Small business debt in Canada: proposals, bankruptcy and what owners are personally on the hook for

Small business debt in Canada raises a question personal debt doesn’t: who owes it? If you run your business as a sole proprietor, its debts are yours. If you run it through a corporation, the company owes its own debts, but owners and directors are often personally on the hook anyway, through personal guarantees, unremitted payroll deductions and GST/HST, and sometimes unpaid wages.

The federal Bankruptcy and Insolvency Act (BIA) also gives businesses a way to restructure rather than close. This guide explains where personal liability comes from, how a Division 1 proposal works, when bankruptcy or receivership is the likelier outcome, and the warning signs that it’s time to get advice.

Business insolvencies in Canada: the numbers

Canada recorded 4,758 business insolvencies in the 12 months to Aug. 31, 2026, down 6.6% from a year earlier, according to the Office of the Superintendent of Bankruptcy (OSB), the federal regulator.¹ Of those, 3,573 were bankruptcies and 1,185 were proposals, so about one business filing in four was an attempt to restructure.²

Year	Business bankruptcies	Business proposals	Total
2019	2,746	934	3,680
2021	1,942	538	2,480
2023	3,702	1,108	4,810
2024	4,771	1,417	6,188
2025	3,714	1,126	4,840
12 months to Aug. 2026	3,573	1,185	4,758

Source: OSB historic insolvency statistics.²

Filings dropped during the pandemic, climbed to 6,188 in 2024, the highest yearly total since 2009, and then eased by 21.8% in 2025. That is still far below the 1996 peak of 14,820.² These counts cover only formal BIA filings, not businesses that close quietly. You can explore the monthly series by province on our Canadian insolvency statistics tracker.

Sole proprietor or corporation: who owes the debt?

Sole proprietors

A sole proprietorship has no legal existence apart from its owner. As the Canada Revenue Agency (CRA) explains, the owner carries all of the business’s risk, right down to their personal property.³ The business loan, the supplier invoices and the HST arrears are, legally, the owner’s personal debts.

The upside is that a sole proprietor can use personal insolvency tools. If your total debts, not counting debts secured by your principal residence, are $250,000 or less, you may qualify for a consumer proposal, explained in our guide to consumer proposals in Canada.⁴ Above that limit, the options are a Division 1 proposal or personal bankruptcy.

Corporations

A corporation is a separate legal person that signs contracts, owns property and owes money in its own name, and shareholders generally aren’t responsible for its debts.⁵ For trade creditors and many other debts, that protection holds. But in a small, owner-managed company, the exceptions are often where most of the money is.

When are owners personally liable for business debts?

Personal guarantees

The CRA notes that lenders to smaller, closely held corporations often ask shareholders to guarantee a loan, and an owner who agrees becomes personally liable if the company doesn’t pay.⁵ Bank loans, lines of credit, equipment and commercial leases, and supplier accounts commonly come with guarantees. Owners often sign several over the years, so start any review by listing who signed what.

Unremitted source deductions

When a corporation fails to deduct or remit employees’ income tax withholdings, the directors in office at the time can be held jointly and severally liable for those amounts, plus interest and penalties, under section 227.1 of the Income Tax Act.⁶ The CRA’s information circular explains that similar rules apply to CPP contributions and EI premiums.⁷ The CRA must first show it can’t collect from the company, for example by proving its claim in the company’s bankruptcy, a condition that is often met just as the business fails.⁶

GST/HST

Section 323 of the Excise Tax Act creates the same kind of director liability for net GST/HST the corporation should have remitted.⁸ The CRA also moves faster on these debts: for payroll and GST/HST remittance arrears, it says it may start legal action as soon as the business is notified, since the notice of assessment serves as the written warning.⁹ Our explainer on whether the CRA can garnish your wages covers those collection tools.

The due-diligence defence and the two-year limit

Directors have two key protections under both statutes:

• Due diligence. A director isn’t liable if they took the care a reasonably prudent person would have taken in comparable circumstances to prevent the failure.⁶⁸ The CRA’s information circular on directors’ liability stresses that the steps must come before the failure, such as a separate account for withholdings and GST/HST and regular confirmation that remittances were made. Not knowing the rules is no defence, and passive directors generally aren’t excused.⁷
• The two-year limit. The CRA can’t assess a director more than two years after that person last ceased to be a director.⁶⁸ A director keeps the role, with reduced powers, even after a trustee or receiver is appointed, so resigning is the usual way the clock starts.⁷

Resigning doesn’t erase liability for remittances missed while you were in office.

