LS-327E
BILL C-53: AN ACT TO INCREASE THE
AVAILABILITY OF FINANCING FOR THE ESTABLISHMENT,
EXPANSION, MODERNIZATION AND IMPROVEMENT
OF SMALL BUSINESSES
Prepared by Nathalie Pothier
Economics Division
30 November 1998
LEGISLATIVE HISTORY OF
BILL C-53
HOUSE
OF COMMONS |
SENATE |
| Bill
Stage |
Date |
Bill
Stage |
Date |
| First Reading: |
23 September 1998 |
First Reading: |
25 November 1998 |
| Second Reading: |
6 October 1998 |
Second Reading: |
2 December 1998 |
| Committee Report: |
6 November 1998 |
Committee Report: |
8 December 1998 |
| Report Stage: |
23 November 1998 |
Report Stage: |
|
| Third Reading: |
24 November 1998 |
Third Reading: |
9 December 1998 |
Royal Assent: 10 December 1998
Statutes of Canada 1998, c.36
N.B. Any substantive changes in this Legislative Summary which have
been made since the preceding issue are indicated in bold print.
|
| |
|
|
TABLE OF CONTENTS
BACKGROUND
DESCRIPTION AND ANALYSIS
A. Title and
Definitions (clauses 1, 2 and 22)
B.
Application and Eligibility Criteria (clauses 3 and 4)
C. Liability of
Minister and Liability Ceilings
(clauses 5 to 9,
clause 15(5) and clause 17)
D.
Registration Fees and Annual Administration Fees (clauses 10 to 12)
E. Audit and Examination
(clause 15)
F. Pilot Projects (clause 13)
G. Regulations (clause 14)
H.
Offences, Punishment and Limitation Periods (clause 16)
I. Reports and
Five-Year Review (clauses 18 to 20)
COMMENTARY
APPENDIX
1
APPENDIX 2
BILL C-53: AN ACT TO INCREASE THE
AVAILABILITY OF FINANCING FOR THE ESTABLISHMENT,
EXPANSION, MODERNIZATION AND IMPROVEMENT
OF SMALL BUSINESSES
BACKGROUND
Bill C-53, An Act to increase the
availability of financing for the establishment, expansion, modernization and improvement
of small businesses, received first reading in the House of Commons on 23 September 1998.
If enacted, it would replace the Small Business Loans Act (SBLA), which came into
force in 1961.
As it now stands, the small business loans
program is designed to establish, expand, improve and modernize small and medium-sized
businesses, by offsetting a portion of lenders’ losses sustained as a result of
certain classes of loans to the small businesses under the program.
Over the years, the SBLA has been amended;
the most important of these amendments, made in 1993 and 1995, are summarized in the
following table.
Major Changes to the
Small Business Loans Program |
| 1961 |
The Small Business Loans
Program was created and delivered by the Department of Finance.
Chartered banks were the
only eligible lenders and the maximum loan amount was $25,000.
|
| 1970 |
Credit unions, caisses
populaires and other co-operative societies, trust, loan and insurance companies became
eligible to lend.
|
| 1971 |
Eligible small businesses
were defined as businesses with less than $1 million in revenues.
The maximum loan amount
increased to $50,000.
|
| 1974 |
|
| 1977 |
Eligible small businesses
were defined as businesses with less than $1.5 million in revenues.
The maximum loan amount
increased to $75,000.
|
| 1978 |
|
| 1979 |
|
| 1985 |
|
| 1993 |
Eligible small businesses
were defined as businesses with less $5 million in revenues. Firms in particular
sectors (including the professions) became newly eligible.
The maximum loan amount
increased to $250,000.
The percentage of financing
permitted increased to 100% from 80% on equipment and 90% on land and buildings.
The maximum rate of interest
increased to prime plus 1.75% from prime plus 1%.
The amount of government
guarantee increased to 90% from 85%.
The registration fee was
increased to 2%.
|
| 1995 |
The percentage of financing
permitted was reduced to 90% (for loans made after 31 December 1995).
The maximum rate of interest
was not to exceed prime plus 3%.
A 1.25% annual
administration fee was introduced.
The amount of government
guarantee for lenders was reduced to 85% (for loans made after 31 December 1995).
|
| 1997 |
|
Source: Auditor
General’s Report, December 1997, Exhibit 29.1; and update.
Since the SBLA’s inception in 1961,
loans totalling nearly $13 billion have been registered; under the program, up to $15
billion in loans can be registered. A number of loans have been repaid or otherwise
discharged, and, on 31 March 1998, $6 billion remained to be repaid. According to the
Department’s calculations, if 100% of loans defaulted on 31 March 1998, taxpayers
would face a maximum liability of $1.3 billion.
