‘Shocking’ surge in business insolvencies
Skyrocketing inflation, rising interest rates and high debt levels are taking their toll in Ontario
A “perfect storm” of interest rates, inflation and the end of pandemic government aid has led to a “shocking” surge in the number of yearover-year insolvencies filed by Canadian businesses.
There were 3,402 business insolvencies last year, up 37 per cent from 2,480 in 2021 according to the Office of the Superintendent of Bankruptcy. In Ontario alone, insolvencies filed by businesses was up 47.8 per cent last year compared with the year before.
Insolvencies, the inability to pay down debt, include both proposals — a formal agreement with creditors on the terms of debt repayment — and bankruptcies — when assets are surrendered in exchange for the elimination of debts.
Business bankruptcies totalled 2,621 for the year, up from 1,942, while proposals filed by businesses amounted to 781, up from 538 in 2021.
President of the Canadian Federation of Independent Business Dan Kelly says the numbers are extremely concerning for businesses across the country and it’s unlikely that insolvencies are going to slow down any time soon.
“I am deeply worried about where this is headed. I don’t think the worst is behind us,” Kelly said, adding that “around 58 per cent of small business owners are sitting on pandemic debt — debt they took on to survive the last three years — and that’s at an average of $144,000.”
In Ontario, the number of insolvency filings from independent businesses rose a whopping 80.9 per cent.
Meanwhile, the number of insolvency filings from Canadian consumers jumped 11.2 per cent in 2022 compared with 2021. There were 100,184 consumer insolvencies filed in 2022 compared to 90,092 in 2021. The consumer figures included 24,586 bankruptcies, down from 27,461 in the previous year, while proposals rose to 75,598 compared with 62,631 in 2021.
Several factors have contributed to the uptick in insolvency filings including skyrocketing inflation, which is driving up the cost of necessities like gas, food and electricity. Fluctuating interest rates are also having a significant impact on any loan payments or mortgage renewals.
With strict COVID-19 lockdown measures at the start of the pandemic, people were forced to stay indoors and spent less money, making it easier for them to save and pay off debt. But as health regulations loosened and businesses reopened, consumers began ramping up spending again.
Insolvencies actually declined during the lockdowns due to generous government aid, but the numbers are starting to rise rapidly now that the aid tap has been turned off.
For businesses struggling with lockdowns over the last three years, the Canada Emergency Business Account (CEBA) offered interestfree loans of up to $60,000 to small businesses. The government set a repayment deadline of Dec. 31, 2023, for anyone who wanted to take advantage of zero interest and having a portion of the loan forgiven.
But Kelly said many businesses are reporting they won’t be able to meet the deadline for paying back the loan.
“We’ve been predicting for some time,” Kelly said, “that the other shoe will drop as a result of the damage that was brought by the pandemic and the resulting aftermath of high inflation and a shortage of labour.”
Sectors that saw some of the biggest increase in insolvencies were transportation and warehousing, up 52.1 per cent in 2022, as well as the construction industry, up 40.7 per cent.
“New home sales have gone down substantially, which is going to put a damper on home construction because it’s going to be harder to sell those houses due to lower prices,” said David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives.
Insolvencies in the transportation sector are also seeing a sharp increase, “likely a reflection of higher fuel prices in particular,” Macdonald said.
But for both businesses and consumers the insolvencies are the result of a “domino effect,” says Laurie Campbell, director of financial wellness at Bromwich+Smith.
“It’s the perfect storm. Interest rates, inflation and high debt levels,” Campbell said.
“The number of business insolvencies is shocking. We should all be concerned as consumers and individuals, because if this is happening to businesses, it’s going to impact all of us.”
Federal income assistance programs like CERB, which provided more than 8.5 million individuals $2,000 a month at the start of the pandemic, have ended. Adding further strain on bank accounts, last May the Canada Revenue Agency began sending notices to COVID-19 benefit recipients who had been deemed ineligible for some or all of what they received, and informing them the debts had officially been added to their CRA accounts.
The volatile housing market has also driven up consumer insolvencies, Macdonald said.
When home prices are high, insolvencies based on mortgage payments are typically lower because people can fall back on the sale of a house to pay off growing debt. But when prices fall, selling a house to pay off a loan is no longer an option because it is worth less than its original purchase price.
“As house prices continue to fall,” Macdonald said, “it makes it harder to get out of a mortgage just by selling a house without having to go into bankruptcy or proposal.”
But he added that Canadians going through financial difficulty should know that they don’t have to weather the storm by themselves.
“Get the help that you need so that you can move forward financially,” Campbell said to consumers. “You’re not alone. A lot of people are experiencing this and there’s help out there.”
‘‘ We should all be concerned as consumers and individuals, because if this is happening to businesses, it’s going to impact all of us.
LAURIE CAMPBELL BROMWICH+ SMITH