Category: Brandon Blog Post

Welcome to our weekly blog on financial matters focusing on debt, debt reduction and alternatives to bankruptcy. Our blog is written by our Senior-Vice President, Brandon Smith, who is a licensed trustee in bankruptcy, hence the title, Brandon’s blog.

Brandon writes on topics of interest for individuals and businesses. We hope that you enjoy Brandon’s blog, visit every week to see the new Brandon’s Blog and spend time on our website learning from the information we provide about bankruptcy, debt consolidation, debt settlement, consumer proposals, restructuring and receivership. We also hope you will spend some time on our website – www.irasmithinc.com, finding out more about our Firm and people.

At Ira Smith Trustee & Receiver Inc., we want to help people for Starting Over, Starting Now, living a debt free life.

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Brandon Blog Post

COURT APPOINTED RECEIVERSHIPS: THE EASIEST WAY TO AVOID COSTLY MISTAKES

court appointed receiverships
court appointed receiverships

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

If you would prefer to listen to the audio version of this court appointed receiverships Brandon’s Blog, please scroll to the bottom and click play on the podcast.

Court appointed receiverships introduction

I have written several blogs before on receivership, be they court appointed receiverships or private appointments. The purpose of this blog is to discuss a recent court decision involving a big mistake made by a court-appointed receiver and why the court would not let them fix their error. That mistake cost them big time!

Some previous court appointed receiverships blogging

In reviewing the court case, three previous blogs of mine on court appointed receiverships came to mind:

The first one dealt with certain procedural matters in court appointed receiverships when the receiver sells real estate.

The second blog dealt with factors a court-appointed receiver must disclose to the court in seeking court approval for a sale of assets.

The third one was about what happens when a court-appointed receiver applies to the court for some relief without knowing all the details of the story they are telling the court! That is very embarrassing for receivers in court appointed receiverships!

The recent case I will shortly speak about reminded me of these three previous blogs. You will see the connection very soon, I promise.

What happens when a company goes into receivership?

When the company enters into receivership, senior management and the Directors shed most of their authority for decision making. The Directors’ general company obligations of preserving corporate records remain, yet any type of decision-making regarding the running of the business or its assets have vanished.

That is now the role of the receiver. This is true for a privately appointed receiver but it is especially so in court-appointed receiverships. That is because the court is now supervising all the company’s affairs and assets through its court officer, the receiver.

Responsibilities concerning the business in a practical sense stop upon the receiver being appointed. Their recommendations and help are only needed if requested by the receiver. They definitely will not be paid for any kind of initiative unless the receiver concurs in writing to make funds available for them in return for their services.

What are the duties of a receiver?

The receiver’s first task is to take possession of and control all of the assets, properties and undertaking covered by the secured creditor’s security in a private receivership. In court appointed receiverships, the receiver’s powers and actions come from the authority given to it by way of the court order appointing the receiver.

The receiver needs to make a decision whether it can get a greater amount for the assets if it runs the business. Conversely, the receiver may choose that the danger of operating the business is not worth it in terms of any type of upside value that may be gained from running the business.

The receiver after that creates a strategy for the running or the shuttering of the business as well as for the eventual sale of the assets. The kind of receivership appointment and the nature of the business operations and assets will dictate what approach the receiver will take. In the meantime, the receiver must protect and conserve all the assets, including making sure there is sufficient insurance coverage in place.

In a private appointment, the receiver requires to obtain the authorization of the secured creditor who appointed the receiver prior to implementing its plan and taking actions concerning the running of the business and the sale of the assets. In court appointed receiverships, the receiver requires the approval of the court.

The Court appointment case

This court case dealt with some very unique issues. The receiver was originally appointed by the court under the Courts of Justice Act (Ontario) and the Bankruptcy and Insolvency Act (Canada). The receiver was making a motion for advice and directions about it wanting approval for its fees and disbursements since the last approval order. It also wanted approval to make an interim distribution.

That seems pretty routine. It was the receiver’s fifth report to the court. The motion was opposed by the company whose assets were seized in the receivership. There was only one problem that caused that party to oppose the receiver’s motion. However, it was a humungous problem this receiver caused itself.

The problem is that the receiver obtained approvals from the court based on the information contained in its fourth report to the court and now the receiver was asking for something different!

Court appointed receiverships: A brief history of this court-appointed receivership

The major secured creditor who made a secured loan against a real estate project under both mortgage security and a general security agreement began court proceedings by making an application to the Ontario Superior Court of Justice Commercial List for the court appointment of a receiver. On June 22, 2017, Justice Conway released an Order appointing the receiver in this matter (the Receiver).

The Order followed the model receivership order format and had the usual provisions. Specifically, it mentioned in paragraph 18 that “the Receiver’s Charge shall form a first charge in priority to all security interests, trusts, liens, charges and encumbrances, statutory or otherwise, in favour of any Person….”.

The Receiver performed its duties and filed reports with the court on a timely basis and received the necessary approvals along the way. So far so good with the first three court reports.

The fourth report was OK too

In November 2019 the Receiver brought a motion for Justice Dietrich to approve its Fourth Report and also its Supplementary Fourth Report. The same stakeholder currently opposing the Receiver’s motion for advice and directions also challenged certain of the Receiver’s recommendations contained in its Fourth Report.

It turns out that from the Receiver’s efforts and sale of the real property, there was not only enough money to pay out all the secured creditors, but there were funds left over. This is a very unusual situation. So the Receiver came to court. One of the approvals it was seeking was its proposal to pay the claims of the unsecured creditors. This company opposed that relief claiming the unsecured creditors were statute-barred. The reason the company opposed this is simple. Whatever the unsecured creditors are not entitled to would presumably be available to flow to the shareholders of the company.

Justice Dietrich looked for further written materials on this issue from the parties which were received on March 16 and 31, 2020. Justice Dietrich considered all the material and released her endorsement on this issue on June 19, 2020.

court appointed receiverships
court appointed receiverships

Court appointed receiverships: Justice Dietrich’s decision

Justice Dietrich’s Order approved the Receiver’s Fourth Report and Supplementary Fourth Report (the Fourth Approval Order) as well as payment to the Receiver of its fees of $373,960.75 plus HST plus an accrual of $25,000 plus HST to finish the management of the receivership. The Order additionally authorized the Receiver’s legal fees of $85,218.23 plus HST and an accrual of $15,000 plus HST for concluding the administration of the receivership.

The Fourth Approval Order approved making payment to the unsecured creditors in the amount of $190,800.71. Those payouts were made without delay by the Receiver even prior to the appeal time for appealing the Fourth Approval Order expired. The remaining funds were to be paid out to the company who opposed the motion, or as the company may direct.

The Receiver made all the payments except for one. The funds to be paid to the company involved in the receivership, which was more than $1 million, had not been paid out to the company as of the date the Receiver came to court with its Fifth Report.

Court appointed receiverships: OOPS – We need a fifth report to court

The Fourth Approval Order was settled with the consent of all stakeholders. That order was obtained on the basis that there was not much work left to do and it would be covered off by the approved fee accruals. The Receiver and its lawyer were to finish its work and then file a certificate with the court to advise the work was finished. The Fourth Approval Order also said that when the Receiver files the certificate with the court, that is the trigger that discharges the Receiver and ends the receivership. This is all standard stuff.

There now is only one huge problem. Subsequent to the Fourth Approval Order being issued and entered, the Receiver requested more money for its fee and its legal fees, well above what it told the court already. The further amount it was seeking was pretty close to an extra $100,000.

The Receiver then delivered a Fifth Report laying out the added costs asked for and also documenting an added HST Refund and accumulated interest. The Receiver acknowledged that it made an error. The Receiver also acknowledged that it could have brought this to everyone’s attention before the Fourth Approval Order was settled, issued and entered and the appeal period already has expired.

Personally, I call that more than an error. That is a huge problem. It is a major blow to the firms’ revenue and cash flow. If not resolved in the Receiver’s favour, it will most certainly cause much angst among the partners in the licensed insolvency trustee firm.

Court appointed receiverships: The Fifth Report To Court hearing and what the two parties said

The Receiver’s position was fairly simple. They really didn’t have much they could say at this stage, other than, OOPS! The Receiver submitted that the Receivership Order appointing the Receiver is clear. Unless the Court orders otherwise, the Receiver will obtain its reasonable fees and costs and those of its legal counsel. Those fees and costs are secured by a first ranking charge against the assets being administered in the receivership.

All other amounts come after this first charge. The Receiver went on to say that the Appointment Order and the Fourth Approval Order were therefore in conflict and the Appointment Order must prevail.

The company in opposing the Receiver’s motion had some pretty simple facts on its side. The court agreed with these facts. The court stated that:

  • The Receiver only brought this motion on in response to the company’s attempt to set down a date for its motion to compel the Receiver to make the $1 million-plus payment to it as directed by the Fourth Approval Order.
  • The company agreed to the settling of the Fourth Approval Order based on the Receiver’s submissions to the court that what it put in its Fourth Reports was everything and there was. There was nothing else getting in the way of making all the payments approved in the Fourth Approval Order.
  • The Fourth Approval Order was intended to be final and for that reason
    incorporates the provisions of the Appointment Order. That is, it is open to the court to find that the Receiver has no capacity to request more fees since the clear objective of the Fourth Approval Order is to wrap up all issues including the discontinuation of the receivership.

The Receiver conceded that the details pertaining to the extra fees was known at the time the Fourth Approval Order was being settled and also after that. However, the Receiver took no particular actions to request them prior to the Order being settled and entered. The only action taken by the Receiver was this Motion for Directions supplied in reply to the company’s motion request to get paid what was already approved by the court.

The Commercial List court understood that the Receiver has undoubtedly made an error. The question the court needed to answer was who should pay for it – the Receiver or the company? The court decided that it should not be the company who settled the Fourth Approval Order understanding what its terms were, including, there was nothing standing in the way of it getting its money as already approved by the court.

The easiest way to avoid costly mistakes

Court appointed receiverhips, by their very nature, are complex administrations. Being a receiver or a receiver manager is a tough role. A court-appointed receiver must be fair and neutral to all parties as an officer of the court. Everyone is scrutinizing the decisions being made. Once a court-appointed receiver serves its motion materials, everyone goes through the receiver’s report with a fine-tooth comb. And rightly so.

It is not a good place to be when you make any kind of error in a public document. It is embarrassing and it makes everyone else wonder what other mistakes have you made? It is especially tough when your mistake short changes your firm out of the money that it has earned. These are awful circumstances.

