corporate bankruptcy in canada Archives - Ira SmithTrustee & Receiver Inc.

I hope you’re safe and well. If your Canadian company can’t pay its debts, it is understandable to worry about what happens next: to the business, its assets, its employees and you personally. Corporate bankruptcy in Canada is one possible route, but it is not the only one. The first step is to understand whether the business can be reorganized or whether an orderly wind-down is the more realistic path.

Corporate Bankruptcy in Canada: Key Takeaways

The first question is viability: can the company operate sustainably if its debt or operations are restructured?
A corporate bankruptcy in Canada is a legal process under the Bankruptcy and Insolvency Act (BIA) administered by a Licensed Insolvency Trustee (LIT). It does not automatically make directors bankrupt.
A Division I Proposal or a proceeding under the Companies’ Creditors Arrangement Act (CCAA) may give a viable business time and legal protection to restructure.
In bankruptcy, the trustee administers the company’s property, subject to valid secured claims and statutory priorities. Ordinary unsecured creditors are generally near the end of the distribution order.
Personal guarantees and certain director liabilities, including some unremitted source deductions and GST/HST obligations, may survive the company’s filing.
Before deciding, gather current financial records and get advice on cash flow, secured debt, tax remittances, employee claims, guarantees and available restructuring options.

Highlights

Is my company viable, and why does that question come first?
What is corporate bankruptcy in Canada, exactly?
What are the reorganization paths: Division I Proposal and CCAA?
What actually happens in a corporate bankruptcy liquidation?
Who gets paid first, and who is last?
What does company failure mean for directors, guarantees and CRA?
What alternatives are worth exploring before filing?
What should I do in the first 30 days?
What are common frequently asked questions (FAQ) about corporate insolvency?

Is my company viable, and why does that question come first?

In my first meeting with directors, I ask what the business would look like with a workable debt burden and enough cash to meet its ongoing obligations. I also ask whether there are parts of the business they would rather not continue and whether they could find a way to do that. Those questions help distinguish a reorganization, an attempt to change the company’s finances or operations so it can continue, from liquidation, the sale of assets to satisfy claims and wind down the business.

Viability is not simply whether the company has customers or valuable equipment. We look at realistic cash flow, operating costs, profitability potential, debt, the security granted to lenders, tax arrears, employee obligations and whether new financing or a restructuring plan is achievable. A business can be busy and still lose money on every job. It can also have a sound core business but be overwhelmed by debt, a temporary cash crunch or an unsustainable cost structure.

What owners are usually surprised to learn is that filing for corporate bankruptcy in Canada is not the first decision we have to make. We first need to understand the company’s position and compare realistic paths. That is how we avoid rushing into a process that may not serve the business or its stakeholders.

As context, the Office of the Superintendent of Bankruptcy (OSB) reported that Canadian business insolvencies in August 2026 were 4.9% higher than in August 2025, while business insolvencies over the 12 months ending August 2026 were 6.6% lower year over year. These are national figures, not a prediction for any one company. See the OSB’s August 2026 insolvency statistics.

What is corporate bankruptcy in Canada, exactly?

A corporation is a separate legal entity. When it becomes insolvent, it may make an assignment in bankruptcy under the federal Bankruptcy and Insolvency Act (BIA). Insolvent generally means the company cannot meet its obligations as they become due, has stopped paying current obligations in the ordinary course, or has insufficient property to pay its obligations.

A Licensed Insolvency Trustee is a federally licensed professional authorized to administer bankruptcy and proposal proceedings. In a corporate bankruptcy in Canada, the trustee administers the corporation’s estate (the property and claims dealt with in the proceeding) and distributes available proceeds according to the law. Unlike an individual, a corporation does not receive a discharge that lets it resume life free of old debt. Bankruptcy is usually part of a wind-down, followed by the end of the business once the estate is administered.

The distinction matters for an unincorporated business. A sole proprietorship is not legally separate from its owner, and a partnership can expose partners to personal liability, depending on its structure and circumstances. Those situations may involve personal insolvency, not a corporation’s bankruptcy. The rules and consequences differ.

What are the reorganization paths: Division I Proposal and CCAA?

