Can a Self-Employed Ontarian File a Consumer Proposal?

Quick answer: A self-employed person in Ontario may be able to file a consumer proposal if they are an insolvent individual and meet the legal debt limit. The analysis depends on whether the business is a sole proprietorship or corporation, which debts are personally owed, whether personal guarantees exist and how CRA claims are structured. A LIT must review the complete debt, asset and income picture before confirming eligibility or recommending a proposal.

Self-employment can make a debt problem difficult to diagnose. Business and household cash flow often share the same bank account. Tax instalments may be postponed to cover payroll or supplies. Credit cards may contain both personal and business purchases. A profitable month can be followed by a slow quarter.

That complexity does not prevent a self-employed Ontario resident from seeking formal debt relief. It does mean that labels such as business debt, corporate debt and tax debt are not enough. The legal borrower, guarantee, security and type of tax claim must be identified before anyone can say what a consumer proposal would include.

This guide explains the main questions a Licensed Insolvency Trustee (“LIT”) will review and why bookkeeping, tax filings and realistic cash-flow projections matter.

Key Takeaways

• Self-employment does not automatically disqualify an individual from filing a consumer proposal.
• A sole proprietorship is not legally separate from its owner, while a corporation is generally a separate legal person.
• Corporate debt does not automatically become shareholder debt, but personal guarantees, director liabilities and other legal rules can create personal exposure.
• The consumer proposal debt limit generally includes aggregate debts other than debts secured by the individual's principal residence. It is not simply an unsecured-debt limit.
• CRA claims require detailed review, especially payroll source deductions, GST or HST, secured claims and director assessments.
• A proposal must be funded from sustainable cash flow, not an optimistic sales forecast.

Start With the Business Structure

Sole proprietorship

A sole proprietor and the business are legally the same person. A trade name may appear on invoices and accounts, but it does not create a separate borrower. Debts for inventory, equipment leases, credit cards, lines of credit, income tax and GST or HST may therefore be personal obligations of the owner, subject to the contracts and applicable law.

That can allow personal and business-related unsecured debts to be considered in one individual proposal. Secured claims, leases, trust claims and debts that survive discharge require separate analysis.

Corporation

A corporation is generally a separate legal entity. The corporation owns its assets and owes its own debts. A shareholder's consumer proposal deals with the shareholder's personal debts, not every liability of the corporation.

Personal exposure may still arise where the individual:

• signed a personal guarantee
• borrowed personally and advanced the funds to the corporation
• used a personal credit card for business costs
• owes shareholder or director amounts
• has been assessed for director liability
• is jointly liable under a contract
• granted personal security for a corporate obligation

The corporation may also need its own legal, accounting or restructuring advice. An individual's consumer proposal cannot be assumed to solve the company's contracts, payroll, leases or tax accounts.

Can Business Debts Be Included

The answer turns on who legally owes the debt and what kind of claim it is.

Corporate credit card: Is the individual the borrower, and is any security attached?

Corporate line of credit: Did the owner sign a personal guarantee?

Equipment financing: Is it a secured loan or lease, and is the business keeping the equipment?

Supplier account: Is the account personal, corporate or jointly guaranteed?

Personal income tax: What period and amount are owing, and has CRA taken enforcement action?

GST or HST: Who is registered, and are trust, security or priority issues present?

Payroll source deductions: Are there deemed trust or director-liability issues?

Many ordinary unsecured claims owed personally can be dealt with in a proposal. A secured creditor generally retains rights in its collateral unless it agrees otherwise. Some claims are treated specially or survive a discharge under the Bankruptcy and Insolvency Act.

Before filing, a LIT will usually request statements, contracts and searches to confirm the creditor, borrower, balance and security. The article what debts can be included in a consumer proposal provides a broader starting point.

Personal Guarantees Change the Analysis

A personal guarantee is a promise by an individual to answer for another borrower's debt. Small-business lenders, landlords, equipment financiers and suppliers frequently request guarantees from owners or directors.

