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Some small businesses are finding out for the first time that they should never have been given pandemic business loans from the government two years ago, as banks begin to issue repayment letters to loan recipients.

The loans were made through the Canada Emergency Business Account program, which was the first and most widely used pandemic aid for businesses. It was unveiled on April 9, 2020, just weeks into the worldwide emergency, and it ultimately directed more than $49-billion to nearly 900,000 businesses.

Each loan is worth $40,000, with $10,000 forgivable if the sum is repaid by a certain date, initially Dec. 31, 2022. That deadline was later extended to Dec. 31, 2023. Eligible small businesses were also able to apply for an extra $20,000, of which $10,000 was forgivable.

The loans are guaranteed by the federal government, administered by Export Development Canada and delivered through financial institutions.

Over the past two weeks, banks and credit unions have begun to issue letters to account holders who took out CEBA loans, to inform them of the deadline extension and repayment terms. Businesses that don’t repay by Dec. 31, 2023, will forfeit the forgivable portion of the loans and begin to accrue interest at 5 per cent a year.

For some businesses, however, these letters have a different message: they are already considered to be in default on their loans, because the government has determined they didn’t qualify to receive the money in the first place.

Dave Dindayal, who does workplace safety training in Toronto through his business Restasure HSC, applied for and received a $40,000 CEBA loan in 2020. He said lockdowns prevented him from doing in-person training, and that the CEBA funds were a huge help in covering costs related to his business.

He said he applied for the extra $20,000 later in 2020, and was told he could not receive it because of a problem with his business number. He said he followed up with his bank and with the CEBA call centre, but never got any additional information, nor was he told about any problems with his original loan.

Then, two weeks ago, he got a letter from his bank informing him that the government had determined that he should never have received the loan. The letter said he would have to pay the money back in full by Dec. 31, 2023, and would not have the $10,000 forgiven.

The letter, which he shared with The Globe and Mail, does not say what the problem was with his application. It says there are no appeals and all decisions are final.

Dan Kelly, president of the Canadian Federation of Independent Business, said Mr. Dindayal is one of dozens of business owners in this situation who have contacted his organization in recent days.

The federal government estimated in the summer of 2021 that 40,000 CEBA recipients should not have received the loans, according to a briefing note obtained by The Globe under access-to-information law. The note estimated another 60,000 accounts would go to collections.

Mr. Kelly said the government should absolutely go after cases of fraud, but that it should treat with compassion business owners who applied in good faith and are only now learning of problems with their applications.

“I do think for many this will be the straw that breaks the back of a business and pushes them into outright failure,” he said.

The CFIB is calling on the government to extend the forgivable portion of the loans to those business owners, and to extend the repayment deadline for all CEBA recipients by another year.

Shanti Cosentino, press secretary for Mary Ng, the Minister of International Trade, Export Promotion, Small Business and Economic Development, said the government recognizes that some small businesses continue to struggle and need more time to repay their loans, which is why Ottawa bumped the repayment deadline to 2023.

“We will continue to work with businesses throughout this process, like we have from the beginning,” Ms. Cosentino said.