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 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
- 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.
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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
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