Self Employment

January 10, 2019

Self employment is no panacea, there are many reasons why people become self-employed ranging from seeking autonomy in the workplace, to desperation after losing regular employment and everything in between.  Self employment may be attractive from the point of view income, assuming the business is successful, but that too can have a negative consequence.

The more money you earn the more taxes you will be required to pay, so most self-employed people turn to an accountant to help them negotiate Canada’s complex tax laws and find ways of minimizing their tax exposure.  The jeopardy is, by showing less income, the self-employed person may have trouble negotiating credit for mortgages, credit cards and even for business expansion.

Self employment can present challenges to a Licensed Insolvency Trustee when determining if you have “surplus income”.  Surplus income is based on a framework provided by the Office of the Superintendent of Bankruptcy, it requires that bankrupt individuals making income above an established threshold should pay some of that extra (surplus) to the trustee to benefit the creditors.

When calculating surplus income, the trustee must consider all sources of income, tax deductible or not.  While some drawings may be allowable for tax purposes but that may not be the case for surplus income calculation.  The same may apply to certain pensions that have a tax-exempt status, they still constitute income.

Paying taxes can be a challenge for people who are self-employed because cash flow is rarely steady.  Once behind on tax remittances the CRA can be relentless in its collection activity, seizing bank accounts and signifying receivables which can impact the business’ reputation and ability to continue operations.

Filing a proposal or bankruptcy will stop the CRA’s seizure of accounts and may allow the business to continue operations but still under threat of a tarnished reputation.  The credit challenges faced by self employment prior to an insolvency proceeding are heightened following a filing.  Nonetheless, credit will still become available and slowly return to normal.

We have seen several self-employed clients successfully rebuild their credit ratings starting with access to credit within months of being discharged from bankruptcy.  Now we caution that everyone’s situation is different, and results will vary, but it seems that lenders are still in the lending business and looking for clients, self-employed or not.

If you are self-employed and experiencing cash flow challenges leaving you behind on your obligations give the office a call 519-646-2222 and come in for a free consultation to explore if a bankruptcy or proposal might be a good solution for you.