The primary goal of the proposed regulatory changes is increasing incremental access to financing for small businesses by alleviating the administrative and financial disincentives to lenders. Better aligning the program with conventional lending would encourage financial institutions to offer loans to small businesses.

In addition to regulatory changes, awareness efforts will be strengthened through partnerships with the lending community and small business intermediaries to let more small businesses know about the program and encourage uptake.

The proposed amendments will assist the Government in meeting its commitment to improve access to financing. They will also remove unnecessary regulatory requirements by reducing red tape and paper burden. The proposed changes aim to increase the use and sustainability of the program so more small businesses are able to access the financing they need to grow and succeed.

Description

Regulatory intervention is necessary as program performance has been hampered by a set of program parameters, which has made it less appealing for financial institutions to offer loans to small businesses. Financial institutions stressed the importance of bringing the CSBFP in line with conventional lending practices and suggest that some program requirements, such as those to gather and keep invoices for each loan, or rules that prohibit most service fees, are inconsistent with evolving and increasingly automated lending practices in the competitive environment in which they operate. The current Government-established practices for administrating CSBFP loans are becoming increasingly obsolete. Lenders also continue to express frustration because of adjustments and rejections of claims for losses due to errors.

The financial institutions that offer CSBFP loans have repeatedly stated that the additional administrative requirements to issue CSBFP loans and the limitations on what fees and interest rates can be charged to small business borrowers act as deterrents when considering offering CSBFP loans to small businesses. Presently, the maximum interest rate is prime plus 3% (or the single-family residential mortgage rate plus 3% for fixed rates), of which 1.25% is remitted to Industry Canada as an administration fee. There are currently restrictions that do not allow any fees for loan setup, renewal or amendments. To alleviate some of these impediments and enhance the availability of CSBFP financing to small businesses, these regulatory amendments will allow lenders to charge conventional fees at a rate of no more than what they charge for conventional loans of the same amount, which is only a modest amount compared to the actual loan amount.

Following prepublication in October 2012, the proposal to increase the maximum allowable interest rate to prime plus 3.75% was removed in order to limit the additional costs passed on to small businesses. Therefore, the maximum allowable interest rate will remain at prime plus 3%.

The program also has substantial administrative requirements as compared to conventional lending practices. Certain requirements, such as personal guarantees, conventional lending fees and enabling electronic systems, will be aligned with conventional lending practices in order to decrease this burden and allow lenders to more easily use the CSBFP to make loans to small businesses. The administrative burden associated with current requirements of the lenders and small business borrowers to collect and provide proof of purchase and payment documentation to Industry Canada will be decreased, while practices will still meet the Government’s legal accountability requirements. Currently, the lender and borrower need to collect all receipts, including for very small amounts (e.g. box of nails, can of paint), for the entire purchase cost of the asset or improvement — only a portion of which is financed by the CSBFP loan — and submit them to Industry Canada during a claim for loss submission. These amendments will reduce the requirement to collect receipts for the full amount of the CSBFP loan, and instead will require the submission of receipts for the principal amount outstanding on the loan. As it is typical that about 20% of receipts represent about 80% of the cost of a project, this change should significantly reduce the amount of paperwork the borrower and lender need to collect and submit. In order to accomplish this decrease in paperwork, the requirement to finance a maximum percentage of 90% of the project’s cost will be removed and deregulated. This change will also let the lender and borrower determine what the appropriate portion of financing should be, based on risk and the needs of the borrower. Regulatory amendments will also allow an optional unsecured personal guarantee to be taken for the full amount of the loan. This guarantee is a key fraud prevention tool as it provides a strong incentive to borrowers to make best efforts to pay off the loan and ensure the fullest possible realization on assets. Lenders have expressed frustration that although they take a number of steps to be prudent in making loans and taking security, they sometimes cannot enforce their security interest when a borrower defaults on a loan. In order to strengthen the relationship with financial institution partners, in the case of a default where security is not enforceable, provided the lender presents proof that they performed a site inspection to ensure the assets being financed existed, the Minister will share in the loss with the lender.

