Bill C-53: An Act to Increase the Availability of Financing for the Establishment, Expansion, Modernization and Improvement of Small Businesses(LS-327E)

BILL C-53: AN ACT TO INCREASE THE
AVAILABILITY OF FINANCING FOR THE ESTABLISHMENT,
EXPANSION, MODERNIZATION AND IMPROVEMENT
OF SMALL BUSINESSES

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	The Province of Alberta Treasury branches were added as eligible lenders.
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	The responsibility for the Program was moved to the Department of Industry, Trade and Commerce.
1979	The maximum loan amount increased to $100,000.
1985	Eligible small businesses were defined as businesses with less than $2 million in revenues. A 1% registration fee was introduced.
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	The ceiling for loans was increased to $15 billion.

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:

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.

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.

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:

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.

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,

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).

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).

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)).

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)).

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)).

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.

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).

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.

(a) the borrower was the proprietor of the business enterprise in respect of which the loan was to be expended;

(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

(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

(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.

(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

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.

(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.