Does Paying My Taxes Late Affect My Credit Score?

It’s no secret that paying your taxes late comes with consequences including interest and penalties that could negatively affect your finances.

But will these consequences affect your credit score?

It’s easy to assume that any money owing and debts will be held against your credit score. However, when it comes to late taxes, it works a little differently:

Does the CRA Report to Canada’s Credit Bureaus?

In general, the Canada Revenue Agency will not report to Canada’s Credit Bureaus if you owe a small amount in income taxes, paid your taxes late or received any basic penalties.

Because of the CRA’s privacy policy, they are restricted in the amount of information they are allowed to share with other organizations, including Canada’s Credit Bureaus.

However, there is an exception: If you owe so much in taxes that it results in a court case and a collection agency becomes involved. In this situation, the Canada Revenue Agency is able to put a tax lien on your credit report.

Overall, if your debts owing to the CRA become public information via a court case or collections case, your taxes owing will affect your credit score.

What Should I Do If I Owe Taxes?

An individual will usually end up late paying back owed taxes because they are not in a financial position to do so.

To avoid any late taxes affecting your credit, it is best to deal with it immediately before the debt becomes too large. Ignoring the problem will not make it go away.

In fact, ignoring owing taxes could result in ruined credit and even bankruptcy.

Even a small amount owing needs to be taken care of as soon as possible before interest charges inflate the original debt.

If you do owe taxes, here are some steps you can take to deal with the debt:

  • Contact the CRA immediately. The Canada Revenue Agency doesn’t want to drag you through court cases, so they are often willing to work out a payment plan. If you can prove that you absolutely do not have the means to pay your owing taxes in a short amount of time, you may be able to work out a multi-year payment plan.
  • The Taxpayer Relief Provision. If your tax situation meets certain criteria, your case may be forwarded to the Minister of National Revenue. Should your case be approved, you could receive tax penalty and interest relief.
  • Save and spend responsibly. You should consider establishing a savings account for tax purposes and other emergencies. Being able to pay a portion of your tax bill is better than not paying anything.

What Does Affect My Credit Score?

Knowing what actions affects your credit score is important in keeping your credit score high.

While your taxes only affect your credit if they become a substantial debt, many other elements come into play when determining your credit score:

  1. Payment History. The largest part of your credit score is based on how well you pay your bills and owing amounts on credit products. It takes into consideration late, short and missed payments – which can negatively affect your credit score.
  2. Utilization. Credit bureaus look at how much debt you have versus how much available credit you have. If you continually run your credit cards to their limits, this will lower your credit score.
  3. Credit History. How long you’ve possessed your credit products also impacts your credit score. Debts that you’ve carried, and maintain good payments on, for many years look better than newer debts.
  4. Credit Product Variety. The credit bureaus also like to see a variety of cresot products, not just credit cards. This includes loans, mortgages and lines of credit.

Why Take the Chance?

Any amount owing in late taxes, whether it be a large amount or small one, can spell trouble for your finances.

Contact Liu & Associates today for more information on how you can avoid interest and penalties when you owe money on your taxes.

COVID-19 Canadian Tax Information

With the recent changes due to COVID-19, many clients and small businesses are feeling financial pressure.  Please know we are deemed an essential service and will continue to serve you.  If you are affected financially by this pandemic, Liu & Associates is here to help.

To help ease financial burdens of taxpayers and small businesses, the Government of Canada is providing options to defer tax payments and is extending the tax deadline.  Read more about financial help for Canadians affected by COVID-19; a hub of benefits the federal government, provinces and territories are offering to people financially affected by the coronavirus.  For more information on how this can help you, your business and your employees, please see our resource section below or call us at 780-429-1047.

You can also visit Government of Canada’s coronavirus disease or call their information line (1-833-784-4397),  available from 7:00 a.m. to midnight (EST) seven days a week.

Our team will continue to update this page as more information becomes available.

Last updated: May 26, 2020

Our Response Plan

The team at Liu and Associates LLP wants to assure you we are closely monitoring the COVID-19 situation from a financial standpoint and recognize it is truly a global crisis and is constantly changing. This is an unprecedented time for all of us, and we feel the need for everyone to work together to weather this storm.