A number of other minor and miscellaneous technical amendments will also be made in order to ensure that the program is operating effectively and efficiently. For example, a secure electronic registration system is being rolled out which enables electronic submission of loan forms by financial institutions. Regulatory amendments clarify and legitimize this process and its requirements.

Regulatory and non-regulatory options considered

A number of regulatory and non-regulatory alternatives were considered.

Status quo

As the program’s loan volume declines, the sustainability of the program may be jeopardized if key improvements to the program are not made. The number of small businesses able to access financing because of the CSBFP will continue to decline as well. This would particularly affect start-ups, young entrepreneurs and businesses in certain higher-risk industry sectors, which are the heaviest users of the CSBFP.

Operational approach

The program would be able to increase awareness and educate potential borrowers about the program through an increased promotion campaign. However, it would be difficult to effectively engage borrowers and lenders without making the program more appealing and less burdensome. It is unlikely that this measure alone would have a large enough effect to better meet the program’s goals and ensure small businesses have access to the financing they need to start, grow and succeed.

A number of stakeholder complaints and problems with the program cannot be addressed through simple administrative or operational solutions. It would also be necessary to intervene with regulatory changes as the issues are caused by requirements within the Regulations.

Regulatory approach

The concerns expressed by financial institution delivery partners are primarily related to the substantial administrative burden and financial disincentives within the Canada Small Business Financing Regulations, which impede their ability to offer CSBFP loans to small businesses. A substantial number of these issues can only be dealt with through regulatory amendments.

Regulatory and operational approach

Although many of the concerns expressed by financial institutions can only be addressed through regulatory changes, during consultations in 2010 a number of small business associations noted that there are substantial opportunities to better inform small businesses about the CSBFP. Since that time, the program’s awareness campaign has been expanded to better inform potential borrowers about the program and its benefits. Going forward, the program will continue to examine additional measures to increase awareness among small businesses.

The program is also implementing an electronic registration system which allows financial institutions to register loans online as well as electronically transfer payment for the registration fee. This will reduce administrative burden and physical paperwork, allowing lenders to register loans faster and more easily.

A combination of regulatory and operational changes will allow the program to better meet the needs of financial institutions and small businesses in a fiscally responsible manner.

Benefits and costs

An analysis of the benefits and costs of the proposed Regulations was conducted in order to estimate and monetize the material impacts of the regulatory proposal on stakeholders, including the Canadian public, small businesses, and Industry Canada.

This cost-benefit analysis assesses the expected incremental costs and benefits due to regulatory changes when compared with the costs and benefits that would accumulate normally under the current design.

As previously mentioned, following prepublication, the proposal to increase the maximum allowable interest rate from prime plus 3% to prime plus 3.75% was removed from the package of regulatory amendments. As a result of this change, figures for forecast uptake as well as the cost and benefits related to each stakeholder group have been updated in the section below.

Summary

It is anticipated that the proposed changes will result in an increase in the availability of financing for Canadian small businesses. Industry Canada estimates increased program uptake of $60 million in new loans per year, bringing the total to $1,010 million, up from $950 million in the base case scenario. Increased use of the program will result in approximately 465 additional loans per year, bringing the total number of loans to 7 855 each year. Through the CSBFP, up to 80%–85% of borrowers are able to access financing for start-up or growth of their businesses that would not have been otherwise available, or would have been available under less favourable conditions.

An increase in lending to small businesses is in turn expected to improve business viability, as demonstrated through greater sales revenue growth, increased probability of survival and greater growth in business investment for the incremental number of firms that received loans.

Canadian businesses are expected to benefit due to increased demand for their goods and services as a result of increased purchases of loan-eligible assets by borrowers and expenditures by suppliers of loan-eligible assets to their suppliers.

Overall, the proposal is estimated to result in a total net benefit of $109.7 million from 2013–14 to 2022–23. Estimated total benefits amount to $211 million and total costs to $101.3 million. Overall, the benefits exceed the costs at a ratio of 2:1. A summary of the costs and benefits is available in Table 1.

