Owner-Managed Business-Creditor Proofing

Every business owner should be concerned about creditor proofing his or her assets. Here are several suggestions to consider:

1) Transfer assets out of the company:

  • Place capital assets in a separate holding corporation so that subsequent legal claims that arise in the operating company do not affect these assets.
  • Lease the assets in the holding corporation back to the operating company. It may be easier to sell the operating company in the future.
  • Protect cash assets from potential claims. Pay tax -free dividends from the operating company to the holding company regularly.
  • Establish a retirement compensation arrangement (RCA). This removes funds from the corporation as a tax-deductible expense and places the cash into a creditor-protected Trust.

2) Secure the business owner’s assets:

  • Secure the shareholder loans by establishing a general security arrangement to provide the shareholder priority over all unsecured creditors.
  • Transfer assets to the lower risk spouse on a roll -over basis for tax purposes. If there were a future marriage breakup, this type of property would usually be equally divided between the spouses under the provincial family legislation, regardless of who owns title.
  • An estate freeze would transfer the future growth of the assets to other family members.
  • Transfer the assets into a Discretionary Family Trust to protect them from creditors. A Discretionary Family Trust permits the transferor to retain control over the assets. This would produce a taxable disposition unless the transfer is to a qualifying Spousal Trust or a Joint Partner Trust or an Alter ego trust.

Leave a Reply

Your email address will not be published. Required fields are marked *