To ensure the health and safety of our clients and staff, we are taking extra precautions in our office – read our blog post about how our office protocol has changed.

External Resources

City of Edmonton

  • The City of Edmonton has launched a new website for business support in response to the COVID-19 pandemic. This website will be updated regularly by the City.
  • If you have any business related questions, contact the City of Edmonton directly: businessinfo@edmonton.ca
  • In an effort to contain the spread of COVID-19, the City of Edmonton is taking immediate action following the direction of Alberta’s Chief Medical Officer of Health.

Surrounding Areas

For up-to-date information related to other surrounding communities, please follow the following links:

Alberta

Canada

The Government of Canada is rolling out constant updates that affect both individuals and businesses.

APPLICATIONS are now being accepted for Canada’s Emergency Response Benefit Program.

The Government of Canada has launched a COVID-19 APP; to download yours visit APPLE  OR  ANDROID

 

Prime Minister Justin Trudeau announced $350 million in emergency funds for community groups and national charities.
Individuals

 

Businesses

For more information, please contact Liu & Associates LLP.

The Benefits of Taking a QuickBooks Training Course

Your business may be small but, even if you don’t feel you need a CPA (Certified Public Accountant), you do need to keep accurate financial records.

This task can be overwhelming but it is vital to the success of your business.

Luckily, there is accounting software available to help small business owners manage their finances as well as many other aspects of business.

Liu & Associates understands the value of being able to take care of business matters. Because of this, they recommend and offer training for an amazing accounting program called QuickBooks.

What is QuickBooks?

QuickBooks is accounting software geared toward small and medium sized businesses.

Some features of the software include:

  • Track income and expenses
  • Capture and organize receipts
  • Track mileage
  • Manage bills and payments
  • Send invoices
  • Maximize tax deductions
  • Accept payments
  • Track sales and sales tax
  • Payroll
  • Track inventory
  • Run reports
  • Send estimates

QuickBooks is designed to support multiple users as well as connect with third party apps.

Why Do So Many Small Businesses Use QuickBooks?

QuickBooks provides a do-it-yourself solution for small business accounting.

The interface is user-friendly and customer-oriented. With a QuickBooks training course, anyone can master this program.

The software also helps small businesses easily manage their taxes, which ensure that taxes are filed properly along with all the necessary information.

QuickBook’s integrated tools help businesses to increase their efficiency and productivity. They also regularly update and improve the software in order to keep the program up-to-date.

Most importantly, QuickBooks offers automated backup services, meaning that all of  the business’s information is safe from data loss.

What Are the Benefits of Taking a QuickBooks Training Course?

1. The Program Can Be Overwhelming

Because QuickBooks incorporates so many wonderful and helpful features, it can take some time to figure it all out. Even with a user-friendly interface, it can be a challenge to easily navigate the software upon first use.

A QuickBooks training course will guide you through using these features and help you gain the confidence to do so in a professional setting.

2. You’ll Learn its Full Capabilities

Even if you are able to grasp how to use QuickBooks, there are some features you may not be aware of. A QuickBooks training course will help you take full advantage of the program’s full capabilities.

QuickBooks’ full array of features are designed to increase the effectiveness of a small business’s accounting department. Understanding how to use them all is valuable knowledge.

3. It’ll Show You How to Apply Your Bookkeeping Skills

You may have plenty of experience as a bookkeeper but it may be difficult to transfer your practical skills to the QuickBooks software.

A QuickBooks training course can teach you how to combine your know-how with the program’s many features.

4. You’ll Make Yourself a Competitive Job Candidate

QuickBooks is quickly becoming the leading accounting software for small businesses. Knowing how to fully use the program is a valuable skill to add to your resume.

Having experience and training with QuickBooks can open the door to jobs in a variety of organizations, including:

  • Small businesses
  • Not-for-profit organizations
  • Government agencies

Businesses appreciate efficiency and productivity, which you can offer with your knowledge of using QuickBooks.

