Creditor proof your portfolio

A recent judgement from the Tax Court of Canada reaffirmed the strong case to be made for creditor proofing your investments with segregated funds.

Earlier this year, the Canada Revenue Agency (CRA) attempted to seize the death benefit of a segregated fund account that was paid to the two daughters of an individual who had passed away. The two daughters were named beneficiaries of their father’s account that was invested entirely in segregated funds.

While this account was used solely for investment purposes, being a segregated fund meant that it falls under the insurance act of Canada and not the bank act. Therefore, when it comes to taxation and estate matters, it is treated as a life insurance policy for tax purposes.

In its submissions, the CRA relied upon subsection 160 of the Income Tax Act which states, among other things, that when someone transfers property to a non-arm’s length person (such as a child) without proper consideration, the recipient may be on the hook for income taxes owing by the transferor. When assets pass outside of the estate of a deceased person, the CRA will often use section 160 to attempt to pursue the funds to pay taxes otherwise owing.

However, in this case the investment assets were held in segregated funds and as mentioned above, they are treated in the same manner as the proceeds from a life insurance policy. With that in mind, the court found that the money paid out to the two daughters constituted life insurance proceeds payable to named beneficiaries and they did not form part of the father’s estate nor were they subject to pursuit through the section 160 clause.

The decision proved as a great reminder of the benefits of segregated funds and helped reaffirm the legal status of segregated funds and the features that they possess. In addition to providing creditor protection (whether from the CRA or an outside party), they also bypass the estate as a whole which can greatly reduce estate and probate costs. For non-registered investments, they can also provide some additional tax savings and reduced accounting costs as well.

Like most other investment options, segregated funds can be purchased in a wide variety of options and properly understanding the type of investments and fees involved is important. While some segregated funds carry substantially higher fees, others can have the exact same fee structure as comparable mutual funds – which means you get the added benefits of creditor protection and tax savings for free!

Make sure you speak to a qualified financial advisor before investing in something new and don’t be afraid to ask a lot of questions and do your research.