Tax & Spend: The zombie companies are finally expiring – The Globe and Mail

The zombie company could finally be expiring.

Business insolvencies are on the rise, nearing prepandemic levels as government supports and the patience of lenders dissipate.

According to data released from the federal Office of the Superintendent of Bankruptcy on Thursday, there were 318 business insolvencies in March, nearly equalling the 324 insolvencies of February, 2020. As recently as last July, insolvencies were less than half of prepandemic levels, with 160 filings that month.

The rebound could spell an end to one of the great economic paradoxes of the pandemic: During one of the worst economic contractions in Canadas history, the number of insolvencies fell dramatically.

Dan Kelly, president of the Canadian Federation of Independent Business, has said that he believed there were thousands of debt-burdened zombie companies that were effectively defunct but were technically staying in business on the faint hope that they could rebound once pandemic restrictions were lifted.

Those hopes are clearly fading, according to the superintendents data. Instead, insolvencies are shooting up; those zombies are finally dying. The stake is going through the heart, Mr. Kelly said, adding that a survey of his members indicates that only 40 per cent have seen their sales return to prepandemic levels and that the average small business has amassed $160,000 in COVID-related debt.

Targeted wage subsidies ended in early May, but Mr. Kelly is still hoping that Ottawa will provide additional relief to small business, by writing off the full value of emergency loans issued over the past two years rather than forgiving only a portion. I worry that weve only seen the tip of the iceberg for business failures, he said.

In a news release, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) noted that business insolvencies rose 34 per cent in the first quarter of 2022 compared with the same quarter in 2021, the biggest increase in 31 years.

Jean-Daniel Breton, chair of the CAIRP, said insolvencies fell during the pandemic because of a combination of factors, including government support programs such as wage subsidies, and the unwillingness of lenders to force debtor firms into bankruptcy in an economic environment unlikely to garner much from asset sales. You cannot get blood from a stone, he said.

Those factors are now pushing in the opposite direction, he said. Support programs began to wind down after November, and lenders are less forgiving. Rising interest rates will intensify the pressure on overextended companies, he added.

Taxing questions

Be careful what you ask for, you might just get it. Thats the foundation for some of the criticism of left-leaning politicians that back carbon pricing but are also floating ways to roll back the soaring cost of a fill-up.

Superficially, it does seem a bit on the posturing side for politicians to want to increase the cost of gasoline, but then also wring their hands about the increasing cost of gasoline. But only superficially.

There are big differences between the price increases contemplated under carbon-pricing systems such as the federal fuel charge, and the recent market-driven spike in prices. For one, there is magnitude. Pretax gasoline prices in Toronto have jumped by more than 40 cents a litre since the start of the year. The fuel charge rose by a relatively modest 2.2 cents a litre on April 1 to a total of 11 cents.

Still, over time, the total will mount. By 2030, the fuel charge will be just under 40 cents a litre.

But that underscores how slowly the fuel charge is slated to rise. This points to another contrast: predictability. The yearly increase in the fuel charge is steady barring a change in the policy that is. On the other hand, there are few things in the world less predictable than gasoline prices. Why trade in your pickup for a price spike that could be over in two months? But if you knew those prices were here to stay, your decision could be different.

Lastly, increases in federal fuel charges are paired with rebates. Those dont cover the extra costs for all households, but at a minimum it defrays them. That is perhaps the biggest difference: Those market-driven spikes are all cost, no rebate.

Line Item

Making employment insurance work: The pandemic has underscored the urgent need to update employment insurance to make it more generous and easier to access, concludes a report from the Institute for Research on Public Policy, issued as Ottawa conducts a two-year-long review of the 82-year-old income support policy. The report, which captures the discussion of the 12-member working group in December, highlights the myriad gaps in the EI program. It also touches on some potentially politically thorny solutions including renewed federal contributions without going quite so far as to endorse them.

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Tax & Spend: The zombie companies are finally expiring - The Globe and Mail

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