A Consumer Proposal is a personal legal process that only protects the individual who files it. While it stops creditors from suing you personally or seizing your personal assets, it does NOT provide a legal ‘stay’ for your incorporated business or its corporate bank accounts.
Many small business owners in Calgary, Edmonton, and Toronto operate through a corporation to benefit from limited liability. However, when financial trouble hits, it often affects both the person and the company. If you find yourself unable to pay your personal taxes or credit cards, a Consumer Proposal is an excellent way to settle those debts for a fraction of what you owe. 🏭
However, it is critical to understand that the ‘Corporate Veil’ works both ways. Just as the corporation’s debts aren’t usually yours, your personal legal filings don’t automatically cover the corporation. If your business has its own line of credit or owes money to suppliers, those creditors can still take action against the corporation even if you have filed a personal proposal.
The Interaction Between Personal Proposals and Business Debt
For entrepreneurs, the line between personal and business finances is often blurred. Understanding how a proposal works in the context of a business is the first step to saving your livelihood. 📋
The Role of Personal Guarantees
Most small business owners have signed ‘Personal Guarantees’ for their corporate loans or office leases. This means if the corporation fails to pay, the bank comes after you. A Consumer Proposal does protect you from these guarantees. By filing, you include the personal guarantee as an ‘unsecured debt,’ effectively neutralizing the bank’s ability to sue you personally for the business’s failings.
Step-by-Step Analysis for Business Owners
Before you file your papers with a Licensed Insolvency Trustee, you must perform a ‘financial triage’ of your corporate structure. 📋
Step 1: Inventory All Corporate Debts
Make a list of every debt the corporation owes. Mark which ones have a personal guarantee and which ones do not. Suppliers in Mississauga or Brampton often deal with the corporation only, meaning they are ‘corporate creditors.’ They cannot garnish your personal wages, but they can stop shipping to your business.
Step 2: Assess Corporate Assets
In a personal Consumer Proposal, you keep your assets. However, if your corporation owns equipment or vehicles, those are corporate assets. If the corporation cannot pay its own debts, those assets are at risk of seizure by corporate creditors. Filing a personal proposal will not stop a bailiff from seizing a corporate truck. 🚚
Step 3: Separate Your CRA Accounts
The Canada Revenue Agency (CRA) treats personal income tax and corporate GST/HST or Payroll as separate entities. While a Consumer Proposal can include your personal tax debt, it does not stop the CRA from freezing a corporate bank account for unpaid GST. You must ensure your corporate tax filings are up to date and handled separately.
Step 4: Communicate with an LIT
When you meet with your trustee, explain your business structure in detail. They can help you determine if you need a Division I Proposal (for businesses and high-debt individuals) or if a standard Consumer Proposal is enough. If the business is also insolvent, you might need to look into a ‘Corporate Bankruptcy’ alongside your personal filing.
Costs and Fees for Business Owners
Filing a proposal as a business owner involves standard costs, but the complexity of your NFP (Net Family Property) or business valuation may increase the time required.
| Service | Estimated Cost (CAD) | Outcome |
|---|---|---|
| Consumer Proposal Filing | $0 Upfront (usually) | Fees are taken from your monthly payments. |
| Business Valuation | $500 – $2,500 | Required if your shares in the company have value. |
| Corporate Bankruptcy | $2,500+ | Optional, if the business also needs to close. |
How Long Does the Protection Last?
Once you file, the ‘Stay of Proceedings’ for your personal debts is immediate and lasts as long as you are making your proposal payments (usually up to 5 years). For the corporation, there is no protection unless the corporation itself files for a Proposal or Bankruptcy. Most owners in Ontario try to keep the business running by paying corporate ‘must-pay’ creditors while using the personal proposal to clear the ‘guaranteed’ debts that threaten their home and family.
Frequently Asked Questions (FAQ)
Can I still be a Director of my corporation?
In Canada, if you file a Consumer Proposal, you can remain a director of a corporation. This is a major advantage over personal bankruptcy, which usually disqualifies you from being a director in most provinces until you are discharged.
Will the bank close my corporate account?
If the corporation owes the same bank money, the bank may use its ‘Right of Offset’ to take money from the corporate account to pay personal or guaranteed debts. It is often recommended to move corporate banking to a new institution before filing a personal proposal. 🏦
What about my ‘Director’s Liability’ for taxes?
Directors in Canada are personally liable for unpaid corporate GST and Payroll taxes. A personal Consumer Proposal can include these ‘Director’s Liability’ assessments once the CRA has officially assessed you for them. This is a vital tool for business owners in financial distress.
Can I start a new business after filing?
Yes. There are no restrictions on starting a new business while in a Consumer Proposal. Unlike bankruptcy, you are not ‘undischarged,’ and you can continue your entrepreneurial activities in Kitchener, Waterloo, or anywhere in Canada. 🚀
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