Table 1: Summary cost-benefit statement

Cost-Benefit Statement

Base Year 2013–14

Final Year 2022–23 (Present Value)

Total (Present Value)

Average Annual (2013–14 to 2022–23)

A. Quantified impacts (millions of dollars)

Benefits

        

Canadian businesses

$17.928

$8.968

$129.920

$17.928

Lenders

$3.900

$2.902

$37.414

$5.282

Government of Canada — Industry Canada

$1.540

$1.726

$19.996

$2.888

Other Canadians

-

$2.559

$23.692

$3.646

Total benefits

$23.367

$16.155

$211.022

$29.745

Costs

       

Borrowers

$5.440

$4.628

$57.410

$8.170

Government of Canada — Industry Canada

$0.083

$3.963

$37.096

$5.672

Lenders

$0.339

$0.641

$6.844

$1.011

Total costs

$5.862

$9.232

$101.350

$14.853

Total net benefits

$17.505

$6.923

$109.672

$14.891

B. Quantified impacts

Borrowers — Firm survival (number of firms surviving for additional year)

-

21

155

25

Other Canadians — Employment (FTEs)

158

265

2 912

430

C. Qualitative impacts

Borrowers
  • Increased ability to access financing
  • Growth in total sales revenues
  • Ability to leverage investment, as demonstrated through growth in total assets greater than comparable small or medium-sized enterprises (SMEs)

Industry Canada
  • Possibility for increased salary and benefit costs for additional CSBFP staff who may be required to administer a greater volume of loans
  • Improved efficiency in loan registration and administration

Canadian small businesses
  • Increased availability of financing for Canadian SMEs

Lenders
  • Improved efficiency in loan registration and administration
  • IT system costs to meet required reporting on CSBFP loans

Governments
  • Increased income tax revenues due to growth in average wages of individuals employed by borrowers
  • Increased GST remittances due to growth in the volume of loan-eligible assets purchased from suppliers

Note: Average annual values are based on the undiscounted value of costs and benefits over the 10-year period.
Costs

Total costs to all stakeholders are expected to be $101.3 million over the 10-year period. A cost breakdown by stakeholder group follows.

Borrowers

Small businesses that borrow will incur costs to receive loans through the CSBFP that include the lending fees they pay to financial institutions.

The total present value of total additional costs to borrowers is forecast to be $57.4 million over the 10-year period. This consists of $22.5 million in additional administration fees and $8.7 million in registration fees as a result of increased lending under the program due to these amendments, as well as $26.2 million for lending fees.

Lenders

The costs to financial institutions that issue loans under the CSBFP include the salaries of staff who administer these loans, direct operating expenditures (including legal fees), and losses due to loans on which borrowers default.

The cost of the proposal to lenders is expected to total about $6.8 million over the 10-year period (present value). This is comprised of $1.1 million for loan officer and other salaries, $1.3 million for legal fees, and $4.4 million in loan default costs. Other costs to lenders have been previously described qualitatively in Table 1.

Industry Canada

There is a possibility, over the 10 years of the analysis, that there may be additional costs of salaries and benefits for the staff who manage the CSBFP. The need for any additional expenditures will be dependent on the extent to which additional workload can be absorbed within existing capacity, and the extent of the efficiencies gained by the implementation of an Electronic Registration System. There are currently no plans to provide additional staffing for the program.

The total cost of the proposal to Industry Canada is forecast to have a total present value of about $37.1 million over the 10-year period. Direct program operating expenditures of $0.2 million and claims paid on loan defaults from additional lending of $36.9 million are expected.

Benefits

Total benefits to all stakeholder groups are expected to amount to $211.0 million over the 10-year period. The details of benefits for each stakeholder group are provided below.