Ready to Step Up Your Business’ Accounting Game?

Liu & Associates is happy to offer comprehensive QuickBooks training!

Whether you are looking to introduce your staff to accounting, or train a new employee, Liu & Associates can tailor a QuickBooks training program to suit your needs. We offer one-on-one or group training sessions.

We work with your schedule to accommodate your QuickBooks training.

Contact us today for more information!

New Guidance for COVID Programs

As we are striving to bring you up to date information as quickly as possible, we are now providing you with further guidance from the www.Canada.ca site for COVID programs and benefits in relation to the Canada Emergency Response Benefit (CERB).

For those individuals who have received non-eligible dividends from corporations in which they held shares as the means of remuneration, the Questions and Answers section of the CERB application has been updated to address the qualification of this type of income in the application for CERB. Please note that non-eligible dividends are indicated in box 10 of any T5’s you would have received. The update is as follows:

Are self-employed small business owners eligible for the CERB?

Yes provided they meet the eligibility criteria including that they stopped working due to COVID-19 and do not earn more than $1000 in a period of at least 14 consecutive days in the first benefit period and for the entire four-week benefit period of any subsequent claim.

Small Business owners can receive income from their business in different ways, including as salary, business income or dividends. In determining their eligibility for the Canada Emergency Response Benefit:

  • Owners who take a salary from their business should consider their pre-tax salary;
  • Owners who rely on business income should consider their net pre-tax income (gross income less expenses);
  • Owners who rely on dividend income should consider this as self-employment income provided it comes from non –eligible dividends (generally, those paid out of corporate income taxed at the small business rate).

Income Requirements

What counts towards the $1,000 in income I can earn?

The $1,000 includes employment and/or self-employment income. This includes among others: tips you may earn while working; non-eligible dividends; honoraria (e.g., nominal amounts paid to emergency service volunteers); and royalties (e.g., paid to artists).

However, royalty payments received from work that took place before the period for which a person applies for the Canada Emergency Response Benefit do not count as income during that specific benefit period.

Pensions, student loans and bursaries are not employment income and therefore, should not be included in the $1000.

Applications will be verified against tax records to confirm income.

What income types count towards the $5,000 in employment and/or self-employment income?

The $5,000 includes all employment and self-employment income. This includes among others: tips you have declared as income; non-eligible dividends; honoraria (e.g., nominal amounts paid to emergency service volunteers); and royalties (e.g., paid to artists). If you are not eligible for Employment Insurance, you may also include maternity and parental benefits you received from the Employment Insurance program and/or similar benefits paid in Quebec under the Quebec Parental Insurance Plan.

Pensions, student loans and bursaries are not considered employment income and should not be included.

Does the minimum income of $5,000 have to be earned in Canada?

No.

The income does not have to be earned in Canada, but you need to reside in Canada.

If I am in receipt of dividends am I eligible for the CERB?

Yes as long as the dividends are non-eligible dividends (generally those paid out of corporate income taxed at the small business rate) and you meet the eligibility criteria.

Non-eligible dividends count towards the minimum $5000 in income required for eligibility. Non-eligible dividends also count toward the $1000 income threshold for a benefit period.

Do artists’ royalties count as employment or self-employment income with respect to the CERB?

Yes, in some cases. Artists’ royalties would be considered payments received as self-employment income if they were received as compensation for using or allowing the use of a copyright, patent, trademark, formula or secret process that is a result of their own work or invention. These royalties count towards the $5,000 income threshold, as well as towards the $1,000 that claimants can earn per month while receiving the Benefit. However, royalty payments received from work that took place before the period for which a person applies for the Canada Emergency Response Benefit do not count as income during that specific benefit period. Other royalties (i.e., from investment activities) do not count with respect to the Benefit.

To read this and more about the qualifications in order to make an application for CERB. Please go to: https://www.canada.ca/en/services/benefits/ei/cerb-application/questions.html .

 

For more information, please contact us today.

What Do I Do After Declaring Personal Bankruptcy?

Did you know that the average Canadian household owes close to $1.78 for every dollar earned?