By now you probably realize that you don’t have to be a licensed insolvency trustee to know the easiest way to avoid costly mistakes. Check, double-check and triple-check everything before you sign and release the report. As my carpenter friend says, “measure twice and cut once”.

Court appointed receiverships summary

I hope you have enjoyed this court appointed receiverships Brandon’s Blog. A sick insolvent company’s business might be saved by a debt restructuring.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy

Categories
Brandon Blog Post

CANADIAN CONSUMER DEBT: NEW REPORT SHOWS COVID-19 INSPIRES INCREASE IN CANADIAN MORTGAGE DEBT

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

Canadian consumer debt introduction

On November 30, 2020, Equifax Canada reported that total Canadian consumer debt climbed 3.8% to $2.041 trillion in the third quarter of 2020 compared to the third quarter in 2019. Canadian household average debt is extremely high.

The purpose of this Brandon’s Blog is to discuss what Canadian consumer debt is, what Canadian households have been doing with credit use during the pandemic and what the Equifax Canada reporting means for household debt.

The pandemic can’t stop Canadian consumer debt increase

The reporting indicates that the rise in Canadian consumer debt came mainly from debt growth in mortgage debt and auto loans. Mortgage balance increases came from both refinancings of existing mortgage debt and new mortgage applications.

The thinking with auto loans is that it resulted from Canadians purchasing vehicles that they had intended to purchase earlier in the year. Concerning mortgages, the refinancings were to consolidate higher interest rate non-mortgage debt, for credit products such as credit cards, into a new higher mortgage amount at much lower interest rates.

This obviously brings down the overall average debt interest rate. The new mortgages are tied directly into Canada’s housing market that the pandemic, so far, could not stop either.

All this has taken place with the backdrop of businesses closing and jobs being lost because of the pandemic. As well, millions of Canadians took advantage of payment deferrals on loan payments, especially mortgage deferrals on home mortgages. Finally, Equifax points out that the largest growth in mortgages came from those 35 years of age and under.

So you although you would think that the pandemic, business closures and job losses would result in an overall Canadian consumer debt increase due to hardship, that is not the case. The rise in Canadian consumer debt has been very focussed and is more about an opportunity for those that have maintained a good income.

While mortgage and auto loans increased, other non-mortgage debt products, such as credit cards and unsecured lines of credit, showed net decreases in outstanding balances. The reason for this is that with Canadians working from home and otherwise staying home while receiving government subsidies, they are spending less. On average, on a net basis, that means Canadians used some of their money to pay down non-mortgage Canadian consumer debt.

The debt-to-income ratio and Canadian consumer debt

On June 12, 2020, Statistics Canada reported that the debt-to-income ratio hit an all-time high of 178% in late 2017. The Statistics Canada report in June 2020 said it was at 177%.

The debt-to-income ratio is the degree of just how much financial obligations a household has, compared to its disposable income. That is, the money you have readily available to spend or invest, on an after-tax basis.

A ratio of 177% means that, throughout all Canadian families, we jointly owe $1.77 for every single dollar of disposable income we have. So that means on average, household debt as compared to household disposable income is very close to the all-time high.

What are the consequences of the debt-to-income ratio and Canadian consumer debt?

The general agreement is that too much Canadian consumer debt makes households financially susceptible. If you’re a financial policymaker, such as the Bank of Canada, you worry that too much debt makes the Canadian economic climate much less resistant to future economic shocks. One of the things worrying the Bank of Canada was expressed recently by Deputy governor Toni Gravelle “that fear hasn’t played out during the pandemic, despite it being the worst downturn since the Great Depression.”

At the personal level, we are likely concerned not with macroeconomic principles, but rather, can we afford to make our monthly payments and delinquency rates. Canadians generally, and unfortunately, do not consider what would happen to their ability to pay if something unexpected occurs such as increases in the rate of interest, or the loss of your job.

Using debt is also correlated with optimism regarding our financial futures. Individuals that expect their financial situation to improve are far more likely to be willing to take on more financial debt. Statistics Canada research reveals that individuals’ assumptions concerning their financial circumstances are strongly correlated with both their amount of total Canadian household debt and their debt-to-income ratio.

Even the most optimistic households, however, are still subject to borrowing rules set by financial institutions. The increase in mortgages, be it a refinancing or a new mortgage, is obviously by people who can meet the borrowing rules. Lenders look at the household’s debt service ratio. This calculation suggests to lenders what the household’s capability to make its debt payments according to the repayment schedule is.

So what this tells me is that the housing market, especially the hot expensive cities of Vancouver and Toronto, is being fuelled by those who have good jobs and who can work from home. Probably white-collar jobs and professionals who see the combination of super-low interest rates, their household debt and debt-to-income ratio as an opportunity. They are not as worried about their debt levels or average debt. They are optimistic about taking on more consumer credit.

canadian consumer debt
canadian consumer debt

Are there dangers with the current level of Canadian consumer debt?

Those who have lost their jobs or business are not buying more expensive homes. Those whose hours are constrained by the pandemic also are not the ones buying. So this highlights a divide in the Canadian economy. Those who can afford to view this pandemic as a financial opportunity vs those who are barely hanging on not knowing how they are going to make next month’s rent payment.

The statistics show that 12% of brand-new loans were by Canadians already taking advantage of payment deferral programs. So presumably, those who took advantage of mortgage deferrals in particular also took advantage of credit use for the opportunity I would guess to refinance other household debt.

They rolled higher rate non-mortgage Canadian consumer debt into much lower rate mortgage debt. Another financial opportunity for those with enough income to meet the lender’s borrowing requirements. This produced growth in mortgage debt but a decline in mortgage delinquency rates.

But there is also the other end of the economic scale. Recently, Prosper Canada, a national charity dedicated to expanding economic possibilities for Canadians living in poverty with program and policy innovation, released its report titled “Roadblock to Recovery: Consumer debt of low- and moderate-income Canadians in the time of COVID-19″.

This report shows the effect of household debt on low-income families. The reports main findings are:

  • Many, but not all, low and moderate household income families carry debt.
  • Low household income families spend an average of 31% of their incomes repaying debt, while moderate household income families spend an average of 18%.
  • Fewer low household income families have debt loads backed by assets than their higher-income counterparts. Only 20% of indebted low-income households and 39% of indebted moderate-income households carry mortgage debt.
  • Fifty-nine percent of indebted low household income families and 56 percent of indebted moderate-income households carry some amount of credit card, unsecured lines of credit and/or installment loan debt, making this the most common type of debt among these households.
  • Twenty-four percent of indebted low household income families carry student loan debt compared to just 15% to 17% of households at other income levels.
  • For many households, especially those outside urban centres, automobiles are a necessity of life. However, auto loans pose several risks to low- and moderate household income borrowers with low credit scores.
  • Financial counselling support for insolvent borrowers is of uneven quality and there are few sources of free, quality financial debt counselling available to Canadians struggling to avoid insolvency. These groups also have no financial plan.

Canadian consumer debt patterns show there are two economic Canadas

The COVID-19 pandemic has actually highlighted in plain terms exactly how unprepared most Canadians are to weather a major economic shock. The above-noted studies show in stark terms that there are at least two economic Canadas.

The first are those who can afford to refinance their mortgage or buy a home to get a new mortgage. The other Canada has lost jobs, businesses and are low to middle income. The low to middle-income groups are in financial trouble and their Canada consumer debt is generally not backed by assets.

However, those who might experience financial problems are not limited to one of the groups. Those who do the refinancings and new mortgages are buoyed by their own optimism for the future. They may tend to just keep taking on more debt. They are not prepared for an unforeseen shock. They will not realize that they are in trouble until they hit the wall.

How do you know if your Canadian consumer debt is a problem?

There are several warning signs that your Canadian consumer debt is a problem. Major indicators are:

  • Your bank account is overdrawn every month.
  • You are using credit cards for daily expenses.
  • You have already taken on payday loans and have started to receive collection telephone calls.
  • Your debt levels are rising are about to hit the maximum of all of your credit lines.
  • You are behind on your loan payments.

If you see your debt levels will soon be out of control, the time to act is now. Contact me and I will review your situation and provide you with a financial counselling session at no cost to you.

Canadian consumer debt summary

I hope you have enjoyed this Canadian consumer debt Brandon’s Blog.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

canadian consumer debt
canadian consumer debt
Categories
Brandon Blog Post

CRA PAYMENT ARRANGEMENTS CONTACT A TRUSTEE FOR COMPLETE DEBT RELIEF

cra payment arrangements
cra payment arrangements

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

If you would prefer to listen to the audio version of this Brandon’s Blog, please scroll to the bottom of the page and click on the podcast.

CRA payment arrangements –introduction

Are you experiencing income tax problems with the Canada Revenue Agency (CRA)? Some people still call CRA by their old name, Revenue Canada. You may need to make CRA payment arrangements. If you are burdened with serious tax debt and tax problems, although CRA may be your most pressing problem, it still may only be one of several creditors that you have to deal with.

You may be bombarded with advertisements from tax lawyers trying to scare you into believing that you need a tax lawyer in Canada to deal with CRA debt. However, if you can’t enter into proper CRA payment arrangements directly with them, consulting with a licensed insolvency trustee Trustee) may be a much better option to get you into a payment arrangement to take care of your tax debt.

What should I do when the CRA collections officer is calling me?

Neglecting the CRA’s letters or phone calls is never a good suggestion. This will just cause extra extreme collection initiatives and make them much less receptive to reasonable CRA payment arrangements.

Make sure you the options that relate to you under Canada’s tax regulations before you react to any inquiries or requests from the CRA. As an example, if a CRA agent asks for your financial information or a listing of your business customers, request time to adhere to this demand. Then use that time to promptly seek the help of a proper tax professional.

Keep all documents and also make sure CRA payment arrangements and other discussions and agreements are confirmed in writing by the appropriate CRA collections officer.

Then armed with proper advice, you can make the choice that best suits your situation.

What are the CRA payment arrangements?

The CRA isn’t looking to prosecute you; the collections officer is looking for debt collection of money from you when you did not include the required payment with your tax filing. One of the ways they can do that is through CRA payment arrangements.

A payment plan with the CRA allows you to make smaller-sized repayments over time till you have paid your entire financial debt. In any payment plan, even though you are making payments, interest continues to be charged on the outstanding tax debt.

To help the CRA establish your capability to pay, they will of course first look up your prior tax returns tied into your social insurance number. They will do that first to see what our average reported income has been over the last few years to get an initial idea of your ability to repay.

