Whether you’re an established entrepreneur or just starting out, it’s important to regularly review your creditor protection strategy. Most business owners, officers and directors don’t realize that their personal assets are at risk of creditor claims in the event that something goes wrong with their business. In fact, a study has confirmed that 3 out of 4 Canadian small business owners have not taken adequate steps to protect their personal assets.
Here are some tips to help manage your risk:
- Consider incorporating your business if it is either large or at risk of litigation. Professional practices should carefully consider this option.
- Not all debt is created equal. Always pay your statutory debt on time; directors and officers can be personally liable for these debts.
- Ensure sufficient personal liability coverage, e.g. director’s, home and auto coverage. In the event of a serious accident your personal assets (e.g. home, car, boat) could be seized to pay any shortfall in insurance.
- Ensure that your spouse is outside the reach of creditors in the event that anything goes wrong in the business. Directors and officers can carry liability for debts. If your spouse is an employee, or not involved in the business, you will have much more flexibility in your creditor protection plan.
- Make use of spousal RRSPs to transfer wealth to a spouse – and away from creditor risk.
- Consider moving your personal assets – like your house and your savings – to your spouse’s name. You can transfer home ownership to your spouse tax-free. If your spouse is involved in the business, consider setting up a family trust.
- Hold life insurance contracts personally (not corporately). Name a “family class” or irrevocable beneficiary on life insurance contracts and list yourself as both the owner and the annuitant. Doing so can prevent creditors from seizing the assets, as well as ensuring the assets transfer immediately to your beneficiary at the time of your death. Remember that if the death benefit is payable to your estate, your assets can get tied up in probate and may be subject to fees.
- Place your savings into investment products sold by insurance companies. When you buy a segregated fund or a GIC product through an insurance company, you’re buying an investment that offers creditor protection potential when you name a “family class” or irrevocable beneficiary.
- Get professional tax and legal advice on a creditor protection plan. This is not a “do-it-yourself” plan.
- Make a plan now. Once your business is in trouble, it is almost impossible to establish a creditor protection plan. It must be done while the business is healthy or new.
Be Cautious About Naming an Irrevocable Beneficiary
Naming an irrevocable beneficiary can mean your rights as an owner become limited.
- Change the beneficiary,
- Change the ownership, or
- Cash in the policy
- Assign the policy as collateral for a loan
…without the consent of the person you’ve named as irrevocable beneficiary.
Also note that naming a child as irrevocable beneficiary on an insurance contract, including a segregated fund investment, means that the contract is effectively frozen until the child is grown – because children cannot legally give consent until they have reached the age of majority. Manulife generally advises against naming irrevocable beneficiaries based on the limitations this designation can impose on the owner.
What is a “Family Class” Beneficiary?
A family class designation is a spouse, child, grandchild or parent of the annuitant in all provinces except Quebec. In Quebec, a family class designation includes the spouse, ascendants and descendants of the policy owner.
A Note on Liability
Business owners, officers and directors can be personally liable for:
- Any debts for which the business owner, officer or director has given a personal guarantee
- Any statutory debts, such as wages* and vacation pay
- Any source deductions owed to Canada Customs and Revenue Agency (formerly Revenue Canada)
- Goods and Services Tax and/or Provincial Sales Tax
- Health and safety violations
- Environmental damage
* Directors are personally liable for wages to a maximum 6 months’ wages for each employee owed.
Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. As one of Canada’s largest integrated financial services providers, Manulife Investments offers a variety of products and services including: segregated funds, mutual funds, annuities and guaranteed interest contracts.
Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation.