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HOW BANKRUPTCIES WORK IN CANADA: 5 NEW CANADIAN INSOLVENCY LAW AMENDMENTS

how bankruptcies work in canada

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Canadian bankruptcies laws

Last week I wrote about amendments to Canadian insolvency law for intellectual property rights in my Brandon’s Blog INSOLVENCY LAW CANADA AMENDMENTS FOR INTELLECTUAL PROPERTY RIGHTS In addition to the intellectual property rights amendments, other amendments affecting how bankruptcies work in Canada. They were enacted as of November 1, 2019. They too were part of the changes announced in the Canadian 2019 Budget.

Corporate bankruptcies Canada

Most of the amendments affect not just corporate bankruptcies. Receiverships and corporate financial restructuring are likewise affected. Even the operation of solvent companies is also affected. The amendments were made to the Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3) (BIA), Companies’ Creditors Arrangement Act (R.S.C., 1985, c. C-36) (CCAA) and the Canada Business Corporations Act (R.S.C., 1985, c. C-44). I will focus on the changes to the BIA and CCAA.

The BIA and the CCAA modifications in the Budget Implementation Act, 2019, No. 1, are planned to boost retired life protection by making the insolvency treatment fairer and much more clear. In the legislation, the amendments fall under the heading “Enhancing Retirement Security”.

This issue remained in the news over the past two years. High profile insolvency situations such as Sears Canada and U.S. Steel Canada brought this matter to the forefront. I wrote a few blogs on the topic of proposals to change the BIA and CCAA. The proposals were meant to supply protection to senior citizens. This consisted of private members’ bills introduced by Hamilton Mountain NDP MP Scott Duvall, Bloc Québécois MP Marilène Gill and Senator Art Eggleton, P. C.

None of their Bills ever came close to being enacted. Rather, the Liberal government made some changes. Only time will tell if the changes I describe below will accomplish the stated goal of enhancing retirement security.

Insolvency and bankruptcy code amendments – BIA

The BIA amendments will apply to bankruptcy, receivership and BIA financial restructurings done under the Proposal section of the BIA. The amendments are aimed at several areas. All the insolvency amendments are for insolvency proceedings beginning on or after November 1, 2019.

1. Good faith

Section 4.2 of the BIA is amended by adding a good faith provision section(4.2)(1). The new language states that any interested person in any type of process under the BIA must act in good faith relative to those proceedings. New subsection 4.‍2(2) codifies a power for the Court. It now states that if the court is satisfied that an interested individual fails to act in good faith, on application by any other interested party, the Court might make any kind of order that it thinks is proper in the circumstances.

I would have hoped that acting in good faith was always a given. Previously, the Court had wide discretion in insolvency proceedings to make an order that it believed to be just and appropriate. I am not sure this new language adds much to “enhancing retirement security”, but at least now it is codified.

2. Registered disability savings plan

Before Budget Canada 2019, there was a gap when it came to a registered disability savings plan (RDSP). The gap was that unlike an RRSP or RRIF, there was no exemption for an RDSP in how bankruptcies work in Canada.

Now Paragraph 67(1)‍(b.‍3) of the BIA is amended to include the same exemption for an RDSP that an RRSP and RRIF enjoy. That is, the amounts in any of these funds are now exempt from seizure in a bankruptcy apart from property added to any such plan or fund in the twelve-month period before the date of bankruptcy.

3. Director liability – Inquiry into dividends, redemption of shares or compensation

Section 101(1) of the BIA has been amended. It now deals with certain transactions that 1 year before the corporation went bankrupt. The time period is within the day that is one year prior to the date of the initial bankruptcy event and ending on the date of the bankruptcy both such dates included. If the corporation had:

  • paid a dividend, aside from a stock dividend;
  • redeemed or acquired for cancellation any one of its shares of the company’s capital stock; or
  • has paid termination pay, severance pay or incentive or other benefits to a director, officer or any person that manages or controls the business

the Court may, on the application of the licensed insolvency trustee (Trustee), inquire into the transaction to find out whether it took place at a time when the firm was insolvent or whether it made the firm bankrupt.