Borrowers and Canadian businesses

A number of benefits have been found to accrue to small businesses that borrow under the CSBFP. It is anticipated that the proposal would result in an increase in the availability of financing for Canadian small businesses. These include improved business viability and growth as demonstrated through higher sales revenue growth, increased probability of survival and higher growth in business investment when compared to similar small businesses. It is expected that an average of 25 firms will stay in business for one more year than they would have otherwise. Total employment retention by small businesses is expected to increase due to their participation in the CSBFP. In any given year, an average of 430 full-time equivalent jobs are expected to be created or retained for a one-year period.

Canadian businesses are expected to benefit from the proposal due to increased demand for their goods and services as a result of increased purchases of loan-eligible assets (real property, leasehold improvements, and equipment) by borrowers. In addition, there is a multiplier effect in the economy resulting from expenditures by suppliers of loan-eligible assets to their suppliers.

The value-add component (salaries, wages and benefits, profits) of assets purchased and payments to suppliers is estimated to be $129.9 million (present value) over 10 years, $76.4 million from asset purchases and $53.5 million from payments by suppliers to suppliers.

Loans provided through the CSBFP have been shown to generate employment creation and retention. Through increased expenditures in the economy due to higher loan volumes, secondary employment is also expected to increase.

Other Canadians

Other Canadians will benefit from increased average wages paid by CSBF borrowers, and employment creation by borrowers and suppliers. Previous studies have found an increase in average wages paid by CSBF borrowers when compared to a similar group of small businesses. This impact is estimated to be $23.7 million (present value) over 10 years.

Lenders

Currently, lenders receive interest revenues on loans, where net revenues are the difference between the interest charged to borrowers, and lenders’ cost of capital. The proposed regulatory changes will enable lenders to charge administration fees at a rate of no more than what they charge for conventional loans of the same amount. and the maximum allowable interest rate that can be charged to borrowers will remain unchanged at prime plus 3%. Additional interest revenues to lenders, as a result of increased overall lending, are estimated to total $11.2 million over the 10-year period. In addition, it is estimated that lenders will receive a total of $26.2 million in administration fees from borrowers.

Industry Canada

To partially offset the costs of claims made for defaulted loans, registration and administration fees are charged on loans. While no changes are being proposed to the fees collected by Industry Canada, increased lending as a result of these amendments is expected to result in additional remittances with a total present value of $20.0 million over the 10-year period, $11.3 million from administration fees and $8.7 million from registration fees.

“One-for-One” Rule

The “One-for-One” Rule came into effect on April 1, 2012, to control the administrative burden that regulations impose on business. Under the Rule, ministers are required to offset administrative burden costs from the stock of existing regulations that are equivalent to the new administrative burden costs on business imposed by the regulatory initiative.

As the Regulations Amending the Canada Small Business Financing Regulations reduce the administrative burden on Canadian financial institutions and small business borrowers, the “One-for-One” Rule applies. The amendments are considered an “OUT” under the Rule, at an annualized average of $422K.

Consultations were held with representatives from three large banks, three small credit unions/caisses populaires and three small business borrowers to assess the administrative costs and savings that would be associated with the proposed changes. The results of these calculations are reflected in the types of tasks and the monetization of their impact on administrative burden included in the tables below.

Overall, the regulatory amendments to the CSBFP are estimated to reduce administrative burden for all businesses by $422,066 each year (see Table 1). The administrative burden on small business borrowers will be reduced by $107,023 each year (see Table 4). Administrative burden on financial institution delivery agents will be reduced by $315,043 each year, of which $184,530 in savings will be to small credit unions and caisses populaires (see Table 3) and $130,513 in savings will be to large banks (see Table 2).

Table 2 : Total administrative cost and savings for all stakeholders

Administrative Activity

Up-front Cost

On-going Cost (Savings)

Total Present Value

Annualized Average

Register, make and administer CSBFP loans and submit claims for loss

  

$(422,066)

$(2,964,418)

$(422,066)

Total

$ 0

$(422,066)

$(1,964,418)

$(422,066)

The detailed results of the quantitative assessment of the administrative burden of the proposed regulations on Canadian businesses are described below.

