Creditor protection — top 10 tips for business owners

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 from creditor claims if something goes wrong with their business.

10 tips to help manage your risk

1. Consider incorporating your business if it’s large or at risk of litigation. Professional practices should consider this option carefully.
2. Not all debt is created equal. Always pay your statutory debt on time; directors and officers can be personally liable for these debts.
3. Make sure you have enough personal liability coverage (e.g., director's home and auto coverage). If a serious accident happens, your personal assets (e.g., home, car, boat) could be seized to pay any insurance shortfall.
4. Make sure that your spouse¹ is outside the reach of creditors if anything goes wrong in the business. Directors and officers can be liable for debts. Whether your spouse is an employee or not involved in the business, you’ll have much more flexibility in your creditor protection plan.
5. Use spousal registered retirement savings plans (RRSPs) to transfer wealth to a spouse and away from creditor risk.
6. 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. Your legal professionals, with the assistance of your advisor, can help you develop a creditor protection plan.
7. Hold life insurance contracts personally, not corporately. Name a family class beneficiary on life insurance contracts and list yourself as both the owner and the annuitant/insured. Doing so may prevent creditors from seizing the assets, as well as make sure 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 and seizure by creditors of your estate.
8. Put your savings into investment products sold by insurance companies. A segregated fund contract or a guaranteed interest account (GIA) product purchased through an insurance company offers potential creditor protection when you name a family class or irrevocable beneficiary.
9. Get professional tax and legal advice about a creditor protection plan. This isn’t a do-it-yourself project.
10. Plan now. Once your business is in trouble, it’s almost impossible to establish a creditor protection plan. It must be done while the business is healthy or new.

What‘s 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.

Be cautious about naming an irrevocable beneficiary. Your rights as an owner become limited. You can't:

• change the beneficiary
• change the ownership
• cash in the policy
• assign the policy as collateral for a loan

without the consent of the person you've named as irrevocable beneficiary.

Naming a minor as irrevocable beneficiary on an insurance contract, including an investment contract, means that the contract is effectively frozen until the minor is older—minors can’t legally give consent until they reach the age of majority. Manulife usually recommends against naming irrevocable beneficiaries based on the limitations this can impose on the owner.

A note on liability

Business owners, officers, and directors can be personally liable for:

• any debts for which they’ve given a personal guarantee
• any statutory debts, such as wages² and vacation pay
• any source deductions and commodity taxes
• health and safety violations, including environmental damage.

1 The definition of spouse may include a common-law spouse depending on applicable legislation. 2 Directors are personally liable for wages to a maximum of six months for each employee owed.