Financial disclosure will be important. They will certainly want you to give current information on your financial situation. This will include evidence of your current income, expenditures, assets, and debts to others. CRA already knows how much you owe them!

If they agree to get into CRA payment arrangements with you, they will want either a series of post-dated cheques or your entering into a pre-authorized debit agreement. They will also warn you that if any cheque is not honoured by your bank, then your deal with CRA is off. At that point, they will go back into full collection mode.

Why enter into a payment arrangement?

If you have an income tax obligation as a result of not being able to pay your full personal income tax obligation when filing your income tax return, then a payment arrangement makes sense.

Since the onset of COVID-19, CRA staff, including the group that includes the collections officer, have been working from home. That is continuing and the tax system in Canada is functioning. Since September 2020, they are calling and writing taxpayers about their existing income tax debt arising from your tax filing and the resultant notice of assessment.

The CRA will reconnect with taxpayers to re-evaluate their financial situation and agree to a settlement plan, where feasible. CRA would prefer to get the money you owe through CRA payment arrangements. They do not want to initiate legal action unless all collection efforts have failed.

So why enter into a payment arrangement? To show CRA that you want to work with them and to avoid tax debt collection activities that will most certainly disrupt your life.

Can you apply to CRA to reduce penalty, interest and tax debt?

Tax lawyers that advertise on television make a big deal out of making an application to the Minister of Revenue to have parts of the individual tax debt either reduced or eliminated. This process is called filing under the taxpayer relief provisions of the Income Tax Act.

When there is a legitimate basis in tax law to do so, of course. However, I have done many consumer proposals for people who went to such a TV tax lawyer who first touted the benefits of making such an application. It is very seductive to be told by a professional that if the taxpayer relief petition is successful, your tax debt will vanish, or at least you will get relief of penalties and there will be no need for CRA payment arrangements.

The problem is that when you have no real basis, it won’t work. It does take a long time for CRA to decide on your relief request so pushing it off way into the future is attractive. However, I have not seen one such application touted by the TV tax lawyer work. What has happened is the person has paid about $10,000 to that tax lawyer to fill in a couple of pieces of paper for a process that did not work.

As I mentioned, those same people then come back to me to file their consumer proposal to settle all their debts. I understand why they would prefer not to. I just hate to see people spend money they can’t afford to because they were sold a dream that can never be fulfilled. Now the person owes even more because of accrued interest. Entering into CRA payment arrangements has a much higher chance of success than applying for taxpayer relief when there is no basis in income tax law to do so.

cra payment arrangements
cra payment arrangements

Without CRA payment arrangements, what can CRA do to enforce payment of my tax liability?

Enforcement activity will usually include freezing and taking the money in your bank accounts, garnishing (taking) your salary or wages if you are an employee. If you are a proprietor of a business, they can notify your customers and seize your receivables. Also, without notice to you, they can get a federal judgment to place a lien on your residence.

You really do not want to experience any of these more drastic collection methods used by CRA. You want to try your best to meet your payment obligations. Third-party assessments, asset liens, tax garnishments are not fun.

These actions are severe and will totally disrupt your life. Keep in mind that CRA usually only goes to this extent if you have shown non-compliance with their attempts to enter into CRA payment arrangements.

What if I am experiencing financial hardship?

If you are experiencing financial hardship and perhaps have unmanageable debts above and beyond income tax debt, then CRA payment arrangements are probably also out of reach for you. In that case, contact a Trustee. I will review your entire financial situation and give you options in eliminating your debts. This initial consultation will be at no cost to you.

Hopefully, you will be able to avoid bankruptcy by filing a consumer proposal. A consumer proposal is the only debt settlement plan approved and supervised by the Canadian government.

If you run a business through a proprietorship, keep in mind that there are two kinds of tax debt that cannot be eliminated, even by bankruptcy. The first is unremitted source deductions from your employee payroll. The other is GST/HST that you collected but have not remitted to CRA.

The reason is that these are trust amounts. The tax law says that you are holding those amounts in trust for the government. So, if you have any tax debts that are trust amounts, those will have to be paid in full. Through a consumer proposal, I can get you into separate CRA payment arrangements so that you will get some time to pay the trust claims. No one, including TV tax lawyers, can do anything better for you for trust amounts.

CRA payment arrangements summary

I hope you have enjoyed this CRA payment arrangements Brandon’s Blog. I can help you solve tax and other debt problems.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

Categories
Brandon Blog Post

CONSUMER PROPOSAL ONTARIO: THE ONLY POST-CERB GUILT-FREE GOVT APPROVED DEBT ELIMINATION PLAN

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

Consumer proposal Ontario: Introduction

The Canada Emergency Response Benefit (CERB) has actually ended. Even more, people are calling me to ask about a consumer proposal Ontario. This is the only Canadian federal government licensed program for people to lower their consumer debt.

In this Brandon’s Blog, I answer the 11 most asked questions about consumer proposal Ontario.

1. What is a consumer proposal in Ontario?

A consumer proposal in Ontario is the same as anywhere else in Canada. It is a proceeding under the Bankruptcy and Insolvency Act (Canada) (BIA). However, it differs from bankruptcy. Such proposals are offered to people whose unsecured financial commitments do not exceed $250,000, not including debts secured by their primary residence.

Collaborating with a licensed insolvency trustee (Trustee) acting as the Administrator, you make it to:

  • Pay your unsecured creditors a portion of what you owe them over a specific duration not surpassing 60 months.
  • Raise the time you need to work it out and pay the amount you agreed to (less than 100% of what you owe)
  • Or a mix of both.

Your payments are made to the Trustee, and the Trustee makes use of that cash to pay each of your creditors their pro-rata share. The consumer proposal Ontario shall end up within 5 years from the day of declaration. The full completion of your plan is what gets you the debt relief you are craving.

Also, the BIA says that it needs to give the insolvent individual’s unsecured creditors a better return than they would certainly obtain under the person’s bankruptcy.

The proposal is not made for a holder of secured debt. Assuming they have valid security against the asset and you are keeping it, like your house, then you just pay what you originally agreed to pay on that loan.

2. How much do you pay in a consumer proposal Ontario?

When I work with people in Ontario who want to file a consumer proposal Ontario, I need to determine what a reasonable deal to your creditors will be, based upon your financial situation.

I usually find that the minimum amount that creditors tend to accept is around 25% to 30% of what you currently owe all your unsecured creditors. You make the same monthly payment for the full time it takes to fully pay off your debt settlement plan.

As I mentioned above, the BIA says that the offer in a proposal must be a better alternative for your creditors than your bankruptcy. So first, I do a calculation of what your creditors can expect to receive in your bankruptcy. That calculation involves two pars:

  • the liquidation value of your non-exempt assets; and
  • the amount of surplus income, if any, you would need to pay in a bankruptcy.

The starting point of what to offer your creditors is something slightly better than the result of your bankruptcy calculation.

3. Can I keep my credit card if I file a consumer proposal Ontario?

I have both good news and bad news. The good news is that there is no requirement for the licensed insolvency trustee to collect your credit cards from you when you file a consumer proposal Ontario. However, every unsecured creditor at the time of your filing, including credit card issuers, receive a notice of your filing and a form 31 proof of claim form to complete.

So now for the bad news. Every credit card issuer you owe money to and therefore gets notice that you filed a proposal, will certainly cut you off. They will not let you keep using the card while not paying them in full.

So, you will be able to keep your credit card, but it won’t work anymore. If you need a credit card, you will have to get a new secured credit card.

4. Can I pay off my consumer proposal early?

A consumer proposal Ontario is like an interest-free loan at an amount much less than you originally owed your unsecured creditors. So it may be helpful to you not to pay it off early to get the full benefit of it.

However, we write all of ours in a way that gives you flexibility. You can take the full 5 years if you need to. If you are able to pay it off early and you have good reasons for wanting to do so, then you can. We word our proposals to say that you promise to pay the total amount in no more than 60 months. So you can take all 60 months or not. The choice is yours.

By wording it this way, we don’t need to go back to the creditors or the court to vary anything. It is built right in. Also, unlike other loans, there is no penalty for paying it off early.

5. How much does a consumer proposal cost in Ontario?

The expense is established by the federal government and is laid out in the proposal rules section of the BIA. The Trustee’s fee is a fixed amount called a tariff.

How much an individual pays in their debt settlement plan is entirely unassociated with the allowable federal government tariff. I explained the calculation the Trustee goes through in determining the amount of your consumer proposal Ontario so that it is a better return than in your bankruptcy.

The Trustee is allowed to take the fee from the amount you agreed to pay right into your financial obligation debt restructuring plan.

So, how much does a proposal cost? My cost is FREE!

6. Consumer proposal Ontario: Is a consumer proposal worth it?

There are benefits for you to file such a financial debt settlement strategy. Initially, you do not give up your assets. Next off, an authorized proposal binds all creditors to the arrangement.

We start with having you complete the standard intake form that we call, the Debt Relief Worksheet. When totally filled out, it gives us a listing of your assets, liabilities, earnings and expenses. Using that details, I have the ability to formulate a proposal based upon your capability to pay.

The proposal is submitted to the Office of the Superintendent of Bankruptcy (OSB). As soon as submitted, you can quit paying your unsecured creditors. If creditors are garnishing your earnings or suing you, those are stopped.

Your credit score will be negatively affected. If you are considering a consumer proposal vs. bankruptcy vs. doing nothing, given all the positives, I say it is worth it.

consumer proposal ontario
consumer proposal ontario

7. Consumer proposal Ontario: How bad is a consumer proposal?

Given all the relief you can get with a consumer proposal Ontario, I would say that it is not bad at all.

As soon as the appropriate files are eFiled with the OSB, I after that send out the proposal to every one of your unsecured creditors. The creditors then have 45 days to accept or reject the offer. If creditors are dissatisfied with the proposal, as the Trustee I can work out adjustments. Nevertheless, everything is based upon what you can still take care of to securely pay.

As soon as we get approval, you are then accountable for making regular payments to the licensed insolvency trustee. The Trustee will absolutely use that cash to pay your creditors as well as the tariff.

As part of the consumer proposal procedure, you will be required to meet with me for 2 counselling sessions. Once you totally finish your payment plan, you will be legitimately released from all of your unsecured debt responsibilities that existed at the date of filing.

There is always an emotional element to filing a consumer proposal Ontario. However, given all of its benefits, including fixing your credit rating over time and allowing you to eliminate your consumer debt, that is why I say that it is not bad at all.