It’s no wonder debt is a financial issue for Canadians, with many of them facing owing amounts so high that there is no hope of paying it off.

If you find yourself in this type of financial crisis, bankruptcy is an option for clearing your debts. However, it comes with certain obligations you are expected to fulfill.

What is Bankruptcy?

Bankruptcy is a legal process for individuals who seek relief from some or all debts when they cannot repay these debts to creditors.

Filing for bankruptcy requires a licensed insolvency trustee, who files the bankruptcy and sends a notice of bankruptcy to the creditors.

The creditors then cannot proceed with any lawsuits, garnishes or payment requests.

After filing for bankruptcy, you are eligible for discharge from the trustees after 9 months. However, the bankruptcy itself remains on your credit report for at least 6 years.

What Happens After My Bankruptcy is Filed?

Once the bankruptcy is filed, you are required to fulfill a few obligations with the trustee.

Your responsibility during the bankruptcy includes:

  • Sending your trustee proof of your income and a monthly budget once a month.
  • Notifying your trustee of any changes with your work or income.
  • Attending 2 credit counselling sessions. During these sessions, a credit counsellor will guide you through budgeting and money management techniques.
  • Making monthly bankruptcy payments to the trustee.

During this time, you can expect to no longer have to deal with creditor calls. When your bankruptcy is filed by the trustee, an “automatic stay” is forwarded to the creditors.

An automatic stay indicates to the creditors that they are not allowed to take collection action against you.

What Should I Do After I File Bankruptcy?

Once your bankruptcy is discharged, you will no longer be required to deal with the trustees.

However, although your obligations to the trustee are compete, there are measures you can take to protect yourself from future bankruptcy and rebuild credit.

1. Check Your Credit Reports

Even though filing for bankruptcy clears your debts, you want to make sure nothing was missed on your credit report before beginning to reestablish credit.

About 3 to 6 months after your discharge from bankruptcy, you should check your credit report.

This is not the same as checking your credit score, which you can do for free now through most bank’s websites and apps.

According to Canada.ca, you can order a copy of your credit report through Equifax Canada and Transunion Canada without affecting your credit score.

2. Start a Budget

The reason bankruptcy proceedings require you to attend credit counseling is to try to prevent a bankruptcy from happening in the future.

You should continue what you learned from the credit counseling even after your bankruptcy is discharged.

Additionally, before you begin to build credit again, you want to make sure you can afford payments on a credit card.

Healthy financial habits will help you avoid a future bankruptcy as well as help you rebuild your credit quickly.

3. Build New Credit

Although the bankruptcy remains on your credit report for a minimum of 6 years, you can begin to build credit again immediately after your discharge.

While some financial institutions will deny you credit due to your bankruptcy, many lenders will look at you as if you have never had credit before, since bankruptcy essentially clears your credit status.

In order to reestablish credit, you should begin with a low limit secured credit card. Secured credit cards, as opposed to prepaid cards, offers you revolving credit.

This means that you can borrow against the card as long as you keep the balanced paid. Secured credit cards require a security deposit.

Be sure to use the card responsibly and only spend what you can afford to pay off each month.

Is Bankruptcy the Right Option For You?

Whether bankruptcy is the right choice for you or there is another viable option to help with your debt, you should speak with a professional accountant to ensure you are heading down the right financial path.

Contact our experts at Liu & Associates for more information about bankruptcy and other debt-solving options.

 

New COVID-19 Protocols

With the COVID-19 Pandemic is having unforeseen implications on Canadian taxes, we will be exercising extra precautions for the safety of our clients and staff.

To do our part to fight the COVID-19 Pandemic, our office is now working remotely.  Although we are no longer in our offices, our admin staff, partners and accountants are still working to provide services to you in a timely manner, as seamlessly as possible.

However, please expect that there could be some minor changes to how we provide our service here are some of these changes:

  • we will keep in touch with you via email or fax telephone and, in some cases video conferencing
  • we will arrange intake and delivery of materials from and to you via email, fax or courier whenever possible
  • we will update our website to provide whatever resources and information we can

We thank you for your assistance and cooperation in this matter.  Please feel free to contact us should you have a special circumstance and require special arrangements.