Private sector financial institutions

Since 2004, 70% of the number of CSBFP loans have been made by 9 large banks, and 30% of the number of CSBFP loans have been made by 568 small credit unions and caisses populaires. The impact of the proposed regulatory amendments on the large banks and the small credit unions and caisses populaires were calculated separately.

Large banks

Table 3: Total administrative cost and savings for large banks

Administrative Activity Tasks Up-front Cost On-going Cost (Savings) Total Present Value Annualized Average
Register, make and administer CSBFP loans and submit claims for loss     $(130,513) $(916,669) $(130,513)
Collect proof of purchase and payment documentation for loan file   $(11,280)    
Determine and ensure compliance with eligible costs (90%)   $(56,861)
Find and submit proof of purchase and payment documentation and conduct calculations   $(17,054)
Personal guarantee process   $(9,646)
Conduct on-site inspection   $28,449
Complete registration form   $(11,658)
Request and issue registration fee payments   $(52,463)
Total   $0 $(130,513) $(916,669) $(130,513)
Small credit unions and caisses populaires

Table 4: Total administrative cost and savings for small credit unions and caisses populaires

Administrative Activity Tasks Up-front Cost On-going Cost (Savings) Total Present Value Annualized Average
Register, make and administer CSBFP loans and submit claims for loss     $(184,530) $(1,296,061) $(184,530)
Collect proof of purchase and payment documentation for loan file   $(74,235)    
Determine and ensure compliance with eligible costs (90%)   $(117,843)
Find and submit proof of purchase and payment documentation and conduct calculations   $(3,146)
Personal guarantee process   $(4,141)
Conduct on-site inspection   $26,828
Complete registration form   $(9,837)
Request and issue registration fee payments   $(2,157)
Total   $0 $(184,530) $(1,296.061) $(184,530)
Small business borrowers

As outlined in the cost-benefit analysis section, after these regulatory amendments are implemented, it is estimated that 7 855 CSBFP loans will be made each year. It is assumed that these loans will be made to 7 855 different small business borrowers each year. The calculated administrative burden impact of the proposed regulatory amendments on small business borrowers is below.

Table 5: Total administrative cost and savings for small businesses

Administrative Activity Tasks Up-front Cost On-going Cost (Savings) Total Present Value Annualized Average
Register, make and administer CSBFP loans and submit claims for loss Time to collect proof of purchase and payment documentation for loan application   $(107,023) $(751,688) $(107,023)
Total     $(107,023) $(751,688) $(107,023)
Assumptions

The following assumptions were made in monetizing the administrative burden costs and savings associated with the regulatory amendments to the CSBFR:

Consultation

Industry Canada has used a collaborative approach to developing this package of proposed changes by actively involving stakeholders throughout the process. Consultations were held with small business and financial institution stakeholders in January 2010 to discuss possible improvements to the CSBFP. Stakeholders were also given two weeks after consultation meetings were held to submit additional comments in writing.

As a follow-up to these consultations, a revised proposal was created to reflect input from stakeholders and then provided to them for further comments.

Proposed regulatory amendments were prepublished in the Canada Gazette, Part I, on October 13, 2012, for a comment period of 30 days. Feedback was received from both lender and small business stakeholders.

In general, lender stakeholders were supportive of the prepublished regulatory amendments, and confirmed that the proposed changes would increase their interest in and use of the program. A few minor amendments were made to the original regulatory text as a result of their technical implementation comments.

Small business stakeholders’ support for the proposed amendments differed based on their perception of access to financing in general and through the CSBFP. One organization indicated that they are not concerned with small businesses’ access to financing or the decline in lending under the program, as declines may have more to do with the shifting loan patterns generally within the small business market and less to do with any design flaws in the program. Therefore, while they support changes to reduce administrative burden, they were not supportive of changes that would increase costs for small business borrowers.

In contrast, another small business organization indicated that their members are becoming increasingly frustrated by the lack of access to financing, which they often used to be able to receive through the CSBFP. The organization indicated that while they are reluctant to recommend changes which will enrich earnings in the banking sector and increase costs to entrepreneurs and small businesses, the ability for their members to receive a CSBFP loan at a slightly higher rate is better than no loan at all, or the current credit card alternatives. Therefore, the organization indicated that they did not object to the proposed changes.