8. How long does a consumer proposal stay on your credit report in Ontario?

A notation that you filed a consumer proposal Ontario, or elsewhere in Canada usually stays on your credit report for 3 to 4 years after you have successfully completed it. It does negatively affect your credit rating. It obviously shows up on your credit history.

However, as part of the counselling sessions, I hold with my clients, I do explain to them ways in which they can start improving their credit rating right away.

9. How long does it take to rebuild credit after a consumer proposal Ontario?

As mentioned above, I counsel my clients on how they can start rebuilding their credit right away after filing a consumer proposal Ontario. No one needs to wait until after they have successfully completed their plan to start rebuilding credit.

Good habits like paying your monthly bills on time, or taking out a small RRSP loan and repaying it within 1 year, all go to rebuilding your credit. Another way is getting a secured credit card and paying it off in full each month.

By doing these small things, your credit rating will start rebuilding sooner than you expected. Soon, your negative credit history will be a thing of the past.

10. Can I buy a house after consumer proposal Ontario?

There are no prohibitions to buying a house after you successfully complete a proposal. There is no law that says you cannot buy a house. As with any major financial purchase, you will probably need to apply for a mortgage. Your ability to buy the house will depend on your ability to get a mortgage.

Being able to qualify for a mortgage depends on many factors. The value of the home, the amount of your down payment that you have saved up, how large a mortgage you need, your credit score, your credit report, can you afford the proposed monthly payment, are there any co-signers or guarantors of your mortgage debt?

It is possible to achieve your dream of home ownership after your CP is over. The chance of qualifying before you successfully complete it is of course much less.

People go through insolvency proceedings for many different factors yet the goal of obtaining a fresh start is the same for everyone. If part of your objectives for the future includes home ownership, we will talk about it in your 2 mandatory counselling sessions. There are steps that you will need to take. It might not be quick or easy, but it is feasible to buy a home after successfully completing a consumer proposal Ontario.

11. How many consumer proposals can you file?

Once you successfully complete your first consumer proposal, there is no law that stops you from filing another sometime in the future. However, you should know that creditors are quite likely to excuse you and let you get a fresh start your first time. Each subsequent time means that you didn’t learn anything from the first one. You were not financially rehabilitated, which is one of the goals of the Canadian insolvency system. So creditors are not so forgiving the second time around.

So, although you can file a new one after successfully completing your first one, it will mean that something went wrong. I would not recommend getting into financial trouble a second time.

Consumer proposal Ontario summary

I hope you have enjoyed this Brandon’s Blog.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious about finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

consumer proposal ontario
consumer proposal ontario
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TRUSTEE BANKRUPTCIES FEES IN A SCARY CORONAVIRUS WORLD

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

If you would prefer to listen to the audio version of this trustee bankruptcies Brandon’s Blog, please scroll to the bottom and click on the podcast.

trustee bankruptcies
trustee bankruptcies

Trustee bankruptcies introduction

Are trustee bankruptcies filings high right now?

Every day we read or hear in the media about the life-threatening health challenges faced daily by Canadians. We also hear sad stories about people who have lost their job because of businesses having to close down.

The general public thinks that right now there is a lot of personal bankruptcy and corporate bankruptcy filings. In actual fact, the numbers are low. The 2 main reasons are:

  • Government support programs have helped support people and businesses. Most of the programs ended effective September 30, 2020.
  • Creditors are not chasing or harassing borrowers right now. Given that we are about 5 weeks away from Christmas, that will not change until some time in 2021.

I am receiving a lot of inquiries from people and entrepreneurs about their personal and business debt situation. I am doing a lot of initial consultations by telephone or video meeting. That tells me that there should be an increase in insolvency filings in 2021.

It may surprise you to hear that even a licensed insolvency trustee (formerly called a bankruptcy trustee or trustee in bankruptcy) business could be having cash-flow problems. A recent court decision out of Ottawa highlights this issue. The purpose of this Brandon’s Blog is to discuss the court case and what it means for a trustee bankruptcies fee collection.

What are the fees of a licensed insolvency trustee?

This question is quite relevant, but the answer depends on what role the licensed insolvency trustee takes on.

A trustee in bankruptcy performs a wide variety of services, such as:

  • administrator in a consumer proposal;
  • the monitor under a Companies’ Creditors Arrangement Act (CCAA) corporate restructuring;
  • licensed insolvency trustee in either a summary administration or ordinary personal bankruptcy;
  • receiver over a company’s assets, either by private appointment or court appointment;
  • the licensed insolvency trustee in a corporate restructuring under the proposal provisions of the Bankruptcy and Insolvency Act (Canada) (BIA);
  • as the licensed insolvency trustee in a corporate bankruptcy; or
  • act as a consultant in either a corporate or personal insolvency situation, advising either a creditor or the debtor.

The fee will certainly differ depending on what duty is played. Keep in mind that the costs of trustee bankruptcies are established under the BIA itself for all insolvency administrations under the BIA.

Personal bankruptcy administration where the non-exempt assets are estimated to be worth less than $15,000 is called a summary administration bankruptcy. Rule 128 of the BIA General Rules dictates the cost and disbursements in such trustee bankruptcies. This kind of fee is called a tariff. A tariff also exists in a consumer proposal file.

A bankruptcy is called an “ordinary” bankruptcy when the realizable assets are estimated at $15,000 or greater in personal bankruptcy. Every corporate bankruptcy is an ordinary administration. The BIA also regulates the trustee bankruptcies fee and disbursements.

With this information as background, I will now discuss the recent case out of the court in Ottawa.

A bankruptcy trustee needs cash flow too

The case involves a court application by an Ottawa bankruptcy trustee on 3 separate ordinary administration personal bankruptcy files. Normally, when a bankruptcy trustee wishes to get an interim draw towards its fees and disbursements in an ordinary administration, they either get the approval of the creditors at a meeting of creditors or, approval of the inspectors appointed in the bankruptcy administration.

The First Meeting of Creditors has to take place within 21 days of the date of bankruptcy. It is rare to have to call another meeting of creditors. So if the Trustee does not get approval for an interim draw at the outset from the creditors present at the First Meeting, that chance is gone quickly. If no inspectors are appointed, or a long time has passed and the Trustee has trouble finding the inspectors, getting inspector approval may also prove difficult.

But there is one more way for a Trustee to get approval to get an interim draw for its cash flow.

Office of the Superintendent of Bankruptcy (OSB) Directive no. 27R

The OSB publishes Directives from time to time. Trustees are bound by and obliged to follow all regulations provided by the OSB. This is so there will be consistency in the insolvency process across Canada. Directive 27R is titled “Advance of Trustee’s Remuneration for Bankruptcies Under Ordinary Administration.”. It was issued on February 10, 2010. The purpose of this Directive is to set out the correct procedure the Trustee should comply with when making an interim withdrawal or taking out an advance on remuneration for ordinary trustee bankruptcies.

To withdraw an advance on its compensation, the Trustee needs to obtain consent in the form of:

  • a resolution of a duly comprised meeting of creditors;
  • the resolution of a majority of the inspectors at a properly convened meeting of inspectors; or
  • make an application to the Court for an order approving such interim advance.

This is what this Ottawa Trustee did for 3 of its trustee bankruptcies.

trustee bankruptcies
trustee bankruptcies

The OSB did not like the court application

The OSB did not like the fact that the Trustee made this application. The OSB actually opposed the application, notwithstanding the Trustee was properly following all the requirements of Directive 27R. The Trustee brought to the court’s attention that it would still take some time to prepare its Final Statement of Receipts and Disbursements, submit it to the OSB to receive their comment letter and then apply to the court for taxation. The process would take many months.

The Trustee also highlighted for the court that these are not normal times. Due to the coronavirus pandemic, government and court staff were not working at their normal pace. The Trustee also pointed out that its own business had to lay off staff and its own cash flow was suffering. Therefore, the Trustee was making an application to the court for approval for an interim draw, as allowed. The Trustee highlighted what has gone on to date in each bankruptcy estate. The Trustee also provided proof of proper service on the OSB of this motion.

The decision does not indicate why the Trustee did not just go for inspector approval. Nevertheless, its position was that it was within its rights to make this application to the court and for the court to approve it.

The OSB’s basis for opposing this motion can be summarized as:

  • Interim draws approved by a court under Directive 27R are just to be made in special circumstances.
  • While COVID-19 is an exceptional situation, it is insufficient to call for the orders asked for by the Trustee.
  • The OSB additionally argues that the motion was not on notice to the creditors in the respective trustee bankruptcies estates concerned, who might actually object to the amount being claimed by the Trustee.
  • The OSB is worried that, if the motion is granted and the court order made, it could cause more need on the court’s time as more Trustees will seek similar orders in other trustee bankruptcies estates.
  • Finally, the OSB says that this matter is not urgent and therefore ought to not be dealt with right now. The Trustee should just go for final taxation in the normal course.

The OSB also provided two earlier court decisions where interim draws were not approved in support of its opposition.

The court sees COVID-19 creating urgencies, even for trustee bankruptcies

The court considered the OSB’s submissions and the cases it relied upon. The court distinguished those cases from the current motion for these trustee bankruptcies. Due to COVID-19, the Court found that it is not practical for the Trustee to need to wait on the receipt of the OSB Letter of Comment and then proceed to final taxation.

The court stated these are not normal times. The timelines for any of the steps involved in the final taxation process could be much longer, taking into consideration the stay-at-home orders that have been issued, even including the OSB team.

The judge stated that the court must deal with the situation as it presently exists and as it advances each day, and also make appropriate decisions as necessary. He stated that businesses in all industries have been laying workers off. This includes the insolvency industry. A lot of the businesses that are still operating are doing so with minimized staff. Those businesses are attempting to make the most out of their limited cash flow to sustain operations.

The court stated that it understands that the choice it makes on this motion might bring about an influx of cases for interim draws in trustee bankruptcies. If that becomes the case, the court will deal with it. In addition, the court recognized that, because of coronavirus, interim draws are a practical method of managing the liquidity crunch presently being experienced by Trustees. Even if there had been no coronavirus pandemic, Directive 27R still allows for such an application to the court in the trustee bankruptcies.

The Court was also conscious that accounting firms, and consequently licensed insolvency trustee businesses, have been proclaimed essential services in the Province of Ontario.

The court’s decision on the trustee bankruptices motion

As a result of all these findings, the court decided that licensed insolvency trustees must have the tools essential to maintain their operations and to permit people and companies to get access to the Canadian insolvency system. Therefore, the court held that Trustees need to be able to access the funds in their trust accounts that they have actually earned as fees, inclusive of HST.

