What Are Segregated Funds?
Segregated funds are an insurance product offered by insurance companies and registered with the Canadian government. They allow investment in a variety of assets such as mutual funds, but with a guarantee to return a portion of the original investment, usually 75-100%, at maturity or death of the policyholder. Interestingly, the assets in the account may also be protected from creditors.
Also, a segregated fund policy for business owners is similar to an individual policy. The business can buy the policy and make contributions, which are then invested in various assets such as stocks, bonds, and/or other investments.
How Do Segregated Funds Provide Creditor Protection?
Creditor protection is a feature that can provide a level of security for an individual or business in the event of financial difficulties. In Canada, when a business owner declares bankruptcy or is unable to pay their debts, creditors may be able to seize the business owner's assets in order to repay the debts. This can include personal assets such as a home, car, or investments.
In the case of Segregated funds, the assets within the funds are protected by the Insurance Act, meaning that they can't be seized by creditors in the event of a policyholder's bankruptcy or when they are unable to pay their debts. This can provide peace of mind for business owners, knowing that their assets are better protected.
Additional Layer of Creditor Protection
The best way to use segregated funds in Ontario for creditor protection would be to use them in combination with other forms of asset protection, such as a holding company or a trust.
One way to do this is to transfer assets, such as investments, into a holding company, and then use that holding company to purchase a segregated fund policy. This can provide an additional layer of protection for the assets, as the holding company would be the policyholder of the segregated fund, rather than the individual.
Another option is to set up a trust and transfer assets into the trust, then use those assets to purchase a segregated fund policy. This can provide an additional layer of protection for the assets, as the trust would be the policyholder of the segregated fund, rather than the individual.
It's worth noting that both of these options can have legal and tax implications, it's best to consult with a financial advisor and legal counsel to determine the best course of action for your specific circumstances.
Setting up a Segregated Fund for Protection Purposes
When purchasing a segregated fund for creditor protection, it is generally not recommended to designate yourself as the beneficiary. This is because the death benefit guarantee provided by the segregated fund is intended to provide protection to the policyholder's beneficiaries, not the policyholder themselves.
Designating yourself as the beneficiary would mean that, in the event of your bankruptcy, the death benefit would be subject to seizure by creditors, negating the purpose of purchasing the policy for creditor protection. Instead, you should consider designating a trusted family member or a trust as the beneficiary, as the death benefit would be paid to them, and it would be more likely protected from creditors in the event of your bankruptcy.
It is possible to cancel a segregated fund contract, but the process and the outcome depend on the specific terms of the policy and the insurance company's policies. Typically, you can cancel a segregated fund contract by providing written notice to the insurance company and surrendering the policy. However, there may be penalties for canceling the policy before it matures, such as surrender charges, and these charges can vary depending on the insurance company and the policy.
If you cancel a segregated fund contract, the death benefit guarantee will no longer be in effect, and your beneficiaries will not be entitled to receive any death benefit. The money that you have invested in the policy will be returned to you, minus any penalties, and the value of the investment may have changed depending on the market conditions.
Does an RRSP Account give you creditor protection?
In Ontario, assets within a Registered Retirement Savings Plan (RRSP) account are protected from creditors in the event of bankruptcy to a certain extent. Under the federal Bankruptcy and Insolvency Act (BIA) and the provincial Ontario's Bankruptcy Act, RRSPs are considered exempt assets and are protected from seizure by creditors during bankruptcy, as long as the contributions were made to the plan more than 12 months before the date of bankruptcy.
The growth within an RRSP is also protected. However, any funds withdrawn from an RRSP within the 12 months preceding the bankruptcy are considered "preferential payments" and can be seized by the bankruptcy trustee to pay off creditors.
It's worth noting that the laws regarding the protection of RRSPs in bankruptcy may vary between provinces in Canada and it's always best to consult with a financial advisor or legal counsel to understand the specifics of your situation.
Does a TFSA give you creditor protection?
A Tax-Free Savings Account (TFSA) in Ontario does not have creditor protection. Under the federal Bankruptcy and Insolvency Act (BIA) and the provincial Ontario's Bankruptcy Act, assets within a TFSA are not protected from creditors in the event of bankruptcy. Creditors are able to seize assets in a TFSA to pay off debts.
Can you own a Segregated Fund in a RRSP Account and TFSA ?
Yes, as well as for non-registered assets.
Overall Tips For Protecting Your Assets As A Business Owner
The best way for a business owner to get creditor protection in Ontario, Canada can depend on the specific circumstances of the business and the assets of the business owner. However, here are a few options to consider:
Incorporation: Incorporating a business can provide some level of protection for the business owner's personal assets, as the corporation is a separate legal entity and is responsible for its own debts.
Holding company: Setting up a holding company and transferring assets into it can provide an additional layer of protection, as the holding company would be the owner of the assets rather than the individual.
Trusts: Setting up a trust and transferring assets into it can provide an additional layer of protection, as the trust would be the owner of the assets rather than the individual.
Segregated Funds: Using Segregated Funds in combination with other forms of asset protection, such as a holding company or a trust can be beneficial.
Insurance: Business owners can also consider purchasing liability insurance to protect their personal assets in case of legal action against the business.
It's always best to consult with a financial advisor or legal counsel to understand the specifics of your situation and to determine if this type of investment is suitable for your specific needs and goals.
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Gianluca Folino
Financial Advisor, Manulife Securities Incorporated
Life Insurance Advisor, Manulife Securities Insurance Inc.
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