Can I Keep My Business if I Declare Personal Bankruptcy?

Can I Keep My Business if I Declare Personal Bankruptcy?

Navigating Personal Bankruptcy While Running a Business in Canada

When financial difficulties arise, the thought of losing one’s business while wrestling with personal bankruptcy can be daunting. For those in self-employment in Canada, understanding the legal and financial implications of declaring bankruptcy is crucial to making informed decisions. This article aims to provide comprehensive information on bankruptcy and self-employment in Canada.

Bankruptcy and Self-Employment: An Overview

When business performance falters, self-employed individuals often wonder if they can keep their business running while declaring personal bankruptcy. The answer is not straightforward as it largely depends on the business structure, the nature of debts and the specific circumstances surrounding the bankruptcy.

Business Structures and Their Implications

Businesses in Canada can operate under three general structures: sole proprietorships, partnerships, and corporations. Each carries different implications for liability, taxation, and succession.

Sole Proprietorships and Partnerships

In sole proprietorships and partnerships, there is no legal separation between the business and personal assets or liabilities. As such, when a business structured as a sole proprietorship or partnership faces bankruptcy, it is the individual, not the business, that declares bankruptcy.


Corporations, on the other hand, are separate legal entities. Their assets are owned by the business, not the individual. Consequently, a corporation can go bankrupt if it cannot meet its financial obligations, regardless of the financial status of the individual owner(s).

Personal Bankruptcy: What Happens to the Business?

If a self-employed individual decides to file for personal bankruptcy, the fate of their business depends on the business structure and the specifics of their financial situation.

Bankruptcy in Sole Proprietorships and Partnerships

In these scenarios, since the business and personal assets are intertwined, declaring bankruptcy means that the assets of the business are considered personal assets. These are then used to pay off the individual’s debts. However, in Ontario, small businesses can claim an exemption for ‘tools of the trade’ with a realizable value of up to $11,300.

Bankruptcy in Corporations

For corporations, the assets of the business are sold as part of the company’s bankruptcy to reduce liabilities. However, once personal bankruptcy is filed, the individual cannot continue to act as the Director of the company.

Debt Considerations for Self-Employed Individuals

One of the largest debts for many self-employed individuals or small business owners often pertains to income tax and sometimes HST/GST arrears. A common misconception is that tax debts can’t be included in bankruptcy. However, unless the Canada Revenue Agency (CRA) has registered a lien against your property prior to bankruptcy being filed, these debts can be discharged through bankruptcy, as the lien would make the debt secured.

Steps to Take When Closing a Business Due to Bankruptcy

If a decision is made to close a business due to bankruptcy, there are several legal and financial steps to be undertaken. These include:

  • Cancelling the business registration for sole proprietorships or partnerships and notifying the CRA.
  • Filing a last tax return if a corporation is being dissolved.
  • Closing RST/PST/QST accounts with the relevant provincial agency.
  • Closing payroll and GST/HST accounts with the CRA.
  • Disclosing the business to a Bankruptcy Trustee as an asset.

Trustee’s Role in Bankruptcy

A Licensed Insolvency Trustee plays a crucial role in the bankruptcy process. They provide unbiased, non-judgmental advice and support throughout the process, helping individuals understand their obligations as they work towards building a strong financial future.

Seeking Professional Advice

Bankruptcy can be a complex process, especially for self-employed individuals or small business owners. It’s essential to seek advice from an experienced Trustee in Bankruptcy to understand your obligations and the options available to you.


Bankruptcy and self-employment in Canada can be a complex area to navigate. It’s crucial to understand the implications of bankruptcy on different business structures and the steps to take when closing a business due to bankruptcy. When faced with financial difficulties, seeking professional advice can help self-employed individuals make informed decisions and work towards a debt-free life.

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