Taking all this into account, the court exercised its discretion and ordered that the Trustee is approved to withdraw 75% of the fee that has been earned in the three trustee bankruptcies, including HST. The Trustee should then move to final taxation. There are already safeguards built into the final taxation process where creditors in each of the trustee bankruptcies estates can object to the taxation and the total fees if they wish to.

If the total final fees are approved, then the Trustee can withdraw the remaining 25%. If final taxation results in any fees less than the 75% interim draw approved in any of the trustee bankruptcies, then the Trustee will have to repay into the bankruptcy estate the specific amount(s).

The court ordered that any costs incurred on the motion was an overhead cost of the Trustee and was not recoverable from the trustee bankruptcies. Costs were neither sought nor awarded. My understanding is that the OSB is not appealing this decision.

Trustee bankruptcies summary

I hope you have enjoyed this trustee bankruptcies Brandon’s Blog. It is the first decision I am aware of that deals with the reality that like any other entrepreneur, a licensed insolvency trustee is running a business too.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

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CLOSING A BUSINESS DOES NOT AUTOMATICALLY MEAN AN ALARMING BANKRUPTCY

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

At the end of this blog, we have a special gift for you!

Closing a business introduction

Many times I am consulted by an entrepreneur about closing a business. This may sound odd coming from a licensed insolvency trustee (formerly called a bankruptcy trustee) (Trustee), but not all business closures involve a formal bankruptcy. In fact, there are more business closures that do not involve bankruptcy

Now with so many businesses hurting due to a slowdown or complete destination due to the result of the coronavirus pandemic, I expect more entrepreneurs are going to want to know about closing a business.

In this Brandon’s Blog, I provide the reasons why. I also go through the various steps in closing a business that you can use as a checklist.

Closing a business that does not have many (free) assets

Many times I get a call from someone whose business is not doing well. They probably cannot afford to pay the business rent next month and it does not make sense to stay open. They think bankruptcy is the only way they have for closing a business. The business does not have many assets, or all the assets are secured by a bank that loaned the corporation money. Think of a business where the assets were bought through a bank loan. The funding may or may not have been under a government small business loan program.

The entrepreneur gave a personal guarantee to the bank ranging from 25% to 100% of the total loan amount. The entrepreneur may also have provided a personal guarantee to the landlord. The business may or may not be current in its employee source deduction remittances and harmonized sales tax (HST) payments. The entrepreneur does not believe the assets have any value above the amount of the secured loan and wishes to place the company in bankruptcy as the answer to closing a business.

Here is why bankruptcy will not help:

  • The assets are fully secured by the bank.
  • Canada Revenue Agency (CRA) may have a trust claim over the assets because of unremitted source deductions.
  • A corporate bankruptcy will not solve the entrepreneur’s personal debt issues under the personal guarantee to the bank for any shortfall claim and the landlord for any claim due to the failure of the corporate tenant.

In this type of situation, there is not much I can do. I tell the entrepreneur that if they are going to shut the business down before the first of the next month, they should do so. Then, they should go to the bank, advise them and cooperate with the bank to allow them to realize their security. I tell them to make sure that they follow the steps for closing a business that I outline below.

I tell the entrepreneur that when the bank and the landlord each make a demand for their obligations under the respective personal guarantees to call me. We will then work together on their personal situation. Perhaps a consumer proposal will be possible. I also tell them that it is not worth spending the money they don’t have in order to bankrupt the company.

That is why in this case a corporate bankruptcy will not help an entrepreneur in closing a business. I call this the self-help remedy.

The business is still operating – will anyone buy it?

Before making any decisions about closing a business, you should first think in terms of is your business worth anything? You have spent many years building your business. It may be insolvent because it has suffered losses for several years, cash flow is weak and the corporation cannot pay its debts generally as they come due.

Although the current corporate body may be weak, you need to determine if your business is still viable. Does the marketplace still have a need for the service or product you provide? Are there competitors who seem to be doing well? Your business has a customer base and trained staff. One of your competitors may find your customer base and some or all of your staff something they want to amalgamate into their existing business.

If that is the case, you need to understand what your business might be worth. The selling prices of similar organizations in your geographical area or market will be a good barometer of what you can anticipate getting for your company. Innovative buyers might evaluate your business on the basis of projected cash flow for the next few years. They may very well mark down the worth of that cash flow to mirror the perceived threats and risks inherent in your business.

In the case of an insolvent but viable business, it may be that an insolvency process is necessary to allow the purchaser to buy the assets it wishes to purchase and take on all or some of your employees, maybe even including you.

The range of options available includes:

So with the right insolvency process, the assets of the business can be put back to good use and be very productive. It may very well help get a good M&A deal done.

I have written before many blogs on how these insolvency proceedings could help in getting the healthy parts of a business into a purchaser while leaving the sick parts behind and then be used for closing a business. Those details are beyond the scope of this Brandon’s Blog.

closing a business
closing a business

When does corporate bankruptcy make sense in closing a business?

Corporate bankruptcy is not a simple process. An entrepreneur needs the advice of their lawyer and also needs to retain a Trustee. This costs money. More often than not, there are no free assets in the company. That means the entrepreneur needs to personally fund the cost of the bankruptcy process for closing a business.

A bankruptcy of the company may make sense in several situations. Some of the most common are:

  • Certain government claim priorities need to be reversed and that only can be done in bankruptcy. The most common one is unremitted HST. Absent a bankruptcy, the HST obligation is a trust claim and will come before the claim of any other creditor, including a secured creditor. As probably the sole director of the corporation, the entrepreneur may be willing to bankrupt the company to put the HST behind the bank. The director may very well choose as part of closing a business, to take their chances on the claim for unpaid HST as a director liability, rather than increase the bank’s shortfall by the amount of that HST claim.
  • There may be value in the premises lease. If the rent under the lease is below market and can be sold, a bankruptcy will be necessary. That is because the combination of the Commercial Tenancies Act Ontario and the Bankruptcy and Insolvency Act (Canada) Trustee has certain rights to sell the lease that the corporation tenant does not have. So, bankruptcy may be a good idea in that case.
  • The security of a lender for which no personal guarantee has been given is invalid against a Trustee. The corporation may be able to restructure with that liability moved from secured to unsecured. Alternatively, a bankruptcy will allow for assets to be better protected for the secured creditors first and then provide some value for the unsecured creditors if there is a bankruptcy.

My closing a business checklist

This is what I tell any entrepreneur for a self-help remedy for closing a business that is most appropriate:

  • Advise the utilities that they should do a final meter reading and shut down the account.
  • Prepare and issue all records of employment to the former employees.
  • Remove the books and records (probably computerized) from the business premises so that the information can be secure.
  • Advise your bank lender that the business is shut down and that you are delivering the keys to the banker so that they can get their security.
  • If there is no bank lender, and no trust claims over the assets, hold a going out of business sale.
  • Tell the landlord the business is over and deliver the keys.
  • Cancel insurance policies. There may be an unearned premium refund coming back to the business.
  • Redirect the business mail to a different address. Most of the mail will be bills, but there may also be cheques you don’t want to miss so you can deposit them into the bank account.
  • Cancel any corporate credit cards.
  • Deal with the termination and return of any business license and permits.
  • Deal with your business social media accounts, website, and any other digital or intangible assets. You will have to decide when it comes up for renewal if you wish to retain the URL in light of your closing a business decision. The URL may have a value that you can unlock.
  • Make sure that the final financial statements and tax returns are prepared. File the tax returns with the government. If there is a balance owing, don’t worry about it as the business cannot pay and corporate income tax owed is not a director liability.
  • Prepare and issue final T4 statements of remuneration paid. Issue them to the former employees. Figure out if there are any employee source deductions owing. If there is and you can pay them as it is a director liability.
  • Calculate, prepare and file the final HST return. If there is a balance owing and you can pay the amount as it is also a director liability.
  • Maintain the books and records as CRA may want to perform an audit.
  • Send a letter to all creditors advising of your closing a business decision was due to financial problems, express your gratitude for the relationships you have built, tell them that there is no money for them and let them know that you have also lost money.
  • Mail a letter to your customers/clients advising of the closure of the business and thank them for their loyalty and patronage over the years.

Closing a business summary

I hope you have enjoyed this closing a business Brandon’s Blog. A sick insolvent company’s business might be saved by a debt restructuring.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need a realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

CLOSING A BUSINESS INFOGRAPHIC. CLICK ON THE INFOGRAPHIC TO DOWNLOAD YOUR OWN COPY

closing a business

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

closing a business
closing a business

Categories
Brandon Blog Post

THE MORTGAGE DEFERRAL PROGRAM IS FINISHED: ARE YOU NOW SUFFERING BADLY?

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

If you would prefer to listen to the audio version of this Brandon’s Blog, please scroll to the bottom and click play on the podcast.

mortgage deferral program
mortgage deferral program

Mortgage deferral program introduction

Better Dwelling, Canada’s largest independent housing news outlet, recently reported that Canadian banks still have over 254,000 mortgage deferral program.

Most mortgage deferral program ended on September 30, 2020. The purpose of this Brandon’s Blog is to discuss what the mortgage deferral program was and since it is over, now what?

What was the mortgage deferral program?

The mortgage deferral program was an agreement between borrowers and their mortgagees, being Canadian banks. It permits mortgagors to delay their home loan payments for a specified amount of time.

After the deferral period ends, they return to making normal home loan payments. Once payments resume, they need to also pay off the home mortgage payments that were put on hold. Your financial institution figures out just how people repay the deferred payments.

Who could apply for the mortgage deferral program?

Financial institutions evaluate the qualification criteria for home loan deferrals on an individual basis. People might have been eligible for the mortgage deferral program if:

  • you, or any person in your household, are out of work as a result of COVID-19; or
  • you, or any person in your family, experienced a considerable reduction in revenue as a result of COVID-19.

What to expect from the mortgage deferral program

A mortgage deferral program does not cancel, get rid of or eliminate any amount owed on your home mortgage. Interest charges also do not stop when on a payment deferral program. At the end of the arrangement, you will have to return to normal payments according to your original amortization schedule.

The interest that hasn’t been paid throughout the deferral period continues to be added to the principal owing on your home loan. This obviously affects the full amount you owe and therefore the amount of total interest you will pay over the life of your mortgage.

Loan repayments are comprised of both interest and principal. The interest accrues daily. When a payment is made, the amount from the total payment needed to pay down interest is allocated that way. The leftover from that monthly payment is applied to pay down the principal balance.