If the corporation defaults, the creditor may assert a claim against the guarantor according to the guarantee. The amount may be fixed or may depend on future events, such as the sale of collateral. A LIT needs the signed guarantee and current creditor information to estimate the claim properly.

Do not assume that closing the corporation cancels a guarantee. It usually does not. Do not assume that the entire corporate balance is automatically a personal debt either. The wording, enforcement steps, collateral and payments from other sources affect the claim.

If another person also guaranteed the debt, an individual's proposal generally does not release that co-guarantor.

CRA Debt Needs a Detailed Review

Self-employed people may owe CRA for several different reasons:

• personal income tax
• GST or HST collected or assessed
• payroll source deductions
• corporate income tax
• director liability assessments
• overpayments or benefit-related claims

These claims should not be grouped together as ordinary tax debt without review.

Personal income tax and many other unsecured CRA claims can often be addressed in a consumer proposal. CRA is then a creditor and may vote on the offer. Its decision can be especially important when it holds a large share of the proven claims.

However, enforcement and priority can change the analysis. CRA may have registered security or taken collection action before filing. Amounts withheld from employees can involve deemed trust rules. A director may face personal assessment for certain unremitted amounts. The Bankruptcy and Insolvency Act also contains special bankruptcy discharge rules for an individual whose personal income tax debt is at least $200,000 and represents 75 percent or more of total unsecured proven claims.

If CRA has frozen an account, redirected receivables or issued a requirement to pay, obtain advice immediately. Review what to do when CRA freezes a bank account and CRA collections in Ontario, but do not delay a file-specific assessment.

The Consumer Proposal Debt Limit

Under section 66.11 of the Bankruptcy and Insolvency Act, a consumer debtor is an individual who is bankrupt or insolvent and whose aggregate debts, excluding debts secured by the individual's principal residence, do not exceed $250,000 or another prescribed amount.

Two details are important.

First, the calculation is not limited to unsecured debts. The statute refers to aggregate debts and excludes a specific category, debts secured by the principal residence. Other secured liabilities can therefore matter in the calculation.

Second, business-related debt is not automatically excluded. If the individual owes it, it may count. The Office of the Superintendent of Bankruptcy may classify an individual insolvency as business-related for statistical purposes when business liabilities reach a specified proportion, but that statistical label does not replace the statutory eligibility test.

If debts exceed the consumer proposal limit, a Division I proposal may be considered. It has no equivalent dollar ceiling, but the process and consequences differ. For example, if a Division I proposal is rejected or deemed refused, bankruptcy can follow. A LIT should explain the risk before any filing.

Can the Business Keep Operating

Possibly. A proposal does not automatically require a self-employed person to stop earning business income. The business must be viable, properly licensed and capable of meeting new obligations as they arise.

A LIT will examine whether the operation produces genuine cash flow after accounting for:

• sales taxes collected
• income-tax instalments
• payroll and source deductions
• rent, insurance and licences
• inventory and contractor costs
• equipment payments and maintenance
• proposal payments

Continuing a business that creates fresh tax debt each month is not a workable restructuring. The budget should reserve tax as revenue is earned and separate operating funds from household spending.

Secured lenders, landlords and key suppliers may have contractual rights that continue despite a personal proposal. If the corporation operates the business, it remains responsible for its contracts.

Building a Proposal With Variable Income

Self-employed income rarely fits a single pay stub. A viable proposal starts with evidence, not the best month of the year.

Prepare:

• 12 to 24 months of business bank statements
• recent personal and corporate tax returns
• GST or HST and payroll filings
• accounts receivable and accounts payable listings
• monthly sales and expense records
• signed loan, lease and guarantee documents
• a list of secured assets and estimated values
• a 12-month cash-flow projection with conservative assumptions

Separate revenue from income. A business with $20,000 in monthly sales may have little available after direct costs, tax reserves and overhead. The proposal payment must come from net, sustainable cash flow.

Seasonal businesses may need a payment structure that reflects actual cash generation. Any variation must be documented in the proposal terms and remain within the legal maximum term. Creditors may ask for changes if the offer appears too low or the assumptions are unsupported.