When a business has a credible path forward, a formal restructuring can provide time to negotiate with creditors and try to preserve value. The two main statutory routes are a Division I Proposal under the BIA and a CCAA proceeding.

A Division I Proposal is a formal offer to creditors to compromise or reschedule debts. It is administered by an LIT and can give the company a statutory stay. A pause on certain creditor enforcement actions. Under the BIA, section 69(1) applies to a Notice of Intention To Make a Proposal, and section 69.1(1) applies to a proposal. A proposal requires approval by the required majority in number and at least two-thirds in value of creditors who vote, followed by court approval. If creditors reject the proposal, or the court refuses to approve it, the company is automatically deemed to have made an assignment in bankruptcy. See the BIA provisions on proposals.

A CCAA proceeding is a court-supervised restructuring generally available to an insolvent company, or affiliated companies, with claims of at least $5 million. The court can grant a stay, appoint a monitor and oversee a plan or other restructuring steps. Creditors vote in classes; approval generally requires a majority in number and two-thirds in value of voting creditors in each class, followed by court sanction. For an overview, see the OSB’s CCAA information.

The CCAA threshold is not a cap on BIA proposals: a Division I Proposal is not limited to companies with less than $5 million in debt. The right process depends on the company’s needs, complexity, creditor structure and ability to fund a restructuring.

An informal workout is a negotiated agreement with creditors outside a formal court process. It may be less disruptive, but a creditor that has not agreed to the arrangement is generally not bound by it.

Which path might fit? This table is a high-level guide, not a recommendation for a particular company. Costs, outcomes and legal effects depend on the facts.

Path	What it is	Who it may suit	Court or court-free?	What happens to the business?	What happens to directors?	Typical cost and main risk
BIA bankruptcy liquidation	Trustee administers the corporation’s bankruptcy estate and realizes available assets.	A company without a viable, fundable restructuring path.	Formal statutory process; court involvement may arise in disputes or applications.	Operations often stop or change; assets may be sold and the company wound down.	Not automatically bankrupt; guarantees and statutory liabilities may remain.	Fees and expenses depend on assets and complexity. Risk: insufficient proceeds and remaining personal exposure.
Division I Proposal	BIA compromise or rescheduling of debts, administered by an LIT.	A company with a workable plan and ability to meet proposal obligations.	Formal process with creditor voting and court approval.	May continue operating while it pursues the proposal, subject to the process and circumstances.	Not automatically bankrupt; director protections or releases are not blanket guarantees.	Professional and administration costs vary. Risk: rejection, failure to perform or deemed bankruptcy.
CCAA	Flexible court-supervised restructuring under the CCAA, generally for claims of more than $5 million.	A larger or more complex restructuring needing court-managed relief.	Court-supervised; a monitor is appointed.	May continue operating, restructure, sell assets or pursue another court-approved outcome.	Directors remain responsible for their own legal obligations; court relief is case-specific.	Usually significant professional and court costs. Risk: plan failure, value loss or unsuccessful financing.
Informal workout	Voluntary negotiation with creditors outside a statutory filing.	A company able to negotiate and obtain necessary creditor cooperation.	Court-free unless a dispute or later proceeding requires court action.	Usually continues operating under agreed terms.	Directors continue managing, subject to duties and any agreements or security rights.	No single standard cost; advisory costs may apply. Risk: a non-consenting creditor may enforce its rights.

Scroll the table sideways to see every column. General information only. The appropriate process depends on the company’s facts, assets, liabilities, financing and objectives.

What actually happens in a corporate bankruptcy liquidation?

Prior to filing a voluntary corporate bankruptcy in Canada, it always begins with a review of the company’s financial position to understand which option is best for the company. Before any formal insolvency process under either the BIA or CCAA, a board resolution authorizing the filing is required. The LIT prepares the required documents, including a statement of affairs, which is a summary of the company’s assets, liabilities and creditors. The LIT files, in this case, a corporate assignment in bankruptcy with the OSB, which issues a Certificate of Appointment confirming the corporate bankruptcy in Canada event date and time, the trustee’s appointment and the date and time of the First Meeting of Creditors.

