Small business owner Andrew Williamson is photographed outside his gallery, the Black Cat, in Toronto, on Wed., May, 6, 2020. (Christopher Katsarov/The Globe and Mail)Christopher Katsarov/The Globe and Mail
Scott Terrio is a certified credit counsellor and manager of consumer insolvency at Hoyes, Michalos & Associates Inc.
Often, small-business owners who are in financial distress may resort to not remitting HST or payroll tax as a means to sustain cash flow until times improve. But the long duration of the COVID-19 shutdown impact made these improved times fail to come about, and the debts business owners incurred to stay afloat ended up out of control for many.
Add a dose of hefty HST debt and perhaps payroll tax debt to the bank credit outlay and then the coming repayment deadline of federal pandemic business loans, and many business owners are now feeling at the end of their rope.
Extending the end-of-year repayment deadline for Canada Emergency Business Account, or CEBA, loans would surely help a great many to maintain their businesses. The federal announcement on Thursday to that effect was a welcome move. But I’m not sure the government truly grasps the situation.
If you’re incorporated, business debt is corporate, not personal. So theoretically you could simply close your corporation and walk away from the debt: It dies with the corporation.
But it doesn’t work that way in practice. For many small businesses, the personal and the corporate are inextricably linked.
Sole proprietors, for one, can’t simply walk away from CEBA debts. Their business debts are one and the same with personal debts: There is no legal separation. For incorporated businesses, meanwhile, owners often take on a lot of personal debt.
There are also business debts for which the owner is personally liable. These include unremitted HST and employee payroll deductions for taxes and governments programs.
You can connect the dots on that.
Working at an insolvency trustee firm, I have an expansive view on how insolvency unfolds for small businesses. Most “business” filings we do are not business at all, really, but personal proceedings once the person has closed their corporation down and still owes personal debts. Or, in the case of a sole proprietorship, it’s essentially a personal insolvency through and through.
In our practice of insolvency, we have spoken to hundreds of small-business owners who have struggled for the past three years just trying to stay afloat. Many have had to reluctantly draw on their banks to keep the doors open, pay staff and suppliers, and maintain any type of competitive edge. Thousands have drawn on savings, as well.
In the spring and summer of 2020, we spoke to hundreds of small-business owners whose businesses were crushed by the economic shutdown. They were frantic. And when entrepreneurs, hardened by the many challenges of running a small-business operation are worried, it’s for real.
Many were forced to resort to their various credit facilities to both stay open and to keep their employees working.
This is what misleads so many when it comes to insolvency for small businesses facing the CEBA repayment deadline.
No business insolvency stats are going to reflect what is really going on, necessarily, in terms of the current struggles of small businesses. Small-business enterprise corporate situations do not end up leading to a corporate insolvency proceeding since simply closing the corporation achieves much of what is needed – but underneath businesses there are people, and through them the debts live on.
Even if the government extends the CEBA deadline further or grants additional relief, small-business enterprise corporate closures and personal insolvency filings will certainly spike.