Whether we like it or not, tax is part of life.
We pay taxes to pay for the delivery of public services like roads, harbours and airports and bridges. As employers, we remit payroll taxes; i.e.. we contribute to public and private pension plans, schemes to help workers hurt on the job, and unemployment insurance. But when these go unpaid, the taxation authority has huge and growing powers of enforcement. In this article, I will argue that not all debt is equal. Some debt is more dangerous than others and not even bankruptcy can save you from paying.
Simply put, some creditors have more power to enforce their claims than others. Although technically these creditors are unsecured and merely preferred they have the power to shut down your business, your life and everything in it. These creditors need to be paid first or negotiated with first. Why? Take this small, real life example. You may wish to pay $100,000 to a supplier first in order to keep materials flowing to the jobsite, but if a government agency scoops your bank account because you owe $6,000, then you are effectively out of business.
At the top of that list are government bodies. These are the tax collecting agencies like Canada Revenue Agency or Workman’s Compensation. They have the power, in only a few hours to get a judgment against you personally, and your company and freeze your bank accounts, padlock the doors, lien your home, and have all your receivables re-directed to the government. They can and will contact your customers to direct all monies owed to you to the government coffers.
And governing bodies, like Employment Standards, also enforce unpaid wage claims whether or not they are just unpaid or occurring as a result of a dispute. Even in a bankruptcy, unpaid wages get paid first and foremost ahead of any unpaid taxes.
Next on the list of dangerous creditors are enforcement bodies like Family Maintenance. They can, in British Columbia, enforce the payment of child support by putting a lien on your house making it impossible to re-mortgage. They can seize unemployment cheques, GST rebates and tax refunds.
Then finally there are property taxes which are enforced by a de facto lien on the property. Property can be seized and sold for back taxes. If instead you sell a property and the taxes are unpaid, then the taxes owing are taken from sale proceeds. Mortgages cannot be renewed with unpaid property taxes outstanding. And if outstanding a long time, the city or municipality has the right to seize the property and sell it. And even in a bankruptcy, the taxing authority has the right to claim two years of back taxes against the assets.
Just because it is the company that owes the money, by the way, does not always leave the owner clear of obligations. In some jurisdictions like British Columbia the old provincial sales tax became a personal obligation of the owners and directors if unpaid. Even in a bankruptcy, unpaid wages have a claim on the assets. In section 136 of the Bankruptcy Act;
(d) wages, salaries, commissions or compensation of any clerk, servant, travelling salesman, labourer or workman for services rendered during the six months immediately preceding the bankruptcy to the extent of two thousand dollars in each case, together with, in the case of a travelling salesman, disbursements properly incurred by that salesman …and.. commissions payable when goods are shipped, delivered or paid for..
Then there are secured creditors. These organisations have taken security against a loan to you. The security could be your house, the company building, equipment, and accounts receivable. Often this is registered as a General Security Agreement or GSA. The most common of course is a mortgage on real property. We are all aware that defaulting on a mortgage can lead to a protracted battle that culminates in seizure of the house and its sale to the highest bidder. What most people do not realize is that any shortfall in the sale proceeds net of mortgage payout, legal and realtor fees is immediately due and payable by the owner. That debt however is unsecured.
The second most common secured debt instrument in British Columbia is the Personal Property Security Act or simply the PPSA. This is the act that allows for repossession of equipment, vehicles and anything else pledged that is mobile, essentially. The act provides for right of seizure and for the shortfall on disposal of the asset to be a debt by the original owner.
And finally there are unsecured creditors. Typically these are credit card companies and your suppliers. The money you borrow from these people and companies, makes life simpler than trying to conduct business on a cash only basis, so of course, you have taken advantage of them. They can enforce their claims by closing your account and sending you to a collection agency. They report your travails to the credit agencies whose reports are then used to assess your further credit worthiness. Tumbling scores due to poor credit card management can restrict your ability to mortgage a house or get a car loan.
It must be obvious by now, that in programmes to restructure debt, due attention must first be paid to the danger quotient of the debt and its ability to hurt you and your business. This in turn, establishes the priority for attention, negotiation and repayment.
Finally, when the worry of debt is gone and cash is not totally dedicated to servicing that debt, you can Build Your Business. Remember that the people who worry least about money or a temporary downturn in business are debt free and have low fixed cost and you want to be there.
Contact Andrew to discuss your business debt and start a new business strategy:
Andrew D. Gregson B.A., M.A. M.Sc.(Econ)
101-1735 Dolphin Ave.
Kelowna, BC, Canada V1Y 8A6
cell: (250) 859-0752
Andrew Gregson has 15 years of experience as a business consultant to small and mid-size businesses in Canada, the United States and the Caribbean. To date, Andrew has analyzed and assisted over 130 businesses in the service, wholesale, distribution, manufacturing and logistics sectors ad is the author of Pricing Strategies for Small Business.
By Andrew Gregson