Unpaid wages

Under section 119 of the Canada Business Corporations Act (CBCA), directors of a federally incorporated company can be jointly and severally liable to employees for up to six months’ unpaid wages each, for work done while they were directors. The employee generally has to try the company first, for example by proving the claim in its bankruptcy, and must sue the director while in office or within two years after leaving.¹⁰

Provincial corporate laws have their own versions. Ontario’s Business Corporations Act, for instance, covers up to six months’ wages plus up to 12 months of accrued vacation pay.¹¹

Source deductions are treated as the Crown’s money

The BIA generally ignores statutes that deem property to be held in trust for the government. Source deductions are the exception: amounts deemed held in trust for income tax, CPP and EI withholdings keep that status in a bankruptcy.⁴ That is one more reason they belong at the top of the list of debts to keep current.

Warning signs to take seriously

Under the BIA, you’re insolvent if you owe at least $1,000 and can’t meet your obligations as they fall due, have stopped paying current obligations in the ordinary course, or wouldn’t cover your debts by selling everything.⁴ For a small business, that often looks like:

• using HST or payroll remittances to cover rent, suppliers or wages;
• a line of credit that stays at its limit month after month;
• suppliers cutting your terms or moving you to cash on delivery;
• CRA arrears you can’t pay, or a letter proposing a director’s assessment;
• a lender’s demand letter or formal notice that it intends to enforce its security;
• paying some creditors (often family, a related company or the guaranteed loan) ahead of others.

That last point matters. In a later bankruptcy, the trustee can challenge payments that preferred one arm’s-length creditor in the three months before filing, or a related party in the prior 12 months. Some transfers for less than fair value can be reviewed going back five years.⁴

Your options

An informal workout or refinancing

If the business is viable and the problem is timing, it may be possible to renegotiate with the bank, set up a CRA payment arrangement or bring in new capital. These options work best early, but they don’t bind a creditor who refuses to co-operate.

A Division 1 proposal

A Division 1 proposal is the BIA’s main restructuring tool for businesses: an offer, prepared with a Licensed Insolvency Trustee, to pay creditors part of what they’re owed, take longer to pay, or both. The OSB’s page on Division I proposals notes it’s open to businesses and individuals with no limit on the debt.¹² Under the Act, it works like this:⁴

1. Notice of intention (optional but common). The business files a notice with the OSB naming the trustee who has agreed to act. A stay of proceedings starts immediately, halting most creditor collection, including CRA garnishment for source-deduction debts.
2. Cash-flow statement. Within 10 days, the business files a projected cash-flow statement reviewed by the trustee. Missing this deadline means a deemed bankruptcy.
3. The proposal. It must be filed within 30 days of the notice. The court can extend that period by up to 45 days at a time, to a maximum of five more months, or about six months in all, if the business is acting in good faith, is likely to make a viable proposal and no creditor would be materially prejudiced.
4. The creditors’ meeting. The trustee calls a meeting within 21 days of filing. Unsecured creditors vote by class, and the proposal passes if each class supports it by a majority in number and two-thirds in value of those voting.
5. Court approval. The court must refuse a proposal whose terms aren’t reasonable or aren’t calculated to benefit creditors as a whole.

If creditors reject the proposal, the business is deemed bankrupt on the spot.⁴ That’s the main trade-off compared with a consumer proposal, so the offer has to be realistic. For a fuller walk-through, see Harris & Partners’ overview of Division 1 proposals.

Can the business keep operating during a proposal?

Generally, yes, and that is the point. Once a notice of intention or proposal is filed, a supplier, landlord or lender can’t cancel or amend an agreement, or demand accelerated payment, only because the business is insolvent or has filed, and a landlord can’t end a lease solely over rent owed from before the filing.⁴ Nobody has to extend new credit, though.

