Does a Trust Protect Assets From Creditors in Ontario?

If you are facing a lawsuit or heavy debt, moving assets into a trust can look like a simple way to protect them. The real answer depends on when the transfer happened, who received the property and what your finances looked like at the time.

This article explains in general terms how a court can undo certain transfers under federal bankruptcy law, how related and unrelated recipients are treated differently, and what to raise with a lawyer before you move anything.

Why a trust is not an automatic shield

A trust is a legal arrangement where one person holds property for the benefit of others. Creating one can be a legitimate part of planning. But a trust is not a magic barrier. If a transfer looks designed to move assets away from the people you owe, a court may be willing to look past it.

Timing matters most. A transfer made well before any financial trouble, for ordinary planning reasons, is in a very different position from a transfer made shortly before a bankruptcy.

When a transfer can be reversed under the Bankruptcy and Insolvency Act

Under section 96 of the federal Bankruptcy and Insolvency Act, a court can void a transfer at undervalue. A transfer at undervalue is, in plain terms, a transfer where you receive little or nothing in return. The rules look back from the initial bankruptcy event, and they depend on who received the property.

For a transfer to someone you do not deal with at arm's length, the court can void it if it was made within one year before the initial bankruptcy event. A transfer made within five years before can also be voided if the debtor was insolvent or intended to defraud, defeat or delay a creditor.

For a transfer to an arm's-length party, the test is stricter. It can be voided only if it was made within one year before the initial bankruptcy event, the debtor was insolvent or made insolvent by the transfer, and the debtor intended to defraud, defeat or delay a creditor.

A family member or a trust where you are a beneficiary may raise that question, so it is worth getting advice.

Other ways a trust may not change the picture

Bankruptcy law is only one part of the picture. Other laws may also allow creditors to challenge transfers, and the details depend on your facts, so a lawyer can confirm what applies to you.

Ownership on paper also may not match ownership in substance. A bare trust is an arrangement where the trustee can reasonably be considered to act as agent for all the beneficiaries and has no significant powers or responsibilities. Likewise, Ontario includes in the estate value any property the deceased owned that was held in another person's name, and putting legal title in another name does not by itself remove a beneficially owned asset from Estate Administration Tax.

Questions that shape the answer

• When would the transfer happen compared with any bankruptcy, lawsuit or demand from a creditor?
• Is the person receiving the property someone you deal with at arm's length?
• Are you insolvent now, or would the transfer make you insolvent?
• Would you receive fair value in return, or would the transfer be at undervalue?
• Do you keep control or benefit from the property after the transfer?

There is no way to answer these in the abstract. Courts look at the facts, and a plan that seems safe may be open to challenge once a creditor starts asking questions.

What to do next

• List your debts, any claims made or threatened against you, and the date each arose.
• Gather records of any past transfers of property, including to family members or trusts.
• Do not move assets until you have spoken with a lawyer about the timing and the recipient.
• Ask whether a licensed insolvency professional should also be involved if bankruptcy is possible.
• Keep documents showing what, if anything, you received in return for any transfer.

Getting advice before a transfer is far better than trying to defend one afterward.

Frequently asked questions