If a transaction referred to above has actually occurred, the Court can give judgment to the Trustee against the directors of the firm, jointly as well as severally, or individually as appropriate in the circumstances.

The amount of the pay or benefits, with interest on the amount, that has not been paid back to the company if the Court discovers that the payment of the pay or benefit:

  • occurred at a time when the company was insolvent or it made the corporation bankrupt;
  • was notably over the reasonable market price of the consideration gotten by the company;
  • was made outside the common course of business

and the directors did not have reasonable grounds to think that the payment:

  • took place when the firm was not insolvent or would not render the firm insolvent;
  • was not conspicuously over the fair market value of the consider obtained by the corporation; and
  • was made in the ordinary course of business.

Interestingly, the new statute also states that a judgment will not be made against or be binding on a director who had protested against the payment of the pay or benefits and had, therefore, vindicated himself or herself under the relevant corporate legislation from any kind of resulting obligation.

No doubt we will only learn how effective this additional liability of directors provision will be after several court cases. Presumably, this amendment to the statute will provide extra food for thought for the insurance companies providing director and officer liability coverage.

Insolvency proceedings under the CCAA

The CCAA covers larger company financial restructuring. In addition to amendments to the CCAA to mirror the BIA amendments discussed above, there were also a couple of other changes made.

4. Initial application

Prior to November 1 CCAA filings, the company was given an initial stay of proceedings for 30 days. Now, for filings November 1, 2019, and after, this initial stay period has been reduced to 10 days.

5. Relief reasonably necessary

An initial order made or during the 10-day initial application stay period will be limited to alleviation that is fairly required for the continued operations of the borrower business in the regular course, but no extra relief will be granted. This narrowing of relief during the initial order period means that the Company cannot ask for all sorts of extra relief outside of the normal course of business.

In order to attempt to get extra relief, the Company will have to make a motion to the Court on notice to any affected parties. The Company will not be able to pack it into an initial order and force affected parties who did not receive notice to have to come to Court under the comeback clause. This was the case before November 1, 2019.

Most times in a CCAA restructuring, it is necessary for the Company’s survival to get debtor-in-possession financing. When such financing is available, it usually comes with very onerous terms. To avoid essentially keeping all of the Company’s assets out of reach by using such financing, the CCAA has been amended. It says that when applying for the initial order or during the initial stay period, no order shall be made unless the court is pleased that the terms of the loan are restricted to what is reasonably necessary for the continued operations of the debtor firm in the ordinary course of business during that initial stay period duration.

In this way, Parliament has tried to put the brakes on wide-sweeping initial orders that have everything including the kitchen sink in them. Parliament wants to have the initial orders contain only what is reasonably necessary to keep the Company’s operations going until everyone is back in Court all lawyered up.

It will be very interesting to see what Court decisions come from all of these new amendments to the Canadian insolvency laws.

Summary

I hope you enjoyed this how bankruptcies work in Canada Brandon’s Blog on the other BIA and CCAA insolvency amendments effective November 1, 2019. 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 corporate restructuring. However, more importantly, we understand the needs of the entrepreneur. You are worried because your company is facing significant financial challenges. Your business provides income not only for your family. Many other families rely on you and your company for their well-being.

The stress placed upon you due to your company’s financial challenges is enormous. We understand your pain points. We look at your entire situation and devise a strategy that is as unique as you and your company’s problems; financial and emotional. The way we deal with this problem and devise a corporate restructuring plan, we know that we can help you and your company too.

We know that companies 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 company restructuring process as unique as the financial problems and pain it is 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 your company back on the road to healthy stress-free operations and recover from the pain points in your life, Starting Over, Starting Now.

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Brandon Blog Post

WILL CRA CONTACT ME IF I DO NOT PAY?

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Introduction

It seems that more often than not, the Canada Revenue Agency (CRA) is a creditor in the personal or corporate insolvency matters that I get involved with. Many times the person, be they just an individual, an unincorporated business owner or the President of the company, will ask, “will CRA contact me if I do not pay?”.

In this Brandon’s Blog, I discuss the various ways CRA will contact the responsible individual, be they the taxpayer or the authorized representative of the taxpayer company.

