‘Business is the art of extracting money from another man’s pocket without resorting to violence’ said somebody, and I’ll add so is protecting your money is your business. The 2020 pandemic put a toll on everyone’s lives. Some have felt the impact more than others. The unemployment rate in Canada has skyrocketed rising 5.2 percentage points in April to 13.0%, following an increase of 2.2% in March. April’s unemployment rate becomes 17.8%, when adjusted to include those who were not counted as unemployed for reasons specific to the COVID-19 economic shutdown. Employment declined in all provinces for the second month in a row. Compared with February, employment declined by more than 10% in all provinces, led by Quebec (-18.7% or -821,000). Montréal recorded the largest decline (-18.0%; -404,000), followed by Vancouver (-17.4%; -256,000) and Toronto (-15.2%; -539,000)i.
In the current environment, there will be a large number of people in financial difficulty. Knowing your rights and obligations and protecting yourself becomes a matter of survival. This article explores the strategies of creditor proofing, seizable and unseizable property, at last bankruptcy.
Creditor Proofing for Business Owners
Creditor-proofing should be undertaken, when your business is solvent and debts can be paid as they become due. At such times, it is usually legal to structure your business to minimize liability before problems arise. If a business tries to implement creditor- proofing techniques when creditors are knocking at the door, it might be too late. Courts will usually deny the benefits of creditor-proofing if they were implemented for the purpose of hindering or defeating existing creditors. There are several techniques that can help to protect, or “creditor-proof” business assets.
1. Incorporate your business. An incorporated business is a distinct legal entity from yourself which means your personal assets are protected from creditors in most cases.
2. Create a holding company. Traditionally, a simple corporate structure that facilitates creditor protection involves the use of a holding company. Profits of the operating company are paid as a dividend to the holding company can lent back to the operating company on a secured basis. If the shareholders themselves are at risk of creditors’ claims, the holding company shares may be transferred to trusted family members to achieve an additional layer of creditor protection. Be aware that under the new TOSI rules, extracting corporate funds may have additional tax consequences
3. Make secured shareholder loans to your company. This strategy will secure your rights as a creditor in case your company has financial difficulties.
4. Know your obligations as a corporate director. Directors can be held personally liable for a corporation’s failure to remit GST, retail sales tax, payroll source deductions, and worker’s compensation (CNESST for Quebec) premiums. They may also be liable for gross negligence in workplace safety, as well as the corporation’s failure to comply with environmental laws, and any failure to pay wages, vacation pay, pension plan premiums and severances. Only a due diligence defense will protect a director from such liability.
5. Another important strategy is to avoid giving personal guarantees. One of the main reasons to incorporate is to separate personal and corporate assets and liabilities, signing a personal guarantee jeopardizes your main reason to incorporate.
6. Transfer the ownership of your personal property to your spouse or to your adult children. The creditors won’t be able to attack neither spouse’s nor the children’s property provided that they are not a grantor of your debt nor a director of your company. Beware of the tax consequences of this strategy.
7. Create an inter-vivos family trust. While creditors may still seek a court order on the trust assets, a trust is a distinct legal entity and can be a layer of protection from creditors.
8. Contribute to a spousal RRSP. Although the RRSPs are protected from creditors, the last 12 months’ contribution is not protected. A spousal RRSP belongs to your spouse. As a business owner you will take the tax deduction, but it’s your spouse’s property.
9. Invest in investment and retirement products through insurance companies. If you designate your spouse, your parents or your children as beneficiaries and the designation is irrevocable, then your investments are protected from your creditors.
10. Create individual pension plans (IPP) or retirement compensation arrangements for yourself. They are for high income earner business owners. For IPP you must be at least 40 years old and must earn at least $100,000. Those plans are creditor protected.
Types of Seizures
Before making a foreclosure, the person or business to whom you owe money must obtain a court judgment. You must respect this judgment and pay your debt. If you do not, depending on the amount of money you owe him, your creditor could seize your salary, your furniture or your house.
Third-party seizure is a procedure by which a creditor seizes a sum or property belonging to the debtor which is in the hands of another person. It can thus enter, in particular:
• the debtor’s work income;
• money or investments that the debtor has deposited in the bank or cash;
• amounts that another person owes to the debtor;
• the securities (e.g. shares of a company) that the debtor holds.
The most common example is the attachment of part of the debtor’s wages through his employer.
Seizure of movable property
Seizure of movable property is a procedure by which a creditor seizes movable property belonging to the debtor with a view to selling it. This seizure is carried out by a bailiff at the time of service of the notice of execution on the debtor. Before carrying out the attachment, the bailiff must read the attachment order to the debtor and demand payment of the debt.
If the debtor pays his debt, the procedure ends. He or she can then keep his movable property.
Real estate foreclosure
Real estate foreclosure is the process by which a creditor seizes an immovable which belongs to the debtor with a view to selling it. This entry is made by a bailiff. The latter must first read the order to seize the debtor and give him the notice of execution.
