How can segregated funds be protected from creditor claims?

Because segregated funds are insurance contracts they are governed by the insurance legislation. As a result, they offer the potential for creditor protection that mutual funds and other investment types do not. However, as this is a complicated area, investors should consult an advisor if their motivation in purchasing segregated funds is simple creditor protection.

There may be circumstances where the creditor protection may not apply. For example, a few considerations include:

  • The segregated fund contract must be purchased in good faith. The creditor protection feature could be challenged if the investor purchases the fund knowing that financial trouble is approaching or they are already in financial difficulty.
  • Creditor protection may not be available for contracts held in nominee-registered accounts with financial institutions. For investors concerned with creditor protection, they should ensure that the contract is registered in the investor’s name to ensure the preferred beneficiary can be named on the contract.
  • If an investor assigns their segregated fund contract as collateral for a loan and then defaults on the loan, the lender can seize the asset.
  • Segregated funds may not provide creditor protection from the Canada Revenue Agency (CRA) if income tax liabilities are outstanding in a non-bankruptcy situation.
  • Segregated fund contracts may not provide protection from any claims arising under Family Law to provide for a dependent. Claims under Family Law may take precedence over creditor protection in a court of law.

Note: Recent federal legislation changes have now extended creditor protection to all Registered Retirement Savings Plans (RRSPs) in the event of bankruptcy.

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