The trustee takes control of the bankruptcy estate and administers the company’s unencumbered assets. Unencumbered means not subject to a valid security interest or other property right. A secured creditor may have separate rights to its collateral, and those rights must be reviewed rather than assumed away by the filing.

The trustee notifies creditors, reviews claims, realizes on unencumbered assets where appropriate and reports on the administration. A meeting of creditors is held as required by the BIA. The trustee ultimately distributes funds according to the statutory scheme and the circumstances of the estate. The company may stop operating immediately upon filing or sometime thereafter, but the timing and steps depend on whether continuing operations briefly would preserve value or assist a sale.

Who gets paid first, and who is last?

No universal one-line order applies to every dollar or asset. A valid secured creditor generally looks first to the collateral covered by its security. Certain statutory claims can affect priority. For example, unremitted employee source deductions are a deemed-trust claim and rank ahead of secured claims. The treatment of GST/HST is not identical; the specific statute, timing and proceeding matter. In a corporate bankruptcy in Canada, the GST/HST claim becomes an unsecured claim.

After secured and statutory rights are addressed, the BIA provides for specified preferred claims, such as certain employee claims, ahead of ordinary unsecured claims. Suppliers and other ordinary unsecured creditors generally share in any available distribution after higher-ranking claims. Shareholders are last: they receive value only if all prior claims are paid, which is uncommon in an insolvent liquidation.

The Supreme Court of Canada’s decision in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, illustrates why tax priority cannot be assumed in every restructuring: the treatment of a Crown deemed trust depends on the statute and the insolvency proceeding. The practical benefit of a claim-by-claim review is that directors and creditors can make decisions based on actual priorities, not a generic list.

What does company failure mean for directors, guarantees and CRA?

Corporate bankruptcy in Canada does not automatically make its directors personally responsible for every corporate debt. But that does not mean directors are insulated from all consequences.

A director may face personal liability under applicable legislation for unremitted employee source deductions, including income tax withholdings, Canada Pension Plan contributions and Employment Insurance premiums. Directors may also face liability under GST/HST legislation in some circumstances. These claims have statutory conditions, time limits and potential due-diligence defences. The Canada Revenue Agency explains director liability in its information on directors’ liability. Get advice promptly if remittances are behind; delay can make it harder to understand the record and options.

A personal guarantee is different. It is a promise by an individual to pay a corporate debt if the company does not. A corporate bankruptcy in Canada does not by itself erase that promise. The guarantee’s wording, amount, security and the lender’s actions need to be reviewed by legal counsel.

If company shares become worthless, shareholders should also speak with a tax professional. A capital loss or allowable business investment loss may be available only if the relevant tax-law requirements are met. A bankruptcy filing alone does not automatically establish a deductible loss.

If you are a director or shareholder who has guaranteed debt or may face statutory liability, assess your personal finances separately. Personal bankruptcy or a consumer proposal is not automatic after corporate bankruptcy in Canada; it may be considered if personal debts cannot be managed. An LIT can explain the options in light of your own situation.

What alternatives are worth exploring before filing?

If the business may be viable, I recommend testing practical options quickly, not just hoping that cash flow improves. Depending on the facts, the following may be lifelines:

Control cash flow. Prepare a short-term cash forecast, prioritize essential operating costs and identify spending that can be reduced without damaging revenue.
Explore refinancing. New or restructured financing may help, but review its cost, security, guarantees and repayment capacity before committing.
Consider shareholder funding. Additional capital or a shareholder loan may buy time, but it should be documented and assessed against the company’s full debt position.
Negotiate an informal workout. Some creditors may accept revised payments or terms. The company needs to know which creditors must agree and what happens if one does not.
Sell surplus assets. A sale can raise cash, but check ownership, security interests, tax consequences and whether the asset is essential to operations.

If the company is not viable, a secured lender may appoint a receiver under its security or seek a court-appointed receiver. Receivership is not the same as bankruptcy: a receiver generally takes control of specified property of the business for the secured creditor’s purposes, while a bankruptcy trustee administers the bankrupt corporation’s estate under the BIA for the benefit of the unsecured creditors. A receiver may continue operations temporarily to preserve sale value, but this is not a promise that the business will be rescued. The company’s security documents and circumstances determine the scope.