The debtor has custody of the building until it is sold. He can neither give up nor damage it. However, he can sell it under certain conditions if his request is accepted by the bailiff responsible for the seizure.
Opposition to foreclosure and sale
A person can oppose the seizure or sale of his property and he can request the cancellation in whole or in part for the following reasons:
• the attachment involves an irregularity which causes damage to the debtor;
• seized property is unseizable;
• the debtor has repaid his debt.
If seized property does not belong to the debtor, the owner may object in order to exempt it from seizure.ii
Income Protected from Seizures
In general, the following amounts of money and income are unseizable:
• amounts received as child support;
• employer contributions to a retirement, insurance or social security plan;
• support payments declared by the donor to be exempt from seizure;
• amounts received as compensation for costs and losses incurred as the result of physical or moral injury, paid following a judgment or under a public compensation scheme;
• the value of the food and accommodation provided or paid for by an employer during travel for work purposes.
Depending on the number of dependents you have, some part of your gross income is unseizable.
Unseizable Movable Property
In general, the following property is protected and cannot be seized during a seizure of your movable property:
• the food, fuel and clothing needed for the life of you and your family;
• the furniture in your main residence needed for the daily life of your family and any personal belongings you choose to retain, up to a market value of $7,000;
• work instruments needed for the exercise of your profession;
• objects needed to alleviate a disability or care for the illness of a family member;
• medals and other similar decorations;
• objects used for family worship.iii
You can only bankrupt if you are insolvent. You must be in the following situation:
• have $1,000 or more of debts
• live or own property in Canada
• not already bankrupt
• are in one of these situations:
- be unable, for one reason or another, to pay your debts as they become due
- have stopped paying debts or monthly bills (hydro bills, telecommunication bills, credit card balance, etc.)
- value of all your property (his “assets”) is less than the value of all your debts (“liabilities”)
What Are the Debts Included in the Bankruptcy?
Most debts can be included in a bankruptcy. They might include these debts:
• unpaid credit card balances
• line of credit debt
• personal loans
• taxes owed
• debts owed to collection agencies
• student loans, in some cases
Some debts cannot be included in the bankruptcy. This means that the creditors could claim this money even though you are going bankrupt. This is the case for these amounts:
• support payments to a former spouse or for children
• fines, penalties, restitution orders or other similar orders imposed by a court
• debts flowing from a civil court decision t ordering payment of money for sexual assault causing physical injury or death
• debts arising from fraud, misrepresentations or illegal acts
• money that a creditor could not get back because you did not tell the trustee that you owed the money
• student loans, if the bankruptcy happened within seven years of the date you stopped being a full or part-time student. In certain rare cases, a judge can reduce that period to five years if it’s satisfied that you made an effort to pay and that you will be unable to pay the debt in the future.
What is your tax filing obligation if you are bankrupt?
If you declared bankruptcy, you are required to file two income tax returns for the year of the bankruptcy:
one for the period from January 1 to the day preceding the date of the bankruptcy; and one for the period from the date of the bankruptcy to the end of the year.
Both of your returns must be filed no later than April 30, 2019 (or June 15, 2019, if you or your spouse carried on a business).
When you file for bankruptcy, the trustee becomes the administrator of your property and assets. One of the roles of the trustee is to wind up the property by selling all the assets and depositing the funds in trust for the creditors in bankruptcy. If an income tax and benefit return had to be filed for the year prior to the year of bankruptcy and you did not file it, the trustee must immediately file one on your behalf. The trustee must also file an income tax and benefit return for the period from January 1 up to the day before the date of bankruptcy; this return is called the pre-bankruptcy return.
The trustee may also file an in-bankruptcy return to report income from liquidated assets (for example, RRSPs) or from businesses the trustee winds up for the benefit of creditors. For Quebec tax purposes a trustee is required to file returns for the years following the bankruptcy in order to report the income derived from bankruptcy operations (such as amounts withdrawn from an RRSP or investment income)iv.
It is your responsibility to file an income tax and benefit return for the post-bankruptcy period, which is from the date of bankruptcy to December 31, if the trustee does not file one on your behalf.
What if your employer is bankrupt?
The Wage Earner Protection Program (WEPP) provides for the payment of outstanding eligible wages to individuals whose employer is bankrupt or subject to a receivership within the meaning of subsection 243(2) of the Bankruptcy and Insolvency Act.
For bankruptcies or receiverships on or after February 27, 2018, the payment covers eligible wages up to an amount equal to 7 times the maximum weekly insurable earnings under the Employment Insurance Act ($7,296.17 for 2020).
What to do if your employer’s business closes and there is no trustee or receiver appointed?
If there is no bankruptcy or receivership, you are not eligible for the WEPP. However, you may ask for assistance under federal or provincial Labour Standards legislation.v
No matter how hard the situation is there are some solutions and mechanisms that will help to outcome difficult times. It is helpful to know the rules and seek assistance.
i Statistics Canada
ii Government of Quebec, Ministry of Justice
iii Justice Quebec
iv Revenue Canada and Revenu Quebec
v Employment and Social Development Canada