Over time as the primary balance goes down, the amount of interest from each payment becomes less. The way the arithmetic works, means, as less interest is being paid, more of the monthly blended payment is allocated to repaying principal. The more time that passes where the principal balance does not decrease due to the mortgage deferral program the more interest winds up being paid.

What about paying certain fees during the mortgage deferral program period?

Particular charges for either the administration of or for additional products connected with mortgages could not be waived during the mortgage deferral program. Sometimes, people opt for the bank’s additional mortgage life, disability or critical illness insurance policies to cover their mortgage payments in the event of illness or death. The insurance premium is added to the monthly blended mortgage payment.

Likewise, many people pay one-twelfth of their annual property taxes each month added to their normal monthly mortgage payment. The property tax portion is subject to annual adjustment to account for the difference between the estimated annual property taxes and the actual property tax, once known.

These kinds of payments had to continue notwithstanding any mortgage deferral program period.

mortgage deferral program
mortgage deferral program

What can I expect once my mortgage deferral is over?

When the mortgage deferral program is over and routine payments return, you’ll have the option to maintain payments as they were or increase them. If you can, you could also make a round figure payment amount. The aim is to catch up as quickly as possible on the interest that accrued during the mortgage deferral program period.

You can catch up to your pre-deferral amortization without incurring any type of extra charges. As soon as you’re caught up, any additional payments you might make would be based on your mortgage’s terms and conditions concerning making lump sum or pre-payment to your principal balance without incurring a penalty.

The mortgage deferral program has ended: What if I still can’t pay?

Just because the mortgage deferral program has ended, it does not necessarily mean that everyone can afford to go back to making normal mortgage payments. The coronavirus pandemic with its business closures and always looming lockdowns has not become easier for many.

People whose financial situation has not become better since the pandemic hit, are frightened. I have checked out some “what to do” short articles about if you are having difficulty making your regular home mortgage payments. Most point readers to looking at how a consumer proposal or bankruptcy might help.

Just so you understand, a consumer proposal or bankruptcy are not designed to help you make mortgage payments. In fact, they may lead to you having to sell your home.

Your mortgagee is a secured creditor, presuming its mortgage security is valid and properly registered. A consumer proposal or bankruptcy is a technique of handling your unsecured creditors. The mortgagee has rights if you default on your home loan whether or not you are involved in an official insolvency process.

If you have way too much financial debt and inadequate income to service all that debt, you may very well need to think about an insolvency filing. Yet it is not a straight answer to your mortgage deferral program finishing.

So in order, below are my 3 top suggestions of what you could do when your home mortgage deferral program finishes and also you believe you will remain in financial trouble.

3 steps you can take if you still have trouble making your mortgage payments

Take a critical look at your family household budget plan

I cannot stress sufficiently just exactly how essential the household budget is to your financial safety and security. A spending plan is a listing of all family earnings and all household expenses. Do it on a month-to-month basis. It allows you to prepare just how you need to spend your cash and if there is anything left over monthly for savings for a reserve or for financial investment.

Rather than money just flying out of your pocketbook, you make intentional choices on where you want your money to go. You’ll never ever question at the end of the month where your money went or search for spare change in your purse or wallet.

So if you already have a home budget that you follow, take a look at it carefully. If you don’t’ have one, prepare it right away. Consider the last 6 months and see what your typical monthly earnings have been and what your typical monthly expenditures were. Note them full blast line by line for both earnings and also costs. Then adjust any line that you think might change in the coming months.

After that have a look at it and see if you are spending less or more than you make. If you are spending more, then you need to reduce particular expenditures, raise your revenue, or a mix of both. Reduce any costs that you can. Get to the point where, as a minimum, you are not spending more than you earn. Ideally, you want to spend less than you earn, on an after-tax basis, so that you can build up an emergency fund in case of, an emergency.

Talk to your banker

Be proactive and get in touch with your banker when you suspect a problem. Let them know that you have an existing family budget plan and it reveals that you may require some help. Tell your banker that with the end of the mortgage deferral program period, you still need help.

Your banker will be impressed that you:

  • have a spending plan that you are tracking; as well as
  • you are being proactive and also not triggering the lender to chase you since you turned up on the computer screen as a late payment.

That already makes you the most liked person in the 10% to 20% of individuals who are experiencing trouble paying their home mortgage. Ideally, your lender will be able to do something for you to help.

Call me

If your spending plan shows that you do not have enough family revenue to pay all the family members’ financial obligations on a regular monthly basis, call me. I will take a look at your family budget plan and perhaps get more financial details from you. After evaluating all of it, I will give you my ideal recommendations to meet your unique economic difficulties.

Remember that this is not your fault. The COVID-19 pandemic and the resulting shutdown of the Canadian economic climate continue to cause trouble for the majority of Canadians.

Mention this blog, and I will not charge you a cent for this assistance. I really want you to prosper.

Mortgage deferral program summary

I hope you have found the mortgage deferral program Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.

We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.

Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.

Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.

If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

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Brandon Blog Post

CEWS APPLICATION: OUR COMPLETE CEWS EXTENSION PRIMER TO GREATLY HELP YOUR BUSINESS

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

CEWS Application introduction

The expansion of the Canada Emergency Wage Subsidy (CEWS) until June 2021, is one of the last few remaining Canadian government subsidies for business as a result of the COVID-19 pandemic. The subsidy that a CEWS application can be made remains at the current subsidy level of a maximum of 65% of qualifying payroll until December 19, 2020. This measure is the government’s dedication to producing over 1 million jobs and hopefully bring back employment to the degree it was before the COVID-19 pandemic.

The purpose of this Brandon’s Blog is to provide you with our CEWS extension primer to answer what we believe are the most common questions regarding the CEWS application program extension.

CEWS application: What is the CEWS?

The federal government is providing organizations with wage help towards worker wages if they are able to reveal a decrease in earnings as a result of COVID-19. Businesses will be eligible to receive the subsidy for the wages they have actually paid their staff members from March 15th, 2020 to June 2021.

Most of CEWS guidelines stay the very same– except for:

  • The computation for the top-up, which had actually been based upon a 3-month standard, will now be calculated upon the existing month’s revenue loss to supply more help to those employers needing to close down again.
  • The subsidy rate will be capped at 0.8 times the income reduction (max of 65%), until December 19, 2020.

As indicated above, the program runs until June 2021.

CEWS application: Who is an eligible employer?

A lot more types of employers have been added as eligible employers, including seasonal operations and also amalgamated companies. For a complete list of who qualifies, check out the Canadian government CEWS application website.

The program does not look at the number of staff on the payroll. Rather, the main requirement is that the business had a CRA payroll account as of March 15, 2020. If your business did not have a CRA payroll number since your third-party payroll provider made remittances for you under their number, you can create one now and still be considered eligible.

How do I calculate my gross revenue drop for the CEWS application?

A revenue decline is the percent of gross revenue shed in a month in comparison to a pre-COVID-19 time frame. To determine your gross revenue, you can pick between two accounting techniques. You can choose to record revenue when received and expenditures when paid (the cash approach) or you can pick to recognize revenue and expenses in the period they are incurred (the accrual method).

Once you have picked your accounting approach, you will need to use that same bookkeeping approach for all periods. If you decide to change from one accountancy method to the other, you will then need to refile for all previous periods. That way, you will still only be using one method in your CEWS application.

To calculate the level of the revenue decline you will need to choose between:

  • contrasting current month revenue to the same month in 2019 (the general method); or
  • comparing current month revenue to your average revenue in January and February 2020 (the alternative method).

Whatever strategy you use, you will need to continue to make use of that exact same method for Periods 1 to 4. The only time you will be able to change your approach from one to the other will be Period 5, after which you will need to use that very same approach for the remainder of the CEWS application periods.

What is the safe harbour CEWS application regulation?

The safe harbour regulation allows organizations who would have been eligible for the 75% wage subsidy under the old CEWS application rules, to still obtain a minimum of 75% under the brand-new regulations for Periods 5 and 6 only.

So, an eligible employer with an earnings reduction of 30% or more in Periods 5 and 6 will be able to receive at the very least a 75% subsidy, or possibly much more under the new rules if their revenue reduction is very high.cews application

How do I determine which employees’ wages are eligible for the CEWS application?

Eligible employees must be those employed only in Canada to qualify for the wage aid under a CEWS application. On top of that, for Periods 1 to 4 only, they can’t lack pay for 14 or more consecutive days within a CEWS application period. This guideline does not apply from Period 5 and beyond.

You will then have to figure out whether the staff member is arm’s length or non-arm’s length (usually household members/owners) and if they are on a paid leave or not.

How do I calculate the pre-COVID payroll amount for the CEWS application?

For Period 7 onwards, the baseline (pre-crisis) pay is just required for workers that are on leave with pay, and also staff members who are non-arm’s length. That baseline pay is the average wage paid from a specific payroll period before COVID-19.

To optimize your staff member’s baseline pay, you will need to establish which prior period offers your worker the biggest average wage. After that, add up all the amounts paid to the employee during the chosen base CEWS application time period.

What is the deeming rule for the CEWS application?

Phase 1 qualification for 75% CEWS application wage support required a decline of 15% from compared period revenues for Period 1 (March 15– April 10). It also needed a 30% decline in revenue throughout each of the three subsequent Periods (2, 3 & 4) through to July 4.

The only exemption to this was a deeming rule that said that if you receive the subsidy from your CEWS application in any one Period, you do not have to prove revenue decrease in the immediate succeeding Period. Essentially, this meant that any business that qualified would automatically get CEWS application wage assistance for eight weeks. It would after that need to requalify through a new CEWS application for any kind of later Period.

This guideline is being adjusted to be a more flexible offering because of the developing assistance levels under the guidelines for Phase 2.

Any Phase 1 CEWS application subsidy period, which ended on July 4, provided a single degree of wage assistance, i.e., 75%. Those calculations and CEWS application decisions made are unaffected by the new guidelines.

The CEWS application calculations are complex

You are right. The CEWS application process in Phase 1 was somewhat confusing and complex. For CEWS 2.0, the government has developed a better online CEWS calculator to make the calculations easier.

The CEWS calculator has actually been updated to do more of the complicated CEWS application computations for you.

Before using it, please understand that the calculator does not accumulate or keep the info you input. Also, making use of the calculator itself does not cause an audit or for alarm bells to ring at the tax authorities.

It is recommended that you utilize the calculator in one sitting so as not to lose your calculations. It is likewise suggested that you print/save your computations in case the Canada Revenue Agency does ask sometime in the future to see just how you did the numbers in your CEWS application.

