(Toronto) The mid-January deadline for businesses to qualify for partial forgiveness of pandemic-related loans likely played a major role in the increase in business insolvencies that month, said the Canadian Federation of Independent Business (CFIB).
As businesses continue to grapple with inflation, labor shortages, rising interest rates and weak consumer spending, for many the deadline has been the “last straw.” “that broke the camel’s back,” said Simon Gaudreault, CFIB’s chief economist and vice-president of research.
“The calculations no longer hold,” he said.
Business insolvencies more than doubled in January from a year earlier and also exceeded pre-pandemic levels for the month.
The Office of the Superintendent of Bankruptcy reports that there were 759 cases of business insolvencies in January, an increase of 42.4% from December and 129.3% from January 2023.
This compares to 308 in January 2020, before the pandemic began. Corporate insolvencies include bankruptcies and proposals (in which part or all of the debt is repaid).
Emergency loans of $60,000 from the Canada Emergency Business Account were provided to nearly 900,000 businesses and non-profit organizations to help them survive the pandemic. Up to a third of this loan could be forgiven if the remaining two-thirds were repaid by January 18 – otherwise the debt became a three-year loan with 5% annual interest.
Businesses were also offered the opportunity to refinance their loan before the end of March while remaining eligible for partial forgiveness.
The tip of the iceberg
Lobby groups including the CFIB had called on the government to extend the deadline, warning it could lead to the closure of thousands of struggling businesses. This deadline had already been extended twice.
Many businesses missed the January deadline, Gaudreault said, noting that many of them also have other types of debt stemming from pandemic-related closures.
And while the rise in insolvencies is worrying, he said the real toll is likely much higher, as many small businesses don’t bother filing for insolvency but simply close their doors .
“Insolvencies are unfortunately only the tip of the iceberg,” he lamented.
The largest increases in January were recorded in accommodation and food services, retail trade and construction.
Business bankruptcies increased more sharply year-over-year than proposals.
Consumer bankruptcies increased in January, but to a lesser extent. They grew by 23.5% over one year and remained lower than those of January 2020.
Business and consumer insolvencies have been on the rise for some time, having reached low levels attributable to the pandemic.
Corporate insolvencies increased by 41.4% in 2023 compared to 2022.
The Canadian Association of Insolvency and Restructuring Professionals explained in a February press release that businesses are struggling with pandemic debt and higher interest rates.
The slowdown in consumer spending is also weighing on businesses, the association added, as Canadians continue to face higher prices and interest rates.