To assist our clients, we have compiled a list of resources for both businesses and individuals. 

We thank you for your assistance and cooperation in this matter.

Please contact us if you have any questions about our services during this time.

COVID-19 Tax Implications

The team at Liu and Associates LLP want to assure you we are closely monitoring the COVID-19 situation and recognize it is truly a global crisis and is constantly changing. This is an unprecedented time for all of us, and we feel the need for everyone to work together to weather this storm.

We want you to know you have our commitment to continue providing you with the services you depend on, including up to date economic information.

You are not alone; we are in this together. So, how are we working together to support each other?

Health & Safety

First and foremost, our plan ensures the health and safety of our employees and our clients. We have implemented special protocols and continue to update them to support our team and to ensure we maintain our ability to serve you, for the long term.

We are being very cautious and have put in place precautionary measures to limit the potential spread of the virus including:

  • Frequent hand washing, supplying hand sanitizer, and masks if needed.
  • By requesting any staff member who has been out of the province to self-isolate for 14 days.
  • Maintaining social distancing within our office.
  • Working remotely wherever possible and using specific software as a unified communication and collaboration platform combining workplace chat, video meetings, file storage, and application integration.
  • Taking steps to limit our outside contact and discouraging in-person meetings as much as possible by asking our clients to provide us with their tax or financial information electronically, and if that isn’t possible, to please make an appointment in advance for an in-person meeting.
  • Materials physically coming into our office are being quarantined, and our intake staff are using precautionary measures.

Monitoring

Our senior leadership team remains vigilant and is monitoring the situation in real time and responding swiftly as conditions evolve.

Please view our most recent update on our COVID-19 protocols.

Tax Changes

We undertake to keep you up to date on changing tax deadlines or government directives, as follows:

You may already be aware of Canada Revenue Agency’s (CRA) announcement to extend the personal tax filing deadline. So instead of an April 30th filing deadline for the 2020 tax filing season, Canadians will have until June 1st to submit their income tax return to CRA. The deadline to pay off any outstanding balances interest-free will also be extended, this time, to July 31st.

Businesses will also have more time to pay their taxes. The CRA will allow all businesses to defer, until after August 31st, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020 including tax balances due, as well as required instalments, under Part 1 of the Income Tax Act.

No interest or penalties will accumulate on these amounts during this period. For more information, please see the statement from the Department of Finance. 

The CRA continues to monitor the evolving situation closely, in collaboration with other government departments and agencies as well as our provincial and territorial partners.

The Government of Canada is taking immediate, significant and decisive action to help Canadians facing hardship as a result of the COVID-19 outbreak. Today, March 18, 2020, the Prime Minister announced a new set of economic measures to help stabilize the economy during this challenging period.

These measures, delivered as part of the Government of Canada’s COVID-19 Economic Response Plan, will provide up to $27 billion in direct support to Canadian workers and businesses. For detailed information please visit their website.

Moving Forward

We are following the guidance of major public health organizations, including the Public Health Agency of Canada, local health authorities, and the World Health Organization, and will continue to do so as the situation unfolds.

To protect ourselves and the communities around us, we can’t stress enough to please follow all the protocols for COVID-19 including frequently washing hands, regular cleaning of work surfaces, and avoiding public or crowded places whenever possible.

Best of health, be safe, and take care of yourselves.

Your trusted financial team at Liu and Associates LLP

How Incorporating Your Business Can Affect Your Taxes

You own a small business and you’re ready to take it the next level. Incorporating your business carries many benefits including easier access to capital, enhancing your business’s credibility and creating an enduring legal business structure.

It also provides protection from personal liability, meaning that you can safely separate your personal assets from the business.

Does this mean you can protect your personal taxes as well?

Read on to learn how you can avoid having your taxes negatively affected by your business’s activities as well as tax benefits from incorporating and how to file your corporate income tax return:

What Does Incorporating a Business Mean?

When you incorporate a business, it means you are turning a sole proprietorship, or general partnership, into it’s own legal business structure. This business structure is set apart from the individuals who founded it.

