Forgivable Loans in Canada

A forgivable loan is a loan where the lender waives or “forgives” either the entire balance or a portion of it.

As a result, the borrower is no longer obligated to repay the amount owing.

How does a Forgivable Loan Work?

On the surface, a forgivable loan works like any standard loan.

As a borrower, you must apply with the organization issuing the loan and meet the eligibility criteria.

Once you’re approved and receive the funds, you must repay the principal and interest you owe according to a pre-set payment schedule.

What makes a forgivable loan unique is that you may qualify to have your principal forgiven, either partially or in full.

Typically, you must adhere to strict conditions outlined in your loan contract to have your loan balance scrubbed.

Otherwise, your payment duties remain intact.

For example, you must allocate the funds toward specific investments or expenses or secure employment within a particular community or industry.

Examples of Forgivable Loan Programs in Canada

Here are some notable examples of forgivable loan programs in Canada:

Federal and Provincial Student Loans

Government student loans constitute the bulk of forgivable loans.

You can apply for one through the Canada Student Financial Assistance Program (CSFA).

Financing is provided jointly by the federal and provincial governments.

Loan forgiveness is available for students pursuing a career as a medical professional in the following fields:

  • Family Doctor
  • Residents in family medicine
  • Registered nurse
  • Registered psychiatric nurse
  • Registered practical nurse
  • Nurse practitioner

To be eligible, you must conduct your work in one or more under-served remote communities for a minimum of 400 hours over 12 months, among other criteria.

Upon completing your service, you’ll need to apply for loan forgiveness within 90 days.

However, the forgiveness provision apples strictly to the federal portion of the loan – you’re still responsible for repaying the provincial part.

Luckily, several provinces offer their own student loan forgiveness programs, including British Columbia.

To have the provincial component of your debt forgiven in BC, you must complete five years of eligible employment, and no longer be enrolled in a post-secondary program.

Your loan must be in good standing (no defaults or missed payments) as well.

If you’re not studying for or actively working in the medical field, you can explore the Repayment Assistance Plan (RAP).

This program provides financial relief for borrowers struggling to repay their student loans.

If you qualify, you’ll receive a reduction in your monthly payments, potentially down to zero.

Canada Emergency Business Account (CEBA)

The Canadian Emergency Business Account (CEBA) was launched by the Canadian federal government on April 9, 2020, as a response to the sharp decline in income suffered by businesses across the country during the COVID-19 pandemic.

Eligible businesses could receive up to $60,000 in interest-free loans.

Up to one-third of the loan balance is forgivable (to a maximum of $20,000) if it’s repaid by December 31, 2023.

The federal government discontinued the program on October 21, 2021.

Fact

The Government of Canada provided funding for over $49 billion in CEBA loans during the COVID-19 pandemic.

Pros of Forgivable Loans

Financial Relief for Borrowers

Carrying a large quantity of debt can place a severe strain on your finances and hamper your life goals, such as retiring early or purchasing a home.

The prospects can be incredibly bleak if you’re a recent graduate who has to deal with overwhelming debt payments while earning a lower salary at an entry-level job.

Debt forgiveness immensely benefits not only individuals but the entire country – it can be conducive to a thriving economy and increase living standards.

By forgiving debt, people end up with more money in their pockets, which they can use to buy property, stay on top of bills, start families, open a savings account, etc.

Public Service Incentive

Many loan forgiveness programs are geared toward individuals pursuing a career related to health and wellness, such as medicine and psychology.

Individuals working in these fields play crucial roles that positively impact many people’s lives, especially those living in under-resourced communities.

Cancelling the sometimes financially crippling loans related to these professions’ education and training encourages more people to consider these careers.

Financial representative explaining how forgivable loan works

Cons of Forgivable Loans

Strict Eligibility Criteria

Depending on your loan, qualifying for loan forgiveness can be challenging.

You may have to satisfy a long list of arduous criteria, all of which can potentially change.

There may be strict rules you must observe in how you use the loaned funds; failing to comply with even one can disqualify you from having the loan balance waived.

Restrictions on Opportunities

Many loans that come with forgiveness provisions require you to obtain employment in a specific locale, sector, community, or industry.

As a result, you could miss out on other more appealing and lucrative opportunities.

Requirements to Qualify for Forgivable Loans

To be eligible for loan forgiveness, you must meet specific criteria, which vary based on the type of loan.

There aren’t any standard requirements across each category of forgivable loans – you’ll have to do the necessary research to find the criteria relevant to you.

Below are some helpful resources that outline the eligibility requirements for various forgivable loans in Canada:

Are Forgivable Loans Taxable?

You may or may not be subject to tax on a forgivable loan.

It depends on the nature of the program and the specific tax rules outlined by the Canada Revenue Agency (CRA).

For example, if you’ve received a CEBA loan, the forgivable portion is taxable in the year you receive it.

Similarly, you must include all loaned funds you receive through the Canada Emergency Commercial Rent Assistance program (CECRA), 100% of which are forgivable.

There’s no requirement to include forgivable student loans as income on your tax return.

Did You Know?

If you file for bankruptcy at least seven years after completing your post-secondary studies, you’ll be absolved from having to pay your student loans.

Frequently Asked Questions

  • What’s the difference between a forgivable loan and a grant?
  • Do you have to pay back a forgivable loan?

Mark is a freelance writer who specializes in covering personal finance topics related to investing, mortgages, credit cards, and more.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.