What should I do in the first 30 days?

The right timetable depends on the urgency. If enforcement, payroll or tax remittances are pressing, do not wait 30 days to seek advice. Start here:

Gather the records: recent financial statements, bank statements, aged receivables and payables, tax filings, payroll records, leases, loan agreements and security documents.
List all creditors and guarantees: identify amounts, arrears, collateral, court actions and any personal guarantees.
Reconcile CRA accounts: separate source deductions, GST/HST, corporate income tax and other balances. Do not treat them as interchangeable.
Build a realistic cash-flow forecast: show expected receipts and essential payments over the coming weeks, using realistic assumptions.
Avoid unusual asset transfers or selective payments without advice: transactions made while insolvent may raise legal issues or be challenged.
Speak with an LIT and, where needed, a business lawyer or accountant: ask what can be done immediately, which options are realistic and what each could mean for the company, directors, employees and creditors.

The point is not to create more paperwork. It is to replace uncertainty with a practical sequence of decisions.

What are common frequently asked questions (FAQ) about corporate insolvency?

Question 1 – How can a company come out of corporate bankruptcy in Canada?

Bankruptcy is generally a liquidation process, not a route for a corporation to receive a personal discharge and resume free of its debts. A business seeking to continue should consider a Division I Proposal or CCAA restructuring, if eligible and viable.

Question 2 – Do directors go bankrupt when the company does?

No. The corporation and its directors are separate legal persons. Directors may still have personal exposure under guarantees or specific statutes, but a personal insolvency filing is a separate decision.

Question 3 – What is the difference between bankruptcy and receivership?

A trustee administers a bankrupt company’s estate under the BIA, acting on behalf of the unsecured creditors. A receiver typically acts under a secured creditor’s rights or a court order over specified property or operations. The authority and purpose differ.

Question 4 – Can shareholders recover anything?

Possibly, but only if there is value left after secured claims, statutory priorities and all other creditor claims are satisfied. In a corporate bankruptcy in Canada liquidation, shareholders normally receive nothing.

Question 5 – How long does corporate bankruptcy in Canada take?

There is no single standard timeline. The duration depends on the assets, claims, disputes, tax matters, litigation and required steps to complete the administration.

Question 6 – What happens to employees?

A corporate bankruptcy in Canada automatically terminates the employment of the people by the company as employer. If the trustee continues operations in bankruptcy, a separate arrangement is established by the trustee to protect the trustee while paying the workers. Employees may have wage and other claims, and some eligible unpaid wages may be considered under the federal Wage Earner Protection Program. The facts and deadlines matter.

Can the company keep operating through a proposal?
Often, a company continues operating while pursuing a proposal, but it must manage its ongoing obligations and comply with the process. A proposal is not a guarantee that operations can continue indefinitely.

Starting Over, Starting Now

Don’t let financial uncertainty dictate your future. If you or your business is struggling with debt, losing sleep, or facing legal action, contact Ira Smith Trustee & Receiver Inc. today.

We offer a free, confidential consultation to discuss your situation, explain your options in plain language, and help you develop a clear, actionable plan. Our team of Licensed Insolvency Trustees is dedicated to providing the compassionate, professional support you need to regain control and achieve a debt-free life.

Take the first step towards a brighter financial future, call us now.

Phone: 905.738.4167
Toronto Line: 647.799.3312
Evening and Weekends: 289.670.7500
Website: irasmithinc.com
Email: ira@irasmithinc.com

Ira Smith Trustee & Receiver Inc. is licensed by the Office of the Superintendent of Bankruptcy. Ira and Brandon Smith are members of the Canadian Association of Insolvency and Restructuring Professionals.

Disclaimer: This analysis is for educational purposes only and is based on the cited sources and professional expertise as a Licensed Insolvency Trustee. The information provided does not constitute legal or financial advice for your specific circumstances. Every situation is unique; the outcomes discussed may not apply to your particular case.

About the Author:
Ira Smith is President of Ira Smith Trustee & Receiver Inc., a CPA CA and Licensed Insolvency Trustee.

