How will you reduce your risk?

Jan 02, 2019 | Joshua Opheim


Safeguard your personal and business assets from creditors

As a business owner, you’ve worked hard to accumulate your assets, so it’s important to take precautions to protect them from risk. Review your situation and consider if you need to “creditor protect” your business. If you operate as a sole proprietor or a partnership, your personal as well as business assets may be at risk from creditors with a claim against your business.
Depending on the province/ territory you live in, placing funds in an insurance policy (life or segregated funds) may safeguard them from potential future claims.
There are a number of potential solutions. One is to keep your personal and business assets separate wherever possible and carefully structure your holdings to minimize your potential liability before any insolvency issues arise. This can be an effective way to protect yourself, particularly if you undertake such planning in the ordinary course of your business. The following are some other strategies that may help:

Protect personal assets

Gifting assets – If you gift assets to family members, you may reduce the number of assets that may be available to your creditors, but bear in mind that those assets may now be at risk from creditors of the family members who receive them. Unless the gift is to a spouse, it’s considered a sale at fair market value for Canadian tax purposes and could potentially trigger a capital gain.
Using insurance – Depending on the province/territory you live in, placing funds in an insurance policy (life or segregated funds) may safeguard them from potential future claims. In many cases the investment component of an insurance policy and the interests of the beneficiaries under the insurance policy may offer protection from the claims of creditors.
Sheltering assets within registered plans – Funds in an RRSP are potentially protected from creditors in certain provinces/territories. Further, RRSPs are generally creditor protected in the event of bankruptcy. In very specific circumstances, some RRSPs have received a favourable judicial ruling following the death of the plan holder, particularly where there was a named beneficiary. Remember that registered pension plans governed by pension legislation may also offer protection from the claims of creditors, subject to specific exceptions.
Transferring assets to a formal trust – The legal ownership of the assets passes to the trustee, so, if properly structured, these assets could be protected from future creditors. However, you may lose control of the funds transferred, depending on the nature of the trust. Determine whether you can afford to transfer control of those assets. If you can, choose a trustee you know will manage them appropriately. Remember there could be significant tax implications in placing assets in a trust, so obtain professional advice to ensure you understand the consequences before you make a decision.
It is possible to appoint RBC Estate & Trust Services* as your corporate trustee. One of the key benefits of using RBC Estate & Trust Services as a corporate trustee is the security of knowing you are engaging experienced professionals to protect the interests and requirements of your trust. RBC Estate & Trust Services can administer the trust and invest the assets according to the directions set out in the trust agreement. Speak to your RBC advisor for more information on how RBC Estate & Trust Services can help.

Safeguard your business

When you’re working on a strategy to protect your business assets from risk, certain actions can create the impression that you intend to put assets beyond the reach of creditors. This can work against you in the event of a lawsuit and can be particularly important if your company is experiencing financial difficulties. Try to avoid the following:
  • Transferring property for less than fair market value
  • Paying for property by cash instead of cheque
  • Transferring property without proper documentation
  • Transferring property where you retain an ongoing interest or continue to behave like the property owner 
  • Transferring property without a change in possession
Protecting your corporate assets may involve transferring them between a number of separately incorporated businesses. The idea is that if one business fails, it won’t leave another in a vulnerable position. It is important to demonstrate that each corporation is a legitimate legal entity, carrying on business independently.
Ensure that transfers between companies occur at fair market value and are documented as though they occurred at arm’s length. To reinforce this, if you have a number of corporations with a common trade name, ensure that all documentation is prepared in the correct corporate name and signed by the authorized signing officer.
To protect your valuable business assets, you may want to structure your business so that your operating company only owns the minimum number of assets necessary to carry on its business. Consider having these assets owned by another company and leased back to the operating company so they are not available to creditors in the event of a claim.

Benefits of incorporation

Incorporating your business may be one way to protect personal assets. As an owner-manager, you are only liable to the extent of your shareholding, so you are not personally liable for the debts of the company. Compare this with sole proprietors, who are personally liable for all the debts and obligations of their businesses, and partnerships, where you can be personally liable for the actions of other partners. If you do incorporate, be careful about giving personal guarantees for loans to your business. The protection provided by incorporation can be lost in such a case and you could be personally liable for the repayment of the loan.

Surplus assets in your business

Consider keeping cash reserves low. If you have accumulated surplus assets in your business that you don’t need for operating expenses, consider transferring them to a holding company. This can help protect them from creditors of the operating company. You should also consider the pros and cons of having your company contribute to an IPP. This can help boost your retirement funds and assets in an IPP are creditor protected. 
Please contact us to review the opportunities you have to safeguard your personal and business assets from creditors.
Business planning quick tip
Many small business owners dedicate most of their financial resources to their business. As a result, it is often difficult to distinguish between “personal” and “business” assets. But by separating personal and business assets and implementing legitimate strategies for both, you can protect yourself against potential creditor claims.