As Parliament begins its study of Bill
C-53, the main parameters of the SBLP are the following:
| Loan loss sharing ratio (the
government's share of losses) |
85 % of eligible losses |
Cap on claims
(maximum payable by government for loans registered in each lender’s separate account
of loans guaranteed under the program) |
90 % of the first $250,000 of
loans in a lender's account, 50 % on the next $250,000, and 10 % of all remaining loans |
| Percentage of the cost of
eligible capital assets accepted for financing |
90% |
| A one-time registration fee paid
by the borrower |
2% of the amount of the loan
extended |
| Annual administration fee paid
by the lender, who is permitted to pass this cost on to the borrower, through the interest
rate charged on the credit |
1.25% of the amount of the
outstanding loan for the life of the lending term |
| The interest rate ceiling |
prime lending rate + 3%
or
residential mortgage rate (fixed rate) for the term of the loan |
| The maximum loan size |
$250,000 per borrower |
Source: Industry
Canada, Access to Financing for Small Business: Meeting the Changing Needs,
p. 17, 1998.
In a report issued in December 1997, the
Auditor General made some important observations with a view to improving the delivery of
services under the Program:
The Program should be
assessed to see if it meets the needs of small business in a rapidly changing economy.
The dual objectives of
increasing the availability of loans at reasonable rates while recovering all costs should
be carefully analyzed.
The Program is moving toward
full cost recovery, but under the present fee structure and loss-sharing ratio, it is
uncertain whether full cost recovery will be achieved. The Department should carefully
monitor any developments and strengthen systems for forecasting future performance of the
Program.
The department must
strengthen its audit procedures for claims to ensure that lending decisions are made with
due care and diligence. Industry Canada should take appropriate steps to reduce the
interest it is paying on claims submitted by lending institutions. The impact of the Act
in connection with loans to related borrowers requires clarification.
Industry Canada should
ensure that parliamentarians are provided with the information necessary to assess the
extent to which the Program is managed efficiently and is achieving its objectives. In
addition, more rigor is required in assessing the Program’s impact on job creation.
Before tabling Bill C-53, the Minister of
Industry consulted with both lenders and borrowers. The scope of the Program, the recovery
of its costs, its administration and its evaluation are among the factors that are most
likely to attract attention when Parliament examines the proposed legislation.
DESCRIPTION AND ANALYSIS
A. Title and Definitions
(clauses 1, 2 and 22)
The new Act would be called the Canada
Small Business Financing Act (CSBFA) (clause 1); it would replace the existing Small
Business Loans Act (SBLA), which would be repealed on 31 March 1999 (clause 22).
Unlike the current situation, the CSBFA would not impose a deadline beyond which the
Minister would not have to compensate lenders for the losses sustained as a result of the
loans made. The Program arising out of the CSBFA would be put in place on a permanent
basis.
The definitions in clause 2 would include
the terms "small business," "loan," "Minister" and
"lender." The English version of the bill provides a definition of
"prescribed."(1) A loan is defined in
accordance with the eligibility criteria set out in clause 4 and the related regulations.
B. Application
and Eligibility Criteria (clauses 3 and 4)
Under clause 3(1) of the bill, the new Act
would apply solely to loans made after 31 March 1999. However, under clause 3(4), any loan
made before 1 July 1999 and approved before 1 April 1999 would be deemed to meet the
eligibility criteria in clause 4(1) and (2) if it met the conditions in clause 3(2)(2) or 3(7)(3)
of the SBLA.
Under clause 3(2) of the bill, if the
lender consented, loans guaranteed by the SBLA that were made after 31 March 1995 and were
still outstanding after 31 March 1999 would be subject to the provisions in clause 12
governing the collection of annual administration fees. Moreover, clause 3(3) provides
that claims for losses made after 31 March 1999, even where they relate to a loan
guaranteed under the Small Business Loans Act, would be subject to the regulatory
provisions governing interim claims for losses.
Clause 4 of the bill provides that, in
order to be eligible for the program, a loan should:
be sought
for a "small business," which is defined in section 2 as a business carried on
or about to be carried on in Canada for gain or profit with a maximum estimated gross
annual revenue of $5 million or any prescribed lesser amount (religious or charitable and
agricultural businesses being excluded);
be made by a
lender to an eligible borrower to finance the expenditures and commitments in the
prescribed classes of loans and not exceeding the regulatory ceilings.
