Closed Your Business? How Personal Guarantees and CRA Director's Liability Decide What You Owe
When a business closes, its debts usually split into two groups. One group stays with the business and ends when the business does. The other follows you personally. Which group a debt falls into depends less on how the business ended and more on two things: what you signed when you borrowed, and which taxes went unpaid.
Start with how the business was set up
If you ran your business as a sole proprietor, there is no separation between you and the business. Credit lines, supplier accounts and taxes are all your personal debts, and closing the doors doesn't change that.
If you incorporated, the company is a separate legal person, and some of its debts can stay with it. A supplier who extended credit to the corporation, with nothing signed by you personally, generally has to look to the corporation for payment. For many owners that is real protection.
What a personal guarantee changes
Most small business credit lines and many business credit cards in Canada come with a personal guarantee. That is a promise that if the company can't pay, you will. Once you've signed one, the corporation offers no shelter for that debt. The lender can pursue you directly, and that can include going after equity in your home.
Guaranteed accounts also tend to report to your personal credit file. Missed payments there can affect your score even though the account was opened for the business. Before you assume a debt died with the company, find the original loan documents and check what you signed.
Where CRA director's liability fits
Taxes work differently. Under federal law, directors of a corporation can be held personally liable for certain amounts the company was supposed to send to the government: payroll deductions such as income tax, CPP and EI taken from employees' pay, and GST collected from customers. That money was held in trust, so the CRA treats it as never belonging to the business. In B.C., unpaid PST is handled by the provincial Ministry of Finance, and directors can face similar personal exposure there.
The CRA also has collection tools that ordinary creditors don't. It can garnish bank accounts and wages without first going to court, and interest keeps building on what's owed. Waiting quietly rarely helps with tax debt. B.C.'s Limitation Act generally gives private creditors about two years to sue, but tax debts run on separate federal rules with much longer collection windows.
There are two important limits on director's liability. The CRA generally has to assess a former director within two years of the date they stopped being a director. A director can also defend against the assessment by showing due diligence, meaning they took reasonable steps to prevent the shortfall, not just to fix it afterward. Directors in B.C. can also be personally responsible for a capped amount of unpaid employee wages under the Employment Standards Act.
Your practical options
Once you know which debts are personal, your choices become clearer.
Talk to the CRA early. Payment arrangements are often available, and engaging with them usually goes better than having collections start without you.
Consider a consumer proposal. A Licensed Insolvency Trustee can explain whether settling for a portion of what you owe makes sense. A proposal often lets you keep assets like your tools or vehicle, and it can be a gentler route than bankruptcy.
Use home equity carefully. If you own your home and have meaningful equity, a refinance can roll high-interest business credit lines into one mortgage payment at a much lower rate. It does turn unsecured debt into debt secured by your home, so the numbers need to work over the long term, not just next month.
Planning your next mortgage
If you move back into employment, most lenders want you past your probation period before they count the new income. If you stay self-employed, CMHC's program for self-employed borrowers sets a minimum credit score of 600. That is one reason it pays to resolve guaranteed debts before they pile up on your file. Lenders also review personal tax filings closely, so getting current with the CRA helps on two fronts.
Closing a business is a hard chapter, but it is one you can work through. If you'd like help weighing a refinance, sorting out which debts touch your home, or mapping a path back to qualifying for a mortgage, I'm happy to look at your situation with you. A short conversation is usually enough to see what's possible.
When a business closes, its debts usually split into two groups. One group stays with the business and ends when the business does. The other follows you personally. Which group a debt falls into depends less on how the business ended and more on two things: what you signed when you borrowed, and which taxes went unpaid.
Start with how the business was set up
If you ran your business as a sole proprietor, there is no separation between you and the business. Credit lines, supplier accounts and taxes are all your personal debts, and closing the doors doesn't change that.
If you incorporated, the company is a separate legal person, and some of its debts can stay with it. A supplier who extended credit to the corporation, with nothing signed by you personally, generally has to look to the corporation for payment. For many owners that is real protection.
What a personal guarantee changes
Most small business credit lines and many business credit cards in Canada come with a personal guarantee. That is a promise that if the company can't pay, you will. Once you've signed one, the corporation offers no shelter for that debt. The lender can pursue you directly, and that can include going after equity in your home.
Guaranteed accounts also tend to report to your personal credit file. Missed payments there can affect your score even though the account was opened for the business. Before you assume a debt died with the company, find the original loan documents and check what you signed.
Where CRA director's liability fits
Taxes work differently. Under federal law, directors of a corporation can be held personally liable for certain amounts the company was supposed to send to the government: payroll deductions such as income tax, CPP and EI taken from employees' pay, and GST collected from customers. That money was held in trust, so the CRA treats it as never belonging to the business. In B.C., unpaid PST is handled by the provincial Ministry of Finance, and directors can face similar personal exposure there.
The CRA also has collection tools that ordinary creditors don't. It can garnish bank accounts and wages without first going to court, and interest keeps building on what's owed. Waiting quietly rarely helps with tax debt. B.C.'s Limitation Act generally gives private creditors about two years to sue, but tax debts run on separate federal rules with much longer collection windows.
There are two important limits on director's liability. The CRA generally has to assess a former director within two years of the date they stopped being a director. A director can also defend against the assessment by showing due diligence, meaning they took reasonable steps to prevent the shortfall, not just to fix it afterward. Directors in B.C. can also be personally responsible for a capped amount of unpaid employee wages under the Employment Standards Act.
Your practical options
Once you know which debts are personal, your choices become clearer.
Planning your next mortgage
If you move back into employment, most lenders want you past your probation period before they count the new income. If you stay self-employed, CMHC's program for self-employed borrowers sets a minimum credit score of 600. That is one reason it pays to resolve guaranteed debts before they pile up on your file. Lenders also review personal tax filings closely, so getting current with the CRA helps on two fronts.
Closing a business is a hard chapter, but it is one you can work through. If you'd like help weighing a refinance, sorting out which debts touch your home, or mapping a path back to qualifying for a mortgage, I'm happy to look at your situation with you. A short conversation is usually enough to see what's possible.
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