Incorporation creates a separate legal entity in order to transact business.

Can Incorporating My Business Affect My Personal Taxes?

Because of the limited personal liability that incorporation offers, your personal assets are protected from tax-related issues.

There is an exception if you fail to deposit taxes withheld from wages. For those, you are held personally liable.

Also, if you treat the corporation as an extension of your personal affairs instead of as a separate legal entity, you could be held personally liable for financial issues. For example, you may be considered using your business as an extension of your personal affairs if you fail to follow routine corporate formalities.

As the owner, and as an individual, you are otherwise expected only to pay personal taxes on your income like any regular employee.

The corporation pays taxes on residual income after salaries, bonuses, overhead and other expenses are paid.

Can I Save Taxes By Incorporating?

In general, corporate tax rates are lower than personal tax rates – so there is opportunity to save taxes by incorporating.

However, in order to benefit from lower tax rates, the company would have to generate a substantial profit.

You can take advantage of lower tax rates if you earn more than you need to live on. Should your profit exceed what you require as a living wage, you can leave the difference in the corporation and pay a reduced income tax rate.

Otherwise, you can take advantage of income splitting in order to save taxes with your corporation. This involves splitting the business income with family members.

Income splitting can create tax advantages more beneficial than reduced tax rates.

Liu & Associates can prepare and file your corporate income tax return for you as well as take advantage of any and all tax benefits. Contact us to find out more information.

How Do I File Taxes for Incorporation?

Corporations are expected to file a T2 corporate tax return every year within six months of the end of its fiscal year. A fiscal year can be the same as the calendar year or it can begin in any months and end twelve months later.

You can file a corporate income tax return electronically with tax preparation software certified by the CRA.

The T2 corporate tax return is more complex than a personal income tax form. It is recommended that you have your corporate tax return prepared by a professional tax accountant.

If your corporation owes taxes after filing a return, the balance can be paid through the CRA online services, from the business’s bank account or by cheque.

Put Your Corporation In Good Hands

Navigating the world of taxes once you incorporate your business can be tricky and complicated.

Avoid making costly mistakes by contacting our expert accountants at Liu & Associates. We can help you properly prepare and file your corporate taxes so that you can experience all of the benefits of incorporating your company.

When Do I Need to Report Rental Income?

Renting property seems like a lucrative entrepreneurial opportunity as more and more individuals are renting out portions of their home and even offering space through popular accommodation services such as Airbnb.

Acquiring rental income is a great way to offset the cost of a mortgage or justify an investment in a secondary property.

However, if you are renting your property to a third party, you are required to report your rental income on your tax return.

While it may be tempting to not disclose this income to the CRA (Canada Revenue Agency), not doing so can lead not only to penalties but also missed opportunities for some tax savings.

What is Rental Income?

When it comes to claiming rental income on your taxes, rental income is considered to be any earned income from a rental property you own. This includes houses, apartments, rooms, office space and other real or movable property.

Rental income from Airbnb, income suits and any short term rentals must be claimed as well.

The duration of the rental, whether it be for one night, a week or a month, does not exempt the income from having to be claimed on your income taxes.

Exceptions to Claiming Rental Income

There is one exception to having to claim rental income on your income taxes – if you are renting a space below fair market value.

Renting below fair market value means that you are charging a rent significantly lower than rents charged for other properties that are similar to your property in your area.

Typically, home owners will charge family members below fair market value rent for allowing them to stay in their home.

If this is the case, you do not need to claim the income. However, you cannot claim any rental expenses or rental loss on your taxes.

The government considers this situation to be a “cost-sharing arrangement”.

Claiming Rental Income at Tax Time

If you are in a situation where you rent a property, or a portion of your property, at or above fair market value, the CRA requires that you pay taxes on the income earned.

In order to claim rental income on your tax return, you must declare the net income on line 160 of form T1. From there, you can subtract any qualifying expenses as well as capital expenditure depreciation expenses. The difference is your reported rental income.