Under clause 4(2), the borrower would be
eligible for a loan if it met the eligibility criteria in the regulations and if the
amount of related unpaid guaranteed loans did not exceed $250,000 or any lower amount
determined by regulation when the loan was made. The latter amount would be the sum of the
amount requested and the total outstanding amount of principal of the loans made under the
Act or guaranteed loans made under the SBLA(4)
to the borrower alone and all related borrowers (clause 4(3)).
Clause 4 refers to classes of loans,
certain eligibility criteria for a loan and the criteria applying to the borrowers, the
regulatory ceilings on the proportion of expenses and certain commitments that a loan
could be used to finance (currently set at 90%), an unpaid loan amount of less than
$250,000, and the criteria used to identify the circumstances in which borrowers are
"related," although in practice they would be defined by regulation.
C. Liability of Minister
and Liability Ceilings
(clauses 5 to 9, clause
15(5) and clause 17)
Under clause 5, the Minister would be
required to compensate lenders for any eligible loss calculated in accordance with the
regulations that resulted from a loan made in accordance with the rules of the program.
The Minister could, with the approval of the Governor in Council, terminate liability to
the lender with respect to compensation for losses for certain classes of loans, by giving
a written notice that sets out a termination date that is effective 24 hours or more
following receipt of that notice at the lender’s head office. Moreover, clause 15(5)
provides that, in the case of a lender that refused or intentionally failed to comply with
any requirement for audit and examination as part of the program, the Minister could give
written notice to the effect that he or she was no longer required to provide compensation
for losses sustained from making the loan. The Minister would provide compensation to the
lenders by payments from the Consolidated Revenue Fund (clause 17).
Regulatory measures relating to the
Minister’s liability would deal, among other things, with the calculation of eligible
losses and limits on liability, including those where there was a transfer or assignment
of loans and where there was an amalgamation of the lenders.
The Act would prescribe ceilings and
limits on the compensation provided by the Minister. Thus,
the Minister
would not be required to compensate the lenders for their eligible losses if the total
principal amount of the loans registered under the program reached a possible liability
ceiling of $1.5 billion for the five-year period beginning 1 April 1999 and for each of
the following consecutive five-year periods (clause 6(1));
the Minister
would not be required to provide compensation to a lender for its eligible losses if the
total amount of the compensation calculated on a five-year basis for each lender exceeded
90% of the part of the principal amount up to $250,000; 50% of the part of the principal
amount from $250,000 to $500,000; and 10% of the part of the principal amount exceeding
$500,000 (clause 6(2));
the Minister
would not be required to provide compensation to a lender for any loss resulting from a
loan it made (under the CSBFA or the SBLA) to a borrower that had actual knowledge that
the maximum amount of the outstanding loan relating to the borrower and related borrowers
exceeded $250,000 or a lesser amount prescribed by regulation (clause 7); and
the Minister
would be required to compensate the lender for losses sustained under the program solely
up to 85% of the eligible losses, of any lesser percentage or of an amount prescribed by
regulation equivalent to a lesser percentage (clause 8).
Furthermore, the Minister would not be
required to compensate a lender which, on the one hand, had not paid the registration fees
provided for under the program and, on the other hand, did not meet all the other
requirements of the Act and the regulations (clause 9).
D.
Registration Fees and Annual Administration Fees (clauses 10 to 12)
Under the program, the lender would pay
the Minister annual registration fees calculated in accordance with the regulations.
Furthermore, when a loan was submitted for registration, the lender would pay the Minister
the related registration fees, as calculated in accordance with the regulations (clauses
11 and 12).
The lender could charge the registration
fees to the borrower, but could charge the borrower for the annual fee only indirectly
through the imposition of interest.
Only the interest, the registration fees
and all the other fees and costs expressly required by regulation would be payable by the
borrower for a loan under the program (clause 10).
E. Audit and Examination (clause 15)
The bill’s provisions relating to
audit and examination would add a new aspect to the existing program. In effect, clause 15
would give the Minister the power to audit and examine the lender’s documents,
records and books of account to ensure that the Act and the regulations had been applied,
especially in terms of the lender’s due diligence in respect of the approval and
administration of a loan and in respect of the relevance and accuracy of the documents
provided. The Minister could exercise this power by giving the lender not less than 21
days’ written notice (clause 15(1)). The Minister could by written notice inform
every lender that refused or intentionally failed to comply with the requirements for
audit and examination that the Minister was no longer required to compensate it for losses
sustained as a result of any loan (clause 15(5)).
The persons authorized by the Minister to
conduct the audit could consult the documents, records and books of account; as part of
this exercise, the lender shall give them any assistance they might reasonably require, as
well as access to appropriate sites, and answers to relevant questions orally or in
writing, as the case might be. The lender would provide these persons with any information
or document in its possession, as well as any duplicates that were required for the audit
or examination (clauses 15(2) and 15(3)). Documents and duplicates could be removed from
the premises only with the lender’s authorization.