Consumer Proposal Bankruptcy and Division I Proposal

Consumer proposal: Eligible individual with a viable payment and debts within the limit — Creditor acceptance and sustainable cash flow

Personal bankruptcy: Individual repayment is not realistic — Assets, income, business operations and discharge issues

Division I proposal: Individual or business debtor requiring a proposal with debts over $250,000 — Greater complexity and bankruptcy risk if the proposal fails

Informal workout: Temporary problem with cooperative creditors — No general stay or binding effect on non-participating creditors

A consumer proposal may provide a stay of proceedings against many unsecured creditors once filed. The stay has limits and may not resolve secured enforcement, trust claims or the corporation's separate debts. Bankruptcy provides a different legal structure and may affect business assets or the ability to perform certain regulated roles.

Compare consumer proposals and bankruptcy in Ontario using the business and personal numbers together.

Common Mistakes Before Seeking Advice

Using new tax money to pay old debt

GST or HST, payroll deductions and income-tax reserves should not be treated as free working capital. Using them to keep other creditors current can create new liabilities and more serious collection pressure.

Paying a guaranteed creditor without reviewing the whole file

A personal guarantee may create exposure, but directing all cash to that creditor can leave wages, rent or taxes unpaid. Map every priority before making a lump-sum payment.

Transferring equipment or shares for less than fair value

Transactions before insolvency can be reviewed. Obtain legal and insolvency advice before transferring assets to a spouse, new corporation or related business.

Relying on gross revenue

Gross sales do not fund a proposal. The payment must fit after legitimate business costs, current taxes and reasonable household expenses.

Waiting until CRA controls the cash flow

Once a bank account or receivable is affected by enforcement, options can narrow quickly. Early advice allows more accurate planning, although no outcome is guaranteed.

Frequently Asked Questions

Can a sole proprietor include business credit cards in a consumer proposal?

If the individual is legally liable and the claim is unsecured, it may be included. Security, joint liability and the nature of the charges still need review.

Does a consumer proposal close my incorporated business?

Not automatically. The shareholder's proposal and the corporation are separate. The corporation must still pay its own debts and remain compliant. Guarantees and director liabilities require separate analysis.

Can CRA vote against my proposal?

Yes. CRA may vote on its proven claim and may request changes. If a creditors’ meeting is held, its vote can determine the outcome when it holds a majority of the voting claims.

Can I include GST or HST debt?

Some GST or HST claims may be addressed, but registration, assessed periods, deemed trust issues, security and whether the debtor is an individual or corporation matter. A LIT must review the account details.

What if I owe more than $250,000?

The calculation excludes debts secured by your principal residence but can include other debts. If you exceed the consumer proposal limit, a Division I proposal or another option may be considered. Do not file until the consequences are explained.

Will I be allowed to keep business equipment?

That depends on ownership, security, leases, exemptions, value and the chosen proceeding. A proposal can allow an individual to retain assets, but secured creditors' rights and the offer to creditors must be addressed.

How are irregular earnings handled?

A LIT will typically review historical records, current contracts and a reasonable forecast. The goal is a payment the business can support in slow periods as well as strong ones.

Prepare the File Before the Cash Crisis Deepens

The best time to assess a self-employed debt problem is before a key supplier stops shipping, CRA redirects receivables or the business uses new tax money to cover old obligations. A complete review can distinguish a viable business with a debt problem from a business model that requires deeper change.

If you are self-employed in Ontario and want to know whether a consumer proposal is available, contact Litvack Group for a confidential consultation with a LIT. Bring business and personal records so the debt limit, guarantees, CRA claims and cash flow can be assessed together.

Sources

• Bankruptcy and Insolvency Act Section 66.11
• Office of the Superintendent of Bankruptcy Consumer Proposals

This article is for general information only and is not legal, financial, tax or accounting advice. Business structure, security, tax claims and eligibility require individual review. A LIT can assess insolvency options, and advice from a lawyer or accountant may also be required.