Business is slow. What should I do to keep my business going besides a CEWS application?

Regrettably, this is happening to lots of businesses. The government has revealed a number of programs to aid businesses through this difficult COVID-19 pandemic time. There are additional actions you can take to plan for your business’s future.

Look at your income and expenses. Are you able to pay your fundamental business expenses? If not, can you get any relief from your vendors? Speak to your accountant/bookkeeper about your alternatives and whether it makes good sense to stay open, temporarily stop your business, or shut it down waiting for better times.

Redo your business plan, budgets and cash-flow statement for this new reality. Things are tough. Make certain you have a plan as to how your business is going to survive. Does and can your business model change to help you weather this storm?

You may need to sit down with both your accountant and a licensed insolvency trustee (Trustee). The Trustee can run through the various options available to restructure your business. Hopefully, a restructuring can be done to allow for either refinancing or the opportunity to bring in an investor. Maybe a sale of the business is possible and the purchaser will want to keep senior staff on for continuity under a multi-year employment contract.

There are many possibilities for the viable but insolvent company to avoid bankruptcy. You can call me today if your company is experiencing difficulties and you don’t know which way to turn.

CEWS application summary

I hope you have enjoyed this CEWS application Brandon’s Blog. Hopefully, you have better insight now into the CEWS program extension.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

cews application

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Brandon Blog Post

CANADA CONSUMER PROPOSAL: SHOULD I IMMEDIATELY OPEN A HAPPY NEW BANK ACCOUNT

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

If you would prefer to listen to an audio version of this Brandon’s Blog, please scroll to the bottom and click play on the podcast.

canada consumer proposal
canada consumer proposal

Canada consumer proposal: Introduction

Subscribers to Brandon’s Blog know that I have written many blogs on the Canada consumer proposal process. When considering a consumer proposal, the insolvent person will many times ask me can I keep my bank account? That is a good question. But the better question is should I keep my current bank account?

In this Canada consumer proposal Brandon’s Blog, I will explain why.

Canada consumer proposal: A refresher

Before explaining why the bank account question should be the question, let me give a brief refresher of what a Canada consumer proposal is.

A Canada consumer proposal is a proceeding under the Bankruptcy and Insolvency Act (Canada). However, it is different from bankruptcy. Canada consumer proposals are available to people whose overall monetary commitments do not exceed $250,000, not including debts secured against their principal home.

Collaborating with a licensed insolvency trustee (Trustee) acting as the Administrator of the Canada consumer proposal, you make it to:

  • Pay your creditors a portion of what you owe them over a particular duration not surpassing 60 months.
  • Increase the time you need to work out those financial obligations.
  • Or a mix of both.

Payments are made to the Trustee, and the Trustee utilizes that money to pay each of your creditors their pro-rata share. The Canada consumer proposal shall be finished within 5 years from the day of filing. Also, the Canada consumer proposal must give the insolvent person’s creditors a better return than they would get under the person’s bankruptcy.

When is a Canada consumer proposal appropriate?

To figure out if a Canada consumer proposal, or a different option, is the ideal selection for you, set up a meeting with a Trustee to discuss your individual circumstances. The Trustee will evaluate your financial scenario and clarify the advantages and disadvantages of the various choices that are appropriate for your circumstances. If you choose to submit a consumer proposal, the Trustee will deal with you to establish a plan that helps you fully discharge your debts.

What happens when you file a Canada consumer proposal?

The Trustee will file the Canada consumer proposal with the Office of the Superintendent of Bankruptcy (OSB). Once your proposal is filed, you quit paying directly to your unsecured creditors. On top of that, if your creditors are garnisheeing your wages or bank account, or have begun legal action against you, these actions are stopped on the filing of the proposal.

The Trustee submits the Canada consumer proposal to your creditors. The proposal will include a report on your personal scenario as well as the root causes of your economic difficulties.

Creditors then have 45 days to either approve or deny the proposal. They can likewise do this either before or at a meeting of creditors if one needs to be held. A meeting of creditors is held if one is requested by enough unsecured creditors who in total are owed at the very least 25% of the overall value of the proven claims.

A meeting request needs to be made by the creditors within 45 days of the declaration of the proposal. The OSB can request the Trustee to call a meeting of creditors any time within that very same period.

The meeting of creditors needs to be held within 21 days after being called. At the meeting, the creditors vote to either approve or refuse the proposal. If no meeting of creditors is asked for within the 45 days of the filing of the Canada consumer proposal, the proposal will be considered to have been accepted by the creditors regardless of any objections received by the Trustee.

canada consumer proposal
canada consumer proposal

Keeping your bank account and other assets in a Canada consumer proposal

A Canada consumer proposal is an approach that is frequently utilized as an option to bankruptcy. It provides several benefits. A consumer proposal permits you to:

  • Pay an amount of cash every month you can afford to fully extinguish your debts based on your budget.
  • Pay back just a portion of your debts but get rid of them all.
  • Pay off your financial debts on an interest-free basis over 60 months (or less if you wish).
  • Keep all your assets that you can afford to keep.

The ability to keep your assets is the main feature that distinguishes a Canada consumer proposal from bankruptcy.

Canada Consumer Proposal: Who can freeze your bank account in Canada?

Having a frozen bank account is definitely discouraging as well as stressful. Freezing up an account is a tool that is frequently used to get your attention by those you owe money to. This is specifically true if various other methods of getting you to react and get a payment plan into place have actually not worked yet.

When your bank accounts are frozen, you are incapable to utilize the cash you have or move money from one of your accounts to another. As well, when your account is frozen, your bank will not honour any cheques written on the account when they hit your bank for clearing. This is regardless of whether the cheques were written before or after the account freeze. Frozen means frozen!

As a result of the stress and anxiety that a frozen bank account can place on your finances and life, it is necessary to understand who can freeze your account, why somebody might freeze your account, and also how you can get your account unfrozen.

Normally, only parties that you owe money to have the opportunity to freeze your bank account. Canada Revenue Agency (CRA) and the bank where your account is maintained, have more power over you when it concerns recovering debts via freezing accounts as opposed to unsecured creditors.

There are three generally three groups of financial institutions that could potentially freeze your account if you owe them money:

  • CRA – If you owe money to CRA and do not either pay off their demand or enter into a payment plan, they can freeze your bank account. They can issue a third party demand to your bank to freeze all accounts that you maintain with that bank. The bank will collect all available funds and send it to CRA while maintaining the freeze until CRA tells them they are fully repaid and the freeze can be lifted. CRA has significant powers that they can use without too much delay.
  • The bank where your accounts are – If you owe money to the bank where your accounts are, then your bank can freeze your accounts. It is a standard term of all credit card and loan documents that if you owe the bank money and are in breach of your credit card or loan agreements, the bank has the right to offset any positive cash balances on deposit with the bank against your debts to the same bank. So it is easy for your bank to turn your account to frozen and take your money.
  • Execution creditors – An unsecured creditor to who you owe money, can go to court and sue you for the amount owing. If you do not defend, or you defend but lose in court, the creditor then holds a judgment against you. They are now an execution creditor. They can then examine you to understand what assets you own and where they are located, including your bank accounts. The execution creditor can then file a request with the Sheriff to create your frozen bank account and garnishee your bank accounts.

These are the creditors that can freeze your bank accounts.

Why you should move your bank accounts before filing a Canada consumer proposal or a Canada bankruptcy

Why should you move your banker account before filing a Canada consumer proposal or a Canada bankruptcy? The reason is simple. You do not want an accident to happen where a creditor is able to withdraw funds from your accounts after you have filed. There is a stay of proceedings once you file your proposal or for bankruptcy. However, mistakes happen and sometimes funds can leak out of your accounts.

How can this happen? I will explain it. Many of us provide one or more vendors that provide goods or services to us with a pre-authorized debit (PAD) arrangement so that they can remove from our account automatically the monthly payment we owe them.

When you file a Canada consumer proposal, any vendor who is fully paid is not a creditor of yours. You may not wish to continue with the service and you may very well be in a long-term contract. So, you would want to cancel the service just before filing. But if you don’t cancel the PAD, the supplier may make a mistake, or not, and continue to pull funds from your account until you cancel the PAD. To avoid this error, it is best to move your bank account before filing so that there are no further funds to withdraw.

The same is true if you owe money to the bank where your accounts are. As soon as your bank gets notice of your Canada consumer proposal filing, they may try to offset the funds in your accounts against what you owe them. This will wreck your budget immediately because you were relying on those funds to pay your necessary monthly expenses and your first proposal payment. So to avoid that calamity, you need to set up new accounts at a bank you don’t owe any money to before filing.

I always advise people to move the accounts when they are contemplating filing. Do it in advance. That planning is important because they may have funds being deposited automatically into their account. Think of your wages, salary or any government amounts deposited into your account. You need time to advise them of your new account that you want your money deposited into. You need the time to make sure that it is being done correctly.

Finally, there are now many online banking choices that offer no-fee accounts and free cheque printing. You can manage everything online, including setting up the account in the first place. These are great choices for people who need to be watching every dollar.

Canada consumer proposal summary

I hope you have enjoyed this Canada consumer proposal Brandon’s Blog. Hopefully, you have better insight now into why anyone thinking about an insolvency filing should set up new bank accounts.

Do you or your company have too much debt? Are you or your company in need of financial restructuring? The financial restructuring process is complex. The Ira Smith Team understands how to do a complex restructuring. However, more importantly, we understand the needs of the entrepreneur or the person who has too much personal debt.

You are worried because you are facing significant financial challenges. It is not your fault that you are in this situation. You have been only shown the old ways that do not work anymore. The Ira Smith Team uses new modern ways to get you out of your debt troubles while avoiding bankruptcy. We can get you debt relief freedom.

The stress placed upon you is huge. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your problems; financial and emotional. The way we take the load off of your shoulders and devise a debt settlement plan, we know that we can help you.

We know that people facing financial problems need realistic lifeline. There is no “one solution fits all” approach with the Ira Smith Team.

That is why we can develop a restructuring process as unique as the financial problems and pain you are facing. If any of this sounds familiar to you and you are serious in finding a solution, contact the Ira Smith Trustee & Receiver Inc. team today.

Call us now for a free consultation.

We will get you or your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

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Brandon Blog Post

COMMERCIAL TENANCIES ACT ONTARIO AND THE BANKRUPT TENANT: THE COMPLETE GUIDE TO HAPPILY LOCking IN A LANDLORD’S CLAIM

The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting. We hope that you and your family are safe and healthy.