Types of CRA debt

The following types of tax debt are the usual ones that a person in Ontario might owe:

The following types of tax debt are the usual ones that an Ontario corporation might owe:

Most likely CRA has already contacted the insolvent person or company before they come to see me for a free consultation. The reality is that when someone owes money to Revenue Canada and gets one of those unique brown envelopes in the mail, they tend to feel sick in the stomach. So, although they may keep the envelope and its contents, they certainly don’t wish to look inside it.

Let’s look at the various ways CRA has to contact a taxpayer and for CRA payment arrangements to be made.

Ways you and the taxman can communicate

Notice of Assessment or Reassessment

The first way CRA will contact you is by sending a notice of assessment or reassessment to the individual or corporate taxpayer. This is a notice that explains the reason for the (re)assessment, the calculation and the amount owing. There is no need to talk about the situation where the taxpayer pays the balance in full on time. I am talking about the situation when the taxpayer cannot afford to pay the amount owing.

Be proactive

If you cannot pay the total you owe, be proactive by getting in touch with the CRA as soon as possible. Overlooking your debt does not make it vanish. As a matter of fact, ignoring it might make things worse. This is the same whether it is a personal debt or a corporate debt.

The CRA tacks on interest at the prescribed rate compounded daily. You can’t avoid this because whether you realize it or not, CRA has become your lender for any unpaid amounts. By taking action first, you can at least ward off a much worse result. So you contacting CRA is the first and best way to make the connection.

I will discuss below what your options are concerning amounts you cannot pay off immediately, but first, I want to discuss other ways that the CRA will contact you if you first don’t contact them.

Telephone or letter

If the taxpayer does not contact CRA to work out a payment arrangement (discussed below), CRA will then communicate with the taxpayer. The amount owing is assigned to a collections officer who will contact the taxpayer by telephone, letter or both.

If the taxpayer responds to that outreach, the collections officer will attempt to obtain payment. The collections officer will also ask many more questions. If the taxpayer is a company, the collections officer may also make an appointment to go visit the company to review its financial records.

The purpose of asking the questions and reviewing corporate financial records is to attempt to determine if any money is owed to the taxpayer by third parties and where does the taxpayer maintain bank accounts.

Garnishment by a Requirement To Pay

Armed with the information obtained from the taxpayer’s tax filings and any additional information collected through discussions or reviews, the next level of CRA contact to get the taxpayer’s attention is not with the taxpayer, but rather with third parties. A Requirement To Pay (RTP) is a lawful notification that the CRA sends out to a 3rd party when:

  • the CRA thinks that the 3rd party owes or will owe money in the future to the taxpayer that has not paid their tax obligation; and
  • the CRA has not been able to collect the taxpayer’s debt or make an appropriate settlement plan with the taxpayer.

The RTP advises the 3rd party to send the money the third party owes to the taxpayer to the CRA, rather than the taxpayer. The RTP reveals the taxpayer’s name, address, and the CRA account number.

The RTP is the way the CRA uses to garnishee bank accounts, wages or any other amount owing by a third party to the taxpayer. An RTP can garnishee all sorts of repayments a 3rd party might make to a taxpayer. The more common ones are:

  • income, earnings, payments, bonus offers, or various other amounts owing by an employer to an employee;
  • repayment of expenses owed to an employee;
  • amounts due to a professional or contractor for work performed, products, or services;
  • lease or rent payments;
  • loan payments;
  • interest or dividend payments;
  • insurance claim settlements
  • amounts on deposit at a financial institution

Seizing your assets

A garnishee through an RTP is to intercept and seize payments from a third party to the taxpayer. But what if there is no such third party that exists or can be found but the taxpayer has assets?

In that situation, the CRA has the power to seize assets found registered in the name of the taxpayer. This is how CRA goes about doing it. The CRA can lawfully register your debt with the Federal Court of Canada. By doing so they get a certificate validating the amount you owe to the Crown. As soon as it is issued, this certification, called a memorial, has the same or even greater impact as a judgment if someone sued you.

Now that the CRA has the memorial, they can register it against any assets in your name. This includes your home and its possessions owned by the taxpayer. The CRA rarely actually takes physical possession of the assets, but in most cases, they don’t need to. It will be impossible to sell or refinance your assets with the CRA memorial registered against it under provincial law. So when that time comes, the taxpayer will have no choice but to deal with the CRA on the outstanding debt, one way or the other.

Here are different ways that you can deal with the CRA on your tax debt if you cannot pay it now in full.

Payment arrangement

This is the first and most hassle-free way of paying off your tax debt. A payment arrangement is a settlement plan you make with the CRA. It enables you to make smaller regular payments over time until you have paid your whole tax debt plus interest.

Prior to agreeing to the settlement plan, the CRA collections officer will want to know that you are paying the maximum amount you can afford. Hopefully, the amount you can pay is at least the same as the minimum monthly amount the collections officer is willing to accept.

So, the collections officer will ask you all sorts of questions and may even want you to complete a questionnaire, so that they understand your monthly budget as part of any debt settlement plan.

As part of making a payment arrangement, you should also be working with your accountant to see if any of the taxpayer relief provisions are available to you. This blog isn’t meant to be a discussion of the income tax act or taxpayer relief, so, I won’t go into any more detail than that.

Any payment arrangement has to deal with 100% of the principal amount of tax owing plus interest. Unfortunately, the collections officer does not have the authority to make a deal to accept less than full payment, absent an insolvency proceeding (further discussed below).

Insolvency proceeding

If you cannot reach a satisfactory payment arrangement with the CRA, or you have one but can no longer keep up with the payments, then, the taxpayer can consider an insolvency filing. In the case of an individual, it would be either bankruptcy or a consumer proposal. For a corporation, it would be either a Division I Proposal or bankruptcy.

Either bankruptcy or a proposal will stop CRA’s ability to issue a requirement to pay or obtain a memorial. However, if CRA has obtained and registered a memorial before the taxpayer files for either a restructuring proposal or bankruptcy, the memorial cannot be eliminated.

Similarly, for a corporation, unremitted source deductions form a deemed trust claim against the company’s assets. So in either a bankruptcy or financial restructuring proposal, this trust claim cannot be eliminated or reduced. However, for both individuals and companies, the income tax debt can be eliminated. For companies, the HST arrears will not be a trust claim in bankruptcy. Unlike a bankruptcy, HST arrears are not automatically made unsecured by the wording of the Bankruptcy and Insolvency Act (Canada). However, current CRA policy in financial restructuring proposals results in the HST arrears being treated as an unsecured claim.

Personal or corporate income tax is an unsecured debt. As soon as you’ve declared bankruptcy or filed the financial restructuring proposal, the CRA cannot begin or continue any action against you, including wage garnishment or freezing your assets, including your bank account. Your licensed insolvency trustee (formerly called a bankruptcy trustee) will alert CRA as soon as you submit your filing and advise it to quit any type of enforcement activity through any RTP. As I stated above, unfortunately, any memorial already registered will remain against your assets.

Do you have too much debt?

I hope you have found this CRA contact Brandon’s Blog to have useful information for you. Do you have too much debt? Are you in financial distress? Do you not have adequate funds to pay your financial obligations as they come due?

If so, call the Ira Smith Team today. We have decades and generations of experience assisting people looking for financial restructuring, a debt settlement plan and to AVOID bankruptcy.

As a licensed insolvency trustee (formerly called a bankruptcy trustee), we are the only professionals accredited, acknowledged and supervised by the federal government to provide insolvency advice and to implement approaches to help you remain out of personal bankruptcy while eliminating your debts. A consumer proposal is a government approved debt settlement plan to do that. We will help you decide on what is best for you between a consumer proposal vs bankruptcy.

Call the Ira Smith Team today so you can eliminate the stress, anxiety, and pain from your life that your financial problems have caused. With the one-of-a-kind roadmap, we develop just for you, we will immediately return you right into a healthy and balanced problem-free life.

You can have a no-cost analysis so we can help you fix your troubles. Call the Ira Smith Team today. This will allow you to go back to a new healthy and balanced life, Starting Over Starting Now.

Call a Trustee Now!