How to protect personal assets if your business fails

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Q. We are closing our business due to the recent pandemic events. We had been looking at selling it anyway due to a struggling economy, challenging franchise, and so on. We are personally liable to the bank for our build-out loan, as well as to the landlord. Basically, we would love to avoid losing our house and were wondering if it is possible to sell our house to a relative for a $1 and then just continue to rent it from the relative until everything is finally resolved. –Annette A. First off, Annette, I am so sorry to hear about your business. You, and many other business owners, have been sideswiped by this pandemic. I suspect you are aware of some of the business measures put forth by the federal government like the Canada Emergency Business Account. The CEBA provides up to a $40,000 loan at 0% interest for businesses with between $20,000 and $1,500,000 in payroll in 2019. CEBA can be used to pay operating expenses, including existing regular debt payments—like your build-out loan. Property tax, commercial insurance and other costs you may be incurring could also qualify to be covered by the loan. CEBA payments do not begin until Jan. 1, 2021, at which point, the loan is amortized over five years. Monthly payments would be $667 for those who utilize the full $40,000 limit. If your repayments are on track by Dec. 31, 2022, the government may deem the remainder of your eligible for forgiveness—25% of the original Jan. 1, 2021 balance, or to $10,000. If you’re unable to repay on this schedule, the balance can be converted to a loan at 5% interest, repayable over the next three years. Your business may be in such a difficult position that not even CEBA funds would help, Annette, and I can appreciate that. But you may be able to salvage either the business, or at least the cost for the build-out. If the CEBA allowed you to, for example, sublet the commercial property to a new tenant, that could be one possible solution. I can also appreciate that finding a replacement tenant when businesses are closing, and people are working from home, may be quite difficult. Your personal liability for the build-out loan is unfortunate. One benefit of incorporation is that it can protect a business owner from personal liability. But having to provide a personal guarantee for a business debt is not uncommon. I would start by speaking to your lawyer about your obligations to the bank and the landlord in your loan agreement and lease. As far as selling your house to a family member for $1, you could do it. Assuming the property qualifies as your principal residence and you have not owned any other real estate for which you have claimed the principal residence exemption while you have owned it, the artificially low sale price would not cause any tax issues. But there is more than tax at play here, Annette. I would be concerned about giving away a valuable asset to someone else without any potential protection. There is nothing to stop your family member from turning around and selling the property. You may think family members would not do that, but what if the purchaser goes through a divorce, becomes disabled or dies? Sometimes, there are more risks to a strategy once you consider the potential scenarios that could unfold. I think the bigger issue, Annette, is whether giving away your assets prior to defaulting on a loan, or possibly claiming bankruptcy, is a viable strategy. Given you probably have a mortgage on your house, in order to sell or gift the house to a family member, they will need to take over the mortgage or pay it off as well. Your mortgage being ported or paid off at the bank that is probably the same one where you have your build out loan is going to look awfully suspicious. As such, giving away your assets may not work anyway, but I am not the right person to ask about that. You should consider getting input from a licensed insolvency trustee to talk about the risks of disposing of assets, understanding which assets are exempt from bankruptcy, and exploring other potential alternatives to dealing with your build out-loan. Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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Comments Cancel reply

Adam Awan says:

June 29, 2020 at 7:27 pm

I have a good offer for my business but I have CEBA loan . Buyer is willing to assume responsibility of loan as well. My question is that if the buyer doesn’t pay the loan back by 2015, will I be responsible to pay ?

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1. Cameron Yee says:
  
  July 2, 2020 at 12:24 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
  Reply
Richard Casanova says:

November 14, 2021 at 9:24 pm

I am considering buying a business but the current owner applied for CEBA and got the money. If I buy the business who has to pay CEBA? The owner or me?

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1. Courtney Reilly-Larke says:
  
  November 15, 2021 at 9:27 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
  
  Reply