Commercial Tenancies Act Ontario: Introduction

On October 28, 2020, the Court of Appeal For Ontario clarified the interplay between the Commercial Tenancies Act Ontario and the Bankruptcy and Insolvency Act (Canada) (BIA) when a commercial tenant in Ontario goes bankrupt.

In this Brandon’s Blog, I describe what the appellate court decided in the 7636156 Canada Inc. (Re), 2020 ONCA 681 (CanLII) case. I also discuss what it means for commercial landlords when one of its tenants goes bankrupt and what the relationship is between the Commercial Tenancies Act Ontario and the BIA.

Commercial Tenancies Act Ontario: The facts

The facts were not in dispute. On May 1, 2018, the corporate tenant filed for bankruptcy and the Trustee was appointed. On July 23, 2018, the Trustee disclaimed the lease on the commercial premises.

One of the schedules for the commercial lease required the tenant to lodge a letter of credit (LOC) in the amount of $2.5 million in favour of the landlord. The LOC was to have an initial term of one year, renewed each year on an automated basis until 60 days after the expiry of the lease’s term. It was stipulated that the LOC is to continue to stand as protection for the landlord in case the tenant ended up being bankrupt.

According to the lease, the tenant provided the LOC. It was an irrevocable standby LOC issued by The Bank Of Nova Scotia (BNS) for the $2.5 million amount in favour of the landlord. The LOC had been renewed annually before the date of bankruptcy.

To get the LOC, the tenant put up money collateral in the amount of $2.5 million to BNS which was invested in a BNS GIC. BNS took security against the company and registered a financing statement under the Personal Property Security Act, R.S.O. 1990, c. P.10. The security was good and valid as against the Trustee. The Trustee was in agreement that the security was valid.

Commercial Tenancies Act Ontario: The landlord draws against the LOC

As of the bankruptcy date, there were no arrears of rent owing under the lease. Since the commercial tenant was bankrupt, the landlord made 3 claims on the LOC. These three claims totalled the full $2.5 million LOC value.

The initial draw, in the amount of $207,732.28, was made on May 16, 2018, before the Trustee disclaimed its interest in the commercial lease. Under the Commercial Tenancies Act Ontario, the Trustee has the right to occupy the premises for 3 months from the date of bankruptcy, if it wishes. By the end of the 3 months, whether the Trustee occupied or not, it must either disclaim its interest in the lease or adopt it and assign it to a purchaser.

The opportunity to sell the lease would happen if the rented commercial premises are in a sought after location and the lease has value in it. A lease can have value if it is at a rental rate below the market rent at the date of bankruptcy.

The 2nd draw, in the amount of $1,709,768.40, occurred on December 4, 2018. The 3rd claim against the LOC, in the amount of $582,499.32, was made on April 2, 2019.

The LOC draws covered the losses asserted by the landlord as follows:

  • $207,732.28 being the rent for May 2018;
  • $1,621,160.72 for rent for the months of August 2018 to April 2019, inclusive;
  • $368,479 for the unamortized cost for the landlord allowance as included in the lease, inclusive of interest; and
  • $302,628 for restoring the premises, as allowed for in the lease.

In support of each demand against the LOC, the landlord gave BNS the required certificate verifying the debt of the tenant under the lease. The landlord was the beneficiary under the LOC for the debt of the tenant, for which repayment was demanded from the tenant and not paid.

BNS accepted the landlord’s draw claims under the LOC and paid the complete amount of the LOC to the landlord. BNS never asked the landlord to return the funds paid.

The landlord believed that it was entitled to the funds under the lease drawn up in accordance with the Commercial Tenancies Act Ontario. BNS also believed that the landlord fulfilled its requirements to receive payment under the LOC from BNS.

Commercial Tenancies Act Ontario: The landlord’s proof of claim

The landlord knew how to complete form 31 proof of claim and filed it with the Trustee. The landlord filed for a preferred claim in the amount of $623,196.84. The preferred claim was for 3 months’ accelerated rent: May, June, and July 2018. The landlord’s proof of claim also attached a schedule showing the calculations.

In Ontario, a landlord’s preferred claim for rent in case of a commercial tenant’s bankruptcy is limited: a maximum of 3 months’ pre-bankruptcy arrears as well as for accelerated rent, a 3-month post-bankruptcy claim.

The right to accelerated rent must be stipulated in the lease. Further, the landlord’s entire preferred claim is limited to the value of the bankrupt company’s property on the premises, after the claims of trust claimants or secured creditors.

All these rights are laid out in the Commercial Tenancies Act Ontario.

Commercial Tenancies Act Ontario: The Trustee’s disallowance of the landlord’s proof of claim

The Trustee disallowed the landlord’s proof of claim, stating that the landlord’s preferred claim for three months’ accelerated rent had been paid by the landlord’s draws against the LOC.

The disallowance also stated that:

  • the funds used to pay the landlord from the LOC originated from funds that came from the bankrupt tenant;
  • the LOC was to be reduced prior to the date of bankruptcy; and
  • the landlord did not include proper support for its case for further damages in regard to the tenant’s obligations under the commercial lease.

The Trustee’s position that the LOC should have been reduced in amount is not important for the purpose of this Brandon’s Blog. I won’t spend any time on it other than to tell you that the court did not agree with the Trustee’s position.

commercial tenancies act ontario
commercial tenancies act ontario

Commercial Tenancies Act Ontario: The landlord appeals

The landlord appealed the disallowance to the Registrar in Bankruptcy. The Registrar permitted the landlord’s appeal partly. She held that considering that the landlord had drawn on the LOC for the May 2018 rent, the Trustee appropriately disallowed the preferred claim for the month of May.

However, she further determined that the landlord was correct in its accelerated rent claim for the other two months. The landlord could look for payment from the bankruptcy estate or from the LOC. According to the Registrar, the Trustee therefore incorrectly refused the preferred claim for those other two months.

Commercial Tenancies Act Ontario: The Trustee’s motion to a judge

The Trustee wasn’t finished debating about the landlord’s rights to claim against the entire LOC given the Trustee’s disclaimer of the lease, the Commercial Tenancies Act Ontario and the BIA. The Trustee made a motion to the court to determine what amount from the LOC the landlord was entitled to. The Trustee’s position was that the landlord was not entitled to the full amount of the LOC. Since the security for the LOC was funding from the company, any excess not required by BNS should be paid to the Trustee.

The parties’ positions that they laid out in their respective materials were largely what was already before the Master. The motion judge concluded that the landlord was only entitled to make use of the LOC for the 3 months’ accelerated rent.

The judge’s reasoning was:

  • a disclaimer of the lease by a trustee in bankruptcy is the same as a voluntary abandonment of the lease by the occupant under the Commercial Tenancies Act Ontario with the consent of the landlord. This snuffs out all obligations of the tenant under the commercial lease;
  • he turned down the landlord’s submissions that the independent obligation of BNS to it under the LOC meant that the funds coming from the LOC were not the property of the bankrupt and therefore not payable to the Trustee;
  • that upon the disclaimer of a lease by a Trustee, a bankrupt commercial tenant does not owe any amounts to the landlord. Therefore, the landlord cannot make use of the LOC for any claim other than the 3 months of rent arrears and the 3 months of accelerated rent; and
  • that the obligation of BNS, under the LOC, to make payment to the landlord beneficiary is limited to the amount owing by the commercial tenant under the lease. As he ruled that from the disclaimer the tenant’s only obligation was for the rent arrears and the accelerated rent, therefore, the landlord could not claim any other amounts against the LOC.

Commercial Tenancies Act Ontario: The landlord appeals to the Court of Appeal For Ontario

The question before the appellate court that I want to discuss is, did the judge err in holding that, upon the disclaimer of the lease by the Trustee, the landlord was not qualified to make use of the LOC other than for the amount of its preferred claim?

The decision of the Court of Appeal for Ontario in considering this case and the interplay between the BIA and the Commercial Tenancies Act Ontario clarified exactly what it means when a Trustee issues a disclaimer of lease and what the contractual relationship around the LOC means.

The Trustee argued that when it disclaimed the lease, the landlord was thereupon stopped from making use of the LOC for any amount other than the amount of its preferred claim. The Trustee contended that such a concept of insolvency legislation overrides the autonomy principle for a LOC and therefore limits the lawful amount the landlord could draw.

The Court of Appeal For Ontario made certain findings relating to a disclaimer of lease by a Trustee as follows:

  • The disclaimer under the Commercial Tenancies Act Ontario is for the sole benefit of the bankrupt commercial tenant.
  • While a disclaimer operates to finish the bankrupt tenant’s responsibilities under the lease, the disclaimer cannot be interpreted to be a consensual surrender for all purposes (emphasis added).
  • A Trustee’s disclaimer of a bankrupt tenant’s lease ends the legal rights of the landlord against the bankrupt tenant’s estate relative to the unexpired term of the lease, aside from the three months’ accelerated rent claim under the Commercial Tenancies Act Ontario and the BIA.

Commercial Tenancies Act Ontario: The landlord has a LOC on things

The appellate court recognized that the ability of the landlord to rely upon the LOC for more than just its preferred claim depends on the wording of the lease. In this case, the lease stated that the LOC functions as safety and security for indemnification of the landlord for losses:

“resulting from any termination, surrender, disclaimer or repudiation of this lease … in connection with any insolvency and bankruptcy or otherwise” and that the Landlord’s rights in respect of the LOC were not affected by the disclaimer of the Lease in any bankruptcy proceeding but would “continue with respect to the periods prior thereto and thereafter as if the Lease had not been surrendered, disclaimed, repudiated or terminated.”

Further, one of the terms of the LOC was that it will not be released, discharged or affected by the bankruptcy of the commercial tenant or the disclaimer of the lease.

The appellate court also went on to state that the motion judge’s decision runs counter to a standard principle relevant to LOCs. That is that providing financial institutions, such as BNS, have an independent responsibility to make a settlement to the beneficiary. The LOC is a contract between BNS and the landlord. It is regulated by the principle of the freedom or autonomy of LOCs, not by the BIA or the Commercial Tenancies Act Ontario.

Under the freedom principle, the issuer needs to pay the beneficiary upon appropriate qualification, subject to the minimal exemption for fraud which was not found in this case.

So with a properly worded lease and a properly worded LOC as security, the landlord can call on the LOC for all claims against the bankrupt commercial tenant after a Trustee disclaims its interest in the lease. With these facts, the landlord was successful in being able to claim everything it was owed, up to the limit of the LOC.

Commercial Tenancies Act Ontario summary

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commercial tenancies act ontario
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