The Minister would provide the lender,
within 21 days after completion of a report, with a copy of any audit or review report
that was prepared (clause 15(4)).
F.
Pilot Projects (clause 13)
The Governor in Council could make the
necessary regulations to use pilot projects to see whether loans made to borrowers in the
voluntary sector or capital leases should be guaranteed and, if so, to determine what
legislative and regulatory measures would then be required (clause 13(1)). Each pilot
project established and implemented by regulation would last for a period not exceeding
five years, unless it was extended (by not more than one year) to permit the coming into
force of the regulatory and legislative measures outlined in a public notice in the Canada
Gazette (clauses 13(3) and 13(4)). The Minister would then table in each House of
Parliament any proposed regulations based on clause 13(1) and each House would refer the
proposed regulations to the appropriate committee (clause 13(5)).
A ceiling on the Minister’s aggregate
contingent liability would be established for each pilot project by an appropriation Act
or another Act of Parliament (clause 13(2)).
G.
Regulations (clause 14)
The paragraphs in clause 14(1) set out
several proposed subjects of regulations that could be made by the Governor in Council. On
the recommendation of the Minister (or ministers, in the case of regulations relating to
the maximum interest rate on a loan), the Governor in Council could make regulations on
the subject of any regulatory measure provided for in the Act.
The Minister could table in each House of
Parliament any proposed regulations based on clause 14(1) and that House would refer the
proposed regulations to the appropriate committee (clause 14(3)).
H. Offences,
Punishment and Limitation Periods (clause 16)
Under the bill, a borrower (or anyone
else) who knowingly made a false assertion or acted with fraudulent intent in respect of a
loan would be liable to more severe penalties than those currently in effect under the
SBLA. An offence prosecuted on summary conviction, which would be statute-barred after
three years, could result in a fine not exceeding $50,000 (compared with $1,000 under the
SBLA), or imprisonment for a term not exceeding six months, or both. On the other hand,
anyone convicted of an indictable offence would be subject to a fine not exceeding
$500,000, or to imprisonment for a term not exceeding five years, or to both.
I. Reports and
Five-Year Review (clauses 18 to 20)
An annual report would be prepared within
twelve months of the end of each fiscal year (clause 18) and a first five-year review
would take place in the year following 31 March 2004, with subsequent reviews every five
years after that (clause 19). The Minister would table in each House of Parliament a copy
of all annual and five-year reports, not later than the fifteenth sitting day of either
House of Parliament following the completion of the report (clause 20).
COMMENTARY
The new Act would implement a program,
whose name would refer to the "financing" of small businesses. The proposed
legislation would continue to provide a mechanism for guaranteeing loans to facilitate the
financing of the assets of small businesses, as though its name referred exclusively to
"loans" to small businesses. Though major parameters of the existing program
would remain unchanged, it would be possible in future to use regulations to reduce the
level of the maximum amount of a loan ($250,000), the ceiling payable on claims for
certain parts of the loans (the 90-50-10 rule), the maximum amount of gross annual
revenues of businesses for determining their eligibility ($5 million) and the loan-loss
sharing ratio (85%). The classes of loans would no longer be defined in the Act but by
regulation.
The proposed Act would redefine the system
of the overall loan ceiling now set at $15 billion and replace it with a ceiling based on
possible liabilities, which would be $1.5 billion for the five-year period from 1 April
1999 and for all subsequent consecutive five-year periods. The ceiling on total liability
could be set at an amount other than $1.5 billion through an appropriations Act or other
federal Act, but the percentage figures for establishing the specific liability ceiling
for a given lender for each of the three loan segments identified in the Act could be set
by regulation at a level below 90, 50 or 10% respectively.
The scope of the program could be
broadened if one of the pilot projects covering capital leases or borrowers in the
voluntary sector proved conclusive. Current borrowers may well not be enthusiastic about
the proposed broadening of the program. In fact, the Senate Committee on Banking, Trade
and Commerce, following initial consultations, said it was in favour of the creation of
the pilot projects in order to check the costs and benefits. It indicated in September
1998, however, that generally the witnesses it had heard were not in favour of extending
the SBLA program to include the volunteer sector or capital leasing. The hearings of the
House of Commons Committee on Industry that considered Bill C-53 also encountered
resistance, especially on the part of the Canadian Federation of Independent Business. The
proposal to implement these pilot projects by means of regulations has caused concern;
partly in an attempt to respond to these concerns, the Industry Committee proposed the
addition to the bill of provisions requiring that any proposed regulations be tabled in
the House of Commons and the Senate and be referred to a parliamentary committee.
