Canada: Asset Sheltering Basics For Business Owners

Last Updated: July 5 2017
Article by Gehlen Dabbs

The fruits of a business owner's lifetime of hard work can vanish almost instantly with the insolvency of a company. Unfortunately, in the heady, frantic days of business startup, many owners may be too focused on success to think about protecting themselves and their assets from the possibility of failure.

Asset sheltering strategies are designed to insulate entrepreneurs from the worst impacts of a business failure. Those strategies have the best effect if implemented at the start of the business venture as opposed to when a company is teetering on the brink of failure. In some cases, attempting to shelter or protect assets when the business is insolvent or near insolvency may be legally prohibited. Accordingly, early planning may make the difference in protecting the entrepreneur's investment from some creditors.


The business owner has some basic decisions to make when starting the business. While businesses may be operated as a sole proprietorship, often the first step to protect the owner is to incorporate the business and operate it through a company. Many benefits can flow from this simple step. There can be tax advantages due to lower tax rates for some companies and through strategic remuneration of shareholders by a combination of income and dividends. The advice of business and tax specialists at the time of the formation of the company will be important.

Once incorporated, the company will be the primary obligant in respect of any claims arising from the operation of the business. The owner will not be liable for most obligations of the company, except for example, claims that arise due to the owner's personal negligence or wrongdoing, or specific claims that might be made against the owner as a director of the company for collected taxes such as GST and for employee source deductions (for example, Canada Pension, employment insurance and the employee's income taxes).

Depending on the nature of the business, additional creditor protection options can be considered. If there are distinct divisions or business operations, having separate companies for each division may be appropriate. In such case, the failure of one division might not affect other divisions.

If there is land and, or, significant equipment that is to be used in the business, those valuable assets can be acquired by a holding company which can then lease the assets to the operating company. If there is a failure of the operating business, the valuable assets in the holding company can be protected from unsecured creditors of the failed company, although lenders to the business may require security from both companies.

It is important to properly document both the arrangements and the accounting between the various companies and maintain the inter-company payments. Failure to do so may result in a successful company having financial obligations to a company that failed, defeating the asset protection strategies that were originally implemented.

Security to the Owner

A second initial step is for the business owner to take security over the assets of the company or companies for the owner's loans. Care must be taken to document each loan and its terms before it is made; but when properly done, the business owner who has advanced funds and taken security for such advances will generally have priority over the claims of unsecured creditors. It is important that the advances be characterized as loans and not equity or capital investments so as to minimize the possibility of the application of certain subordination principles in the event of a bankruptcy.

While initially the owner may have priority in respect of his or her security, it should be recognized that other lenders, such as financial institutions, may also want security from the company. If so, these other lenders will usually demand that the owner give priority to the lender's security. In addition, certain types of government claims may take priority over the owner's security (as well as the security of other secured creditors of the company). Accordingly, while having security is not a guarantee that the owner will recover on his or her loans; it can give the owner the opportunity to recover ahead of unsecured creditors.

Supporting company debt

Business owners should avoid becoming an obligant in respect of the company's debts. This may mean refusing to co-signing on leases with the company, refusing to give personal guarantees, and making sure that the company complies with obligations where the director/owner may become personally liable. That is often easier said than done. Financial institutions will generally want personal guarantees as may other creditors of the company. The owner should carefully weigh the effect of becoming personally liable for any company debt.

If the owner cannot avoid becoming personally liable for some of the company debts, he or she should take care to not personally accumulate assets from which those debts might be recovered. While that may be easy going forward, the assets in the hands of the owner at the commencement of the business may be available to satisfy such debts. Even though the business owner may be tempted to transfer property to a spouse, children or even a trust to put current held assets outside the reach of creditors, such transfer may be subject to reversal by the court if that is the sole reason for the transfer. However, transfers done for reasonable value or to achieve other legitimate goals, such as estate planning, may successfully survive a court challenge. Legal advice prior to making a transfer may avoid or limit problems in the future should creditors of the owner come to collect.

An experienced insolvency lawyer, together with tax and other advisors, can provide options and direction for business owners who seek techniques to shelter assets from creditors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions