Bankruptcy Statistics Up in Canada

Evelyn Jacks

The most recent statistics released in August tracking bankruptcies, paint a grim picture of business reality in Canada.  While there is some good news - bankruptcies decreased in June over the month before – it is clear that 2024 has been a difficult one especially for small businesses.  Did the CEBA loan repayment requirement last month push many over the edge?  That and other factors are to blame, and tax and financial advisors are well poised to help.

The Statistics.    The Office of the Superintendent of Bankruptcy notes the following:

For Businesses – Defined as  “Any commercial entity or organization other than an individual, or an individual who has incurred 50% or more of total liabilities as a result of operating a business,” the increase in bankruptcies in 2024 over 2023 were a staggering 45.3%.

For Corporations – Defined as “A commercial entity or organization”, the numbers were even worse: an increase of 55.4%.

For Individual Businesses – Defined as “An individual who has incurred 50% or more of total liabilities as a result of operating a business,” the increase in bankruptcies were smaller:  3.7%.

This follows a first quarter report in which business bankruptcies shot up by 93%. 

What’s the Cause?  High input and labor costs, the expiry of the CEBA loan in March all may have added to high borrowing costs.  The Bank of Canada concurs on the effect of post-pandemic malaise in its most recent Financial Stability Report.  Smaller businesses, it notes, appear to be under more financial pressure than their larger counterparts:

“The number of businesses in Canada filing for insolvency, which had been unusually low during the pandemic, has surpassed pre-pandemic levels by a large margin. A key reason for this rebound could be that the temporary government support programs put in place during the pandemic delayed the impacts of underlying financial pressures for some businesses and reduced the number of insolvency filings relative to pre-pandemic levels.” 

The report further explains that as of March 2024, the number of businesses filing for insolvency was about double its average from before the COVID‑19 pandemic with a combination of factors to blame, including higher borrowing costs, slower economic activity and the phasing out of federal and provincial pandemic support programs.

CPP Hikes at Just the Wrong Time?  Still, there was more bad news early in 2024, which increased the cost of labor.  CRA’s mandatory source remittances increased with the introduction of a “CPP 2”. Compared to 2018, self-employed people now contribute 52% more when they reach maximum contributory earnings of $73,200 ($5188 in 2018 vs $7885 in 2024).

This increased burden is also reflected in the average balance due in 2024:  ironically, 7.7 million people owed an average of $7,885 when they filed their T1 returns in 2024.

Retirements Gone.   What these reports don’t reflect is the number of businesses that simply shut their doors, unable to realize any gains on their equity over the years.  For many, this was their retirement security, now evaporated.

Future Dispositions Cost More.  Businesses that have made it this far face a higher tax burden when they do sell:  66 2/3% capital gains inclusion rate which is offset by a $1.25 million capital gains exemption if they meet qualifying criteria.  Plus, there is a new Alternative Minimum Tax and Intergenerational Business Transfer rules to decipher – rife with complexity.  This means higher professional fees.

Bottom Line.  Business owners are continuously reacting to changes in the economy and the foreseeable future points to more volatility.  According to RBC Thought Leadership: “business investment is on track to decline for a second straight year in 2024. . .and household debt service costs will continue to increase with about $200 billion in four and five-year fixed-rate mortgages in total are coming up for renewal this year (roughly a fifth of the outstanding balances of those mortgages), with another $275 billion in 2025. Almost all of those will be renewing at higher interest rates even with assumed BoC interest rate cuts.”

This reality will no doubt further cut into consumer spending. 

It’s been a difficult journey from 2019 to 2024 for most businesses.  While we celebrate their resilience the economy sputters back to a new normal, the economic forecasts are not encouraging. 

For these reasons, tax and financial advisors can be of renewed service, helping with debt management, retirement counselling and planning, CRA debt management, budgeting and forecasting can assist business owners make sound decisions in difficult times.

For additional educational resources to shore up knowledge, see Knowledge Bureau’s new Diploma in Advanced Family Tax Compliance, as well as the new Income Tax Fundamentals Course – a pre-cursor to the DMA™ Specialist programs.