According to the Department, the current
structure of the program can achieve the cost-recovery target. In its reply to the report
of the Standing Committee on Public Accounts dated 6 October 1998, which supported the
recommendations made by the Auditor General in December 1997, the government indicated
that, for reliable forecasts, more data are needed on stable program parameters. The
report notes, for example, that measuring the effect of expansion of the program is
complicated by the difficulty of obtaining data on non-SBLA loans from lending
institutions, the impact of changes, general economic conditions, and the need to factor
in the behaviour and policies of the lenders responsible for making lending decisions.
Appendix 1
Extract from the Small Business Loans Act, subclause 3(2)
Conditions
(2) The conditions referred to in
subclause (1) are as follows:
(a) the borrower was the proprietor
of the business enterprise in respect of which the loan was to be expended;
(b) the estimated gross revenues of
the business enterprise
(i) did not exceed $5 million for the
fiscal period of the business enterprise during which the loan was approved by the lender,
or
(ii) in the case of a business enterprise
about to be carried on, was not expected at the time the loan was approved by the lender
to exceed $5 million for its first fiscal period that is of not less than fifty-two
weeks’ duration;
(c) the loan was made for the
purpose of financing expenditures or commitments that did not that did not arise more than
one hundred and eighty days before the loan was approved by the lender;
(d) the total of the following
amounts did not at the time the loan was approved by the lender exceed two hundred and
fifty thousand dollars, namely
(i) the principal amount of the loan and
(ii) the aggregate balance outstanding of
all guaranteed business improvement loans under this Act and guaranteed loans under the Fisheries
Improvement Loans Act previously made to the borrower and either disclosed to the
lender by the borrower or of which the lender had knowledge;
(d.1) if the loan relates to
premises,
(i) at least fifty per cent of the area of
the premises was used in carrying on the business enterprise or, at the time the lease was
approved by the lender, was intended to be so used within ninety days after the first
advance under the loan, or
(ii) at least fifty per cent of the gross
revenues of the business enterprise were derived from business activity on the premises
or, at the time the loan was approved by the lender, were expected to be so derived;
(e) the loan was repayable in full
by the terms thereof within the period prescribed for that loan, and in any event in not
more than ten years after the date of the first scheduled principal instalment as
prescribed, under that loan;
(f) no fee, service charge or
charge of any kind was by the terms of the loan payable to the lender in respect of the
loan as long as the borrower was not in default, other than
(i) a prescribed fee or charge,
(ii) a charge not exceeding the amount of
the fee payable by the lender pursuant to paragraph (4)(b), and
(iii) interest at a rate not exceeding the
prescribed maximum rate or the maximum rate determined by the prescribed formula or
formulae;
(g) the repayment of the loan was
secured in the prescribed manner;
(h) the loan was not made for a
purpose deemed for the purposes of the Act to be contrary to the public interest; and
(i) the loan came within a
prescribed class of business improvement loans and was made on such terms and in
accordance with such conditions, in addition to those specified in paragraphs (a)
to (h), as were prescribed for loans of that class.
Appendix 2
Extract from the Small Business Loans Act, subclause 3(7)
Minister may make payment
(7) Where, at the time the lender makes a
loan, the prescribed maximum rate of interest, the maximum rate determined by the
prescribed formula or formulae or a condition set out in paragraph 2(e), (f)
or (g) or subparagraph (4)(c)(ii) is not complied with, the Minister may pay
to the lender the amount of any loss that is eligible for payment under subclause (1) if
(a) the Minister is of the opinion
that the non-compliance was inadvertent and that the loss was not affected by the
non-compliance; and
(b) the lender has reimbursed the
borrower for any resultant overcharges and otherwise remedied the non-compliance prior to
any default in respect of a payment on the loan or prior to the expiration of two years
after the initial disbursement of funds under the loan, whichever occurs first.
R.S. 1985, c. S-11, s. 3; R.S. 1985, c. 19
(1st Supp.), s. 2, c. 22 (3rd Supp.), s 3; 1990, c. 10, s. 1; 1993, c. 6, s.3; 1995, c.
48, s.1.
(1) The French version does not include an equivalent
definition of this expression because of a peculiarity legislative drafting.
(2)
See Appendix 1 to this document.
(3)
See Appendix 2 to this document.
(4) On 23 November 1998, at the report stage, the House of
Commons passed a motion to the effect that loans made under the Agricultural Businesses
Loans Act would not be included in the amount of unpaid loans that could not exceed
$250,000. |