The economic impacts that came out of the COVID-19 pandemic closed more businesses than the financial crisis in 2008, according to a new report from Statistics Canada.
Many of these business owners didn’t file for bankruptcy—they just closed their doors and walked away. The term StatCan used for the phenomenon in its report, “A profile of corporate exits and insolvencies,” is “business exit,” defined as the permanent closure of a business and an exit from the marketplace.
The percentage of employer businesses in the private sector exiting in 2020 compared with 2019 “represents a larger increase than observed during the 2008/2009 financial crisis, where the exit rate increased by 1 percentage point,” said StatCan.
“A business owner may abandon the business or walk away without a formal process,” said the report, referenced by Blacklock’s Reporter. “A business exit can happen voluntarily.”
Released on Oct. 25, the report estimated that 14 percent of small businesses permanently closed in 2020, which in part was calculated by the number of businesses that stopped issuing payroll tax slips for employees.
“Recent evidence of the impacts of the pandemic on businesses showed that small firms were among the hardest hit,” it said.
Exits rose at the same time bankruptcies fell due in part to pandemic lockdowns of the courts. “The COVID-19 pandemic had a substantial impact on business dynamics, leading to the temporary or permanent closure of many businesses,” said the report.
Canada went into the pandemic with 1,198,632 small businesses, according to a Department of Industry estimate. Federal agencies to date have not compiled comprehensive figures on the economic impact of COVID-19, but the report said “exits” did not appear in bankruptcy court statistics.
“Formal insolvencies are not the whole story. Formal insolvency is but one path a business in distress may take,” it said.
Other financial markets have referred to these businesses as “zombie” companies. According to the U.S. Federal Reserve, zombie companies are unable to make enough profits to cover their debts, and often need to borrow money from the bank to survive. Basically, they are unviable.
“In my view there are hundreds of thousands of zombie businesses, businesses that are essentially dead but haven’t finalized the closure process altogether,” the CEO of the Canadian Federation of Independent Business, Dan Kelly, told a 2020 Senate finance committee.
“We are seeing greater numbers of business failures that actually haven’t been reported. We’re only at the tip of the iceberg.”
A 2022 Bank of Canada survey estimated half of businesses that had their doors closed by pandemic lockdowns were not reopened five months later. A bank report, “Business Closures and Re-Openings in Real Time Using Google Places,” described the phenomenon as “business hibernation.”
The Statcan data tracked 12,976 businesses in Vancouver, Toronto, and Ottawa that were under lockdown orders in April and May 2021. The businesses included bars, restaurants, shops, nightclubs, and motels.
“Half of businesses recorded as temporarily closed in May had reopened by the end of September,” said the bank report. Another 40 percent were still “hibernating,” and 10 percent were closed for good.
The StatCan report said most of the businesses that just exited the market in 2020 were small businesses, while most bankruptcies involved larger businesses. It suggests that small businesses, “in particularly the smallest ones,” suffered way more as a result of COVID-19 than larger businesses.
In Quebec, there were low business exit rates but the highest bankruptcy rates in the country.