Following prepublication, additional consultations were held with a number of financial institutions to assess the degree to which the proposed interest rate increase would influence their future use of the program. While a number of smaller lenders indicated that conventional lending fees, as well as the amendments designed to reduce the red tape burden, were more important changes within the package of regulatory amendments, larger lenders indicated that while changes to fees and administrative burden helped, the key factor to encourage additional lending was the proposed interest rate increase. Following these consultations, the proposed interest rate increase was eliminated from the package of regulatory amendments in order to minimize the additional costs to small businesses.

Rationale

The goal of the CSBFP is to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses, which would not otherwise be able to access financing, while offsetting costs to taxpayers. In the course of the Comprehensive Review, lenders indicated that the increasing gap between administration procedures of the CSBFP (which have changed little in the past two decades) and conventional lending administration are a disincentive to using the program. The administrative burden caused by the Regulations and the current pricing limits on CSBFP loans directly limits how often lenders use the program to make CSBFP loans to small businesses. Ultimately, the program is a partnership with lenders, and success depends on their level of satisfaction with, and participation in, the program. Should their concerns not be substantially alleviated, the loan decline is expected to continue, thereby jeopardizing the sustainability of the CSBFP. These regulatory changes aim to reduce administrative burden and minimally increase the maximum price of CSBFP loans in order to ensure small businesses can access affordable financing through the CSBFP that they cannot otherwise obtain.

As discussed in the cost-benefit section, these amendments are estimated to result in an overall net benefit to small businesses and Canada. Net benefits are expected to be $109.7 million from 2013–14 to 2022–23 with total benefits amounting to $211.0 million and costs totalling $101.3 million. Overall, the benefits exceed costs at a ratio of 2:1, indicating substantial benefits to small businesses and Canada. Employment retention by small businesses is also expected to increase due to their participation in the CSBFP. In any given year, an average of 430 full-time equivalent jobs are expected to be created or retained for a one-year period.

At the same time, Industry Canada will continue its increased awareness efforts by working with small business associations and other small business intermediaries to let them know about the program and encourage uptake. Previous experience has shown that in target areas where the program has been promoted more heavily, the use of the program has also increased. These measures will address the low level of awareness identified in the Comprehensive Review and the Evaluation Report.

Implementation, enforcement and service standards

Industry Canada has been working with 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 on April 1, 2014. To formalize the use of the new electronic registration system, amendments related to the electronic registration system will also come into effect once the Regulations are registered.

Industry Canada will continue working with the associations of small- and medium-sized businesses to raise awareness about the program and its benefits to small businesses. These efforts will build on the program’s past promotional activities and will continue examining additional innovative efforts to better target small businesses and entrepreneurs.

These amendments will not alter existing compliance and enforcement mechanisms under the Act or 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 collateral that secured the loan before submitting its claim. An examination of this process by the Auditor General in 2002 showed that Industry Canada uses a valid procedure to ensure that claims are properly justified. Furthermore, 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 the audit and examination of lenders’ books and records of account on reasonable notice (21 days) and require lenders to cooperate and assist the Minister as required. If a lender fails to cooperate, the Minister 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 and will remain unchanged as a result of these amendments.

Performance measurement and evaluation

The evaluation of the CSBFP is guided by a performance measurement strategy, which was most recently revised in 2012. 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 Canada Small Business Financing Act requires a comprehensive review 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 2004 to 2009 was tabled in April 2010 and can be found at www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la03011.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 2011–12 annual report was tabled in February 2013 and can be found at www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la03106.html.

Contact

For further information, please contact the following person:

Nathalie Poirier-Mizon
Director
Small Business Financing Directorate
Industry Canada
235 Queen Street
Ottawa, Ontario
K1A 0H5
Telephone: 613-946-3391
Fax: 613-954-5541
Email: nathalie.poirier-mizon@ic.gc.ca