Creditor Proofing

When putting together a creditor proofing plan it is essential that legal advice is sought. 

Creditor Proofing Plans

The following creditor proofing plans range from basic to elaborate structures.  A creditor proofing plan must fit within the client's business structure.  Taken to an extreme, one could creditor proof a client to the point where he can't borrow funds to operate his business!  Be practical when designing a creditor proofing plan.

1) Have the spouse own the family home.  The transfer of the family home can be achieved on a tax free basis and should be exempt from Property Purchase Tax.

2) If the spouse owns the family home, ensure that she doesn't own the family car.  We are aware of several cases where a child is responsible for a vehicle accident and the amount of the insurance coverage is less than the victim's award.  The spouse could lose the family home.

3) If the spouse is also at  risk, transfer the family home to a “principal residence” trust.  The trust should have several trustees.  It should have several family members as discretionary beneficiaries.  The principal residence exemption should be available on the transfer of the family home to the trust.  Tax advice is required for this structure, as it may affect the principal residence exemption of the beneficiaries.

4) Beneficiaries of life insurance policies should be specifically named.  One's estate should not be the named beneficiary (as noted in TaxFacs 99-011 this may also avoid probate fees).

5) Use spousal RRSP's.  This may not only save tax on future withdrawals, but could protect the funds from creditors.

6) Transfer corporate assets to a holding company.  In general, corporate assets may be protected by:
 

The transfer of the shares of an operating company to a holding company can usually be done on an income tax deferred basis.  There are GST and PST considerations that must be addressed.

7) Have assets held by a foreign trust.  This is an “extreme” strategy.  You will be relying on the trust laws of a foreign jurisdiction.  For example, certain Caribbean countries will not allow a creditor to make a claim against an asset held by a trust which is resident in their country, if the claim is made after two years from the date of transfer of the asset to the trust.  For the structure to work, the majority of the trustees must be outside of Canada.  It should be noted that this structure is not intended to avoid Canadian income tax; it will likely require reporting to Revenue Canada.

When dealing with creditors, it is far better to bargain from a position of strength.  Creditor proofing may mean the difference between bargaining out of a bad situation and insolvency.