Timing matters with secured lenders. One that already took possession of its collateral, or sent its formal notice to enforce more than 10 days before the notice of intention, can carry on.⁴

What a proposal can and can’t do with CRA debt

Most Crown claims, including GST/HST and corporate income tax arrears, rank as ordinary unsecured claims in a proposal and can be compromised.⁴ Source-deduction arrears are different. Unless the Crown agrees otherwise, the court can’t approve a proposal that doesn’t pay them in full within six months of approval, and the business must keep new remittances current or the stay against the CRA ends. An employer’s proposal must also pay certain unpaid wages right after court approval.⁴

What happens to directors during a proposal

While a corporation’s proposal is underway, the BIA also freezes most claims against its directors for company obligations they’re liable for as directors, and the proposal can compromise those claims.⁴ The freeze doesn’t cover a personal guarantee, which has to be dealt with directly or through the owner’s own filing.⁴

The CCAA, for larger debtors

The Companies’ Creditors Arrangement Act (CCAA) is a court-supervised restructuring law for companies with total claims of more than $5 million.¹³ A court-appointed monitor oversees the process, and the company isn’t automatically bankrupt if creditors reject its plan.¹⁴ Most small businesses fall below the threshold.

Corporate bankruptcy

When the business isn’t viable, a corporate bankruptcy is an orderly wind-down. A Licensed Insolvency Trustee takes control of the company’s assets, sells them and pays creditors in the order the Act sets out, and collection against the company stops.

Two points often surprise owners. A bankrupt corporation can’t get a discharge unless it pays its creditors in full, so in practice the company simply ends. And the bankruptcy doesn’t release a guarantor: neither a discharge nor a creditor’s acceptance of a proposal frees anyone who guaranteed or co-signed the debt.⁴ Bankruptcy is also a common trigger for director liability claims. Harris & Partners explains what a corporate bankruptcy involves, step by step.

Receivership by a secured lender

A receivership is a lender’s remedy, not the owner’s choice: a receiver takes over some or all of the business’s assets, often to sell them.¹⁵ Before enforcing against all or substantially all of a business’s inventory, receivables or other business property, a secured creditor generally has to give 10 days’ notice, and unless the debtor consents or the court decides otherwise, a court-appointed receiver can’t step in before then.⁴ That window is often the last practical chance to consider a proposal.

Bill S-7: a proposed small-business track

On Oct. 7, 2026, the federal government introduced Bill S-7 in the Senate. According to the OSB, it would create streamlined bankruptcy and proposal processes for very small businesses, open only to insolvent corporations, with size thresholds and other eligibility rules to come later by regulation.¹⁶ LEGISinfo lists the bill at second reading in the Senate, and most of its BIA changes would take effect only on a date set by cabinet.¹⁷ None of it is law yet; we covered what Bill S-7 actually says when it was tabled.

Practical steps for owners

1. Write down who owes what. Separate company debts from those you guaranteed, and note who has been a director in the last two years.
2. Protect remittances first. Keep source deductions current and set aside GST/HST as you collect it. These are the debts most likely to follow you personally.
3. Build a 13-week cash-flow forecast. Lenders, the CRA and trustees will all ask for one.
4. Don’t keep trading on hope. Running up remittance arrears or paying favoured creditors can widen your personal exposure if the company later files.
5. Read every letter. A lender’s notice to enforce, a CRA letter about a director’s assessment or a statement of claim each starts a clock.
6. Get advice early. Proposals and bankruptcies under the BIA are administered by a Licensed Insolvency Trustee, and an early conversation leaves more options open. You can check a trustee’s licence in the OSB’s federal trustee search. Where guarantees are significant, it can help to involve your accountant and a lawyer too.

Frequently asked questions

Am I personally liable for my corporation’s debts in Canada?

Generally not, as a shareholder, because a corporation owes its own debts.⁵ You can become personally liable if you signed a personal guarantee, or if you are a director and the company failed to remit source deductions or GST/HST or left employees with unpaid wages.

Can CRA come after directors for unpaid payroll remittances?

Yes. Directors in office when a corporation failed to deduct or remit source deductions can be assessed personally for the unpaid amounts, plus interest and penalties, once the CRA shows it can’t collect from the company.⁶ A director who exercised due diligence isn’t liable, and the CRA must act within two years after the person stops being a director.⁶⁷

What is a Division 1 proposal?