#CorporateBankruptcy #BusinessInsolvency #DivisionIProposal #CCAA #CreditorPriority #DirectorLiability #CorporateBankruptcyInCanada #CorporateRestructuring #StartingOverStartingNow

Corporate bankruptcy in Canada: Introduction

A brand-new report from PwC Canada discloses that in 2018, Canadians anticipate spending an average of $1,563, up 6.7% over last year. Men are expected outspend women by almost $400. That got me to start thinking about what the most complex issue for corporate bankruptcy in Canada is when an online business fails?

The report finds that the majority of Canadians still prefer the in-store experience. Nearly two-thirds consider brick-and-mortar retail for their primary holiday season shopping. The rest is online shopping. Unsurprisingly, most millennials (51%) think of online purchasing first, which is in line with United States consumers overall (50%).

E-commerce, like any other industry, has its startups and more mature companies. There will be winners and losers. The fulfilment of online digital products is done online. The fulfilment of physical goods orders bought online more often than not will be done by a third party. That third party may not necessarily be fulfilling orders from Canada.

Corporate bankruptcy in Canada: The most complex issue for an e-commerce business, IMO

With that said, the retail vendor’s inventory, computer hardware and software value are relatively easy to determine. But to my way of thinking, the #1 issue for corporate online vendors, both solvent and viable or insolvent and not viable, is the area of sales tax.

In attempting to abide by tax laws for your e-business, you might find yourself falling down the rabbit-hole, going through the looking glass, and attending a Mad Tea-Party.

Sound judgment, logic, and fairness never did apply totally to the field of taxation, however, this is specifically true of e-commerce deals.

Corporate bankruptcy in Canada: Canada Customs Welcomes You to Canada!

Considering that I’m situated in Canada, let’s start here. To keep things simpler, but certainly not simple, I will review this issue strictly from a Federal tax collection perspective, i.e. Harmonized Sales Tax (HST).

Canada has what you may call a nationwide sales tax or a value included tax (VAT). This Goods and Services Tax (GST) of seven percent is applicable to lots of Canadian transactions.

Not just is it critical to identify whether a taxable sale was made in Canada or not, but also where in Canada. If it was made (or deemed to be made) in any of the HST provinces, a higher rate applies. This is due to the fact that those provinces have allowed Canada to gather their provincial sales taxes for them, as follows:

Province	HST % rate
New Brunswick	15
Newfoundland and Labrador	15
Nova Scotia	15
Ontario	13
Prince Edward Island	15

Each province and territory has its own guidelines. Ontario charges 8 percent retail sales tax on numerous common internet deals whereas Alberta has no provincial sales tax.

Obviously, this is just scratching the surface. This entire blog by necessity is an oversimplification of an extremely complicated topic. As a licensed insolvency trustee (formerly called a bankruptcy trustee), I would certainly require the advice of a professional tax advisor to help me through e-commerce Taxland.

Since I am not a tax professional, you should also seek the advice of a tax professional. This is merely one bankruptcy trustee’s view of the issues in the insolvency of an e-commerce business.Corporate bankruptcy in Canada: When Exports Aren’t Exports!

In Canada, exports are “zero-rated” sales for GST purposes. This means that when you ship a product to someone outside Canada, you don’t charge GST. Yet, you get to claim (or subtract from the GST collected by you) all the “input tax credits” (GST that you spent for business functions) to make that export.

However, if you export items aside from physical products, beware! There are lots of mistakes to look out for.

As one example, think about digitized products that you may offer from Canadian sites, such as e-books, downloadable software application, or subscriptions to a material. You would be considered to be selling “intangible personal property”. Unless your item is also thought about “copyright” (such as software or e-books that you produced or have gotten the rights for), you will need to charge GST. The reason, according to the Canada Revenue Agency, is that it could be utilized inside Canada, even if it isn’t.

Say you sold a subscription for accessing digitized content (from various sources) on your Canadian site to a client in the United States. Given that there are no restrictions regarding where the intangible personal property might be used, and the property is not considered copyright (nor the provision of a service), the American client goes through GST, even if he never comes to Canada.