Here are some common rental expenses that can be deducted against your rental income:

  • Advertising
  • Insurance
  • Mortgage interest
  • Repairs and maintenance
  • Property management
  • Utilities

To ensure that you are claiming the appropriate expenses for your rental property, contact the expert accountants at Liu & Associates for more information.

What Happens If I Don’t Claim Rental Income?

When the CRA expects you to claim any sort of income on your tax return, not doing so can lead to unpleasant consequences:

  • Interest accrual. If you owe taxes on rental income, and fail to report it, the amount can be subject to interest.
  • Penalties and fines. The CRA is within their rights to implement penalties for filing your taxes late. This amount is backdated to the time when the rental income should have been reported. Interest is also charged on the penalty amount.

Withholding your rental income from the CRA not only leads to financial consequences, but it also means that you miss out on the valuable deductions listed above.

Avoid the Confusion of Claiming Your Rental Income

Get in touch with the professional accountants at Liu & Associates to find out more information about how to properly claim your rental income as well as all of the tax benefits you can reap by renting out your property.

 

 

 

Does Declaring Corporate Bankruptcy Affect Me or My Credit?

Bankruptcy may seem like a golden ticket when you are looking at clearing debts from your creditors – but there are many things to think about before you file for bankruptcy, especially if you are doing so for your corporation.

One such concern is whether or not declaring corporate bankruptcy will affect your personal credit.

When it comes to owning a corporation, as opposed to a sole-proprietorship or partnership, you are not legally responsible for business debts.

However, there are exceptions for which you can be personally liable.

Before explaining these exceptions, it’s best to understand the difference between corporate bankruptcy and personal bankruptcy:

Corporate Bankruptcy versus Personal Bankruptcy

Because both individuals and corporations can own assets, they are both able to file for bankruptcy under the Bankruptcy and Insolvency Act.

The process is fairly similar, which a few key differences:

  • When declaring personal bankruptcy, all assets and liabilities are considered personal.

  • When declaring corporate bankruptcy, an incorporated entity is considered a legal “person” according to the Bankruptcy and Insolvency Act. This means that while some debts may be eliminated under bankruptcy, there are those exceptions that you may be held personally liable for.

The process of declaring bankruptcy is similar as well. The individual or corporate business owner must meet with a Licensed Insolvency Trustee (LIT) to file for bankruptcy. Once the bankruptcy is filed, creditors are notified and not permitted to contact you regarding the debt.

From the date of filing, you are eligible to be discharged from the bankruptcy after 9 months. However, the bankruptcy will remain on your or your business’s credit history for at least 6 years.

Before making any decisions about bankruptcy, talk to a trusted advisor at Liu & Associates to consider alternative solutions to your financial problems.

How Corporate Bankruptcy Can Affect Your Personal Credit

As mentioned above, there are special circumstances in which filing for corporate bankruptcy could affect your personal credit.

These circumstances include making personal guarantees on loans or credit and the company’s tax liabilities.

Personal Guarantees

It’s possible that when you apply for a loan or credit, the lender or creditor will require the corporate business owner to sign a personal guarantee for the credit.

This is an agreement that you, as an individual, will take full responsibility for the payments.

Should you file for corporate bankruptcy, this debt then becomes your financial responsibility. If the debt is unpaid, it affects your personal credit.

Business Taxes

Unpaid business taxes are not typically cleared through corporate bankruptcy. This includes any taxes withheld from employee salaries or sales tax (also known as trust fund taxes).

You are personally responsible if you collect these taxes but fail to forward them to the taxing authority. This unpaid debt will directly affect your personal credit.

Bankruptcy As a Last Resort

Before you file for corporate bankruptcy, it is recommended that you seek professional assistance to discuss all of your options.

Even if you have no debts that could be held against your personal credit, there are considerations that should be made before declaring corporate bankruptcy:

  • The business will be finished.

  • Your employees will lose their jobs.

If your corporation has run into financial difficulties, there may be an alternative to your situation.

Our expert accountants at Liu & Associates can review your corporate finances to determine if there is a better path for you, your business and your employees.

Contact us today to discuss your options. We are more than happy to help you save your business!