It’s a formal offer to creditors under the BIA, made through a Licensed Insolvency Trustee, to repay part of what’s owed, take longer to pay, or both, with no debt limit.¹² Creditors vote on it, the court must approve it, and if creditors reject it, the debtor is deemed bankrupt.⁴

Can my business keep operating during a proposal?

Usually, yes. Filing stops most collection and prevents suppliers, lenders and landlords from ending contracts only because of the insolvency or the filing.⁴ The business must pay for new goods and services, stay current on new source deductions and follow a cash-flow plan the trustee monitors.

What happens to a personal guarantee if my company goes bankrupt?

The guarantee survives. The bankruptcy stops creditors from pursuing the company, but it doesn’t release people who guaranteed its debts, so the lender can usually call on the guarantee.⁴ A guarantor who can’t pay can look at personal options: a consumer proposal (within the $250,000 limit), a Division 1 proposal or personal bankruptcy.

This guide is general information, not legal advice for your situation. Kyle Harris is a lawyer and Licensed Insolvency Trustee at Harris & Partners Inc.

Footnotes

1. Office of the Superintendent of Bankruptcy, Insolvency Statistics in Canada, August 2026. https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/insolvency-statistics/monthly-reports/insolvency-statistics-canada-august-2026 ↩

2. Office of the Superintendent of Bankruptcy, historic monthly insolvency data set (1987 onward, data to August 2026), as compiled in The Paydown’s tracker. https://open.canada.ca/data/en/dataset/746709f1-c729-44a1-ba84-7be5eadd3664 ↩ ↩² ↩³

3. Canada Revenue Agency, “Sole proprietorship.” https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/setting-your-business/sole-proprietorship.html ↩

4. Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 2 (“insolvent person”), 50(13), 50.4, 51, 54, 57, 58, 59, 60(1.1)–(1.3), 62(3), 65.1, 66.11, 67(2)–(3), 69, 69.31, 86, 95, 96, 169(4), 179, 243 and 244. https://laws-lois.justice.gc.ca/eng/acts/B-3/FullText.html ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷ ↩⁸ ↩⁹ ↩¹⁰ ↩¹¹ ↩¹² ↩¹³ ↩¹⁴ ↩¹⁵ ↩¹⁶ ↩¹⁷

5. Canada Revenue Agency, “Corporation,” section “Assessing your responsibility for corporation’s debts.” https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/setting-your-business/corporation.html ↩ ↩² ↩³

6. Income Tax Act, s. 227.1. https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-227.1.html ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

7. Canada Revenue Agency, Information Circular IC89-2, Directors’ Liability, paras. 1, 6–18. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic89-2/director-s-liability.html ↩ ↩² ↩³ ↩⁴

8. Excise Tax Act, s. 323. https://laws-lois.justice.gc.ca/eng/acts/E-15/section-323.html ↩ ↩² ↩³

9. Canada Revenue Agency, “If you don’t pay your debt – Debt collection at the CRA” (modified Sept. 18, 2026). https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/when-you-money-collections-cra/personal-debt/legal-warning.html ↩

10. Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 119. https://laws-lois.justice.gc.ca/eng/acts/C-44/section-119.html ↩

11. Ontario, Business Corporations Act, R.S.O. 1990, c. B.16, s. 131. https://www.ontario.ca/laws/statute/90b16 ↩

12. Office of the Superintendent of Bankruptcy, “You owe money — Division I proposals.” https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/you-owe-money/you-owe-money-division-i-proposals ↩ ↩²

13. Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, s. 3(1). https://laws-lois.justice.gc.ca/eng/acts/C-36/section-3.html ↩

14. Office of the Superintendent of Bankruptcy, “Restructure your business through the Companies’ Creditors Arrangement Act (CCAA).” https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/you-owe-money/you-owe-money-restructure-your-business-through-companies-creditors-arrangement-act-ccaa ↩

15. Office of the Superintendent of Bankruptcy, “Definitions,” “receiver.” https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/definitions ↩

16. Office of the Superintendent of Bankruptcy, “Proposed amendments to BIA under Bill S-7,” Oct. 8, 2026. https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/licensed-insolvency-trustees/proposed-amendments-bia-under-bill-s-7 ↩

17. Parliament of Canada, LEGISinfo, Bill S-7 (45-1), status as of Oct. 16, 2026. https://www.parl.ca/legisinfo/en/bill/45-1/s-7 ↩