Strangely, the same logic doesn’t apply when an American buys a routine book (or an automobile) which he could bring into Canada with him and utilize here. It holds true that it is much easier for Canada to assess such products at the border than in the online world. However, I have not heard of any cases of Americans being taxed on the cars and trucks or books they bring with them when they come to reside in Canada for a part of the year.

As a Canadian registrant, one way you might legally avoid this ridiculous March Hare is to clearly mention on your website and invoice that utilize of such intangible personal effects in Canada is restricted (or requires an extra charge and the payment of GST).

Corporate bankruptcy in Canada: When imports Aren’t imports

Goods shipped to Canada are subject to GST on importation. Such tax is often assessed at the border. What if you are a Canadian registered for GST, selling to a Canadian customer but your provider is in a foreign country?

Pretend that your Canadian consumer has bought a book from you from your Canadian website. Your dropship supplier is located in the United States and is signed up for GST. You send your order to the American business, and they, in turn, ship the book for you (total with Customs Declaration and their GST Business Number).

Since they paid the GST, you wouldn’t think you would need to charge it again, would you? “Wrong!”, smiles the Cheshire cat. Since you are a registrant located in Canada, you need to charge and remit the GST. But you are entitled to input tax credits, aren’t you? In many cases, the answer is “No”.

It might be very tough for you to satisfy the documentary and other technical requirements. As an example, it is not uncommon for American providers to absolutely refuse to provide an invoice breaking down the GST or to enable you to be the importer of record. This complicates their life unnecessarily and they just don’t require the aggravation.

There are easing tax provisions covering drop shipping, sales agencies, and other situations. In most cases, sadly, the most practical option is to permit the tax to be paid twice.

Corporate bankruptcy in Canada: When you are subject to tax where you’re not subject to tax

It makes sense that countries impose a tax on sales and earnings made in their own jurisdiction. Does it make sense for Germany to tax sales made in the United States?

Starting July 1, 2003, the European Union actually did just that by enforcing an online sales tax.

This implies that if somebody from England buys an e-book from somebody in the United States, the American should submit this tax. Naturally, If the sale was to someone in Germany, the tax rate would be more complicated.

The reasoning behind this is as follows: Since countries can’t gather sales tax on internet deals at their borders, the only method they can collect it (other than a self-assessment system) is with an online sales tax. Even more, it is claimed that companies in the European Union suffer a significant competitive disadvantage due to the fact that they need to gather Value Added Tax but others don’t.

Corporate bankruptcy in Canada: But that isn’t all

So that is just a “scratching of the surface” description of the issue for Canadian companies selling online when it comes to HST. But if the company is insolvent, and will go into either receivership or bankruptcy, the story gets worse.

For every insolvent company in receivership, an HST liability is a trust claim against the assets of the company. So in a liquidation, the HST liability would have to be paid before a secured creditor, normally a chartered bank, recovers any money. What this means for the owner(s) who guaranteed the bank debt, is that they have additional exposure for any shortfall of the bank debt by the amount of the HST liability.

In a bankruptcy though, the HST liability is not a trust claim, but rather an unsecured claim. So, the good news is that it does not come ahead of the bank debt the owners have probably guaranteed payment for. However, the bad news is that the HST liability is always a Director liability. So in a bankruptcy, there are always insufficient funds to pay off the unsecured creditors 100%. So, the Directors of the bankrupt company will be on the hook for any unremitted HST.

Corporate bankruptcy in Canada: Does your company have too much debt?

Is your company, either a traditional retailer, online retailer or both, experiencing financial difficulties? If yes, call the Ira Smith Team. Our approach for each file is to create an end result where Starting Over, Starting Now takes place. This starts the minute you are at our front door.

The earlier you contact us, the more options we will have to implement. Whether it is a corporate restructuring or personal debt settlement through a consumer proposal, the goal is to avoid bankruptcy. However, if bankruptcy turns out to be the best option, we can assist there too.

You’re simply one phone call away from taking the necessary steps to get back to leading a healthy, balanced hassle-free life, ending the pain and stress you are feeling forever. Call Ira Smith Trustee & Receiver Inc. today for your free consultation.