My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Thursday, February 17, 2011

Creditor Proofing Corporate Funds and Do You Eat to Live or Live to Eat?

Creditor Proofing Corporate Funds

Most owner-managers of private corporations are concerned about creditors potentially gaining access to their corporation’s cash and investments through real or frivolous lawsuits. The simplest method to protect surplus corporate funds is through the use of a holding company. 

The Income Tax Act permits an owner-manager to transfer the shares of their operating company (“Opco”) to a new holding company (“Holdco”) without incurring any tax.  Following this type of transfer, the owner-manager would own the shares of Holdco, which, in turn, would own the shares of Opco.  With that type of ownership structure in place, Opco and Holdco would be what is known as connected corporations. 

When corporations are connected, they can typically pay their retained earnings (excess cash and other assets net of liabilities) of the corporation , as a dividend from Opco to Holdco on a tax-free basis.  This has the effect of removing excess cash and other assets from Opco so that it would no longer be susceptible to future creditors’ claims. This can be repeated in the future as Opco accumulates additional retained earnings.

If Opco requires ongoing cash and working capital, the funds received by Holdco could be loaned back to Opco on a secured basis provided a General Security Agreement (“GSA”) is registered by a lawyer. It is important to note the dividend first paid by Opco must be physically paid by way of a cash or other asset transfer and then physically loaned back to Opco by Holdco to ensure that the GSA is valid. 

Opco’s banker should always be advised in advance that Opco is undertaking a creditor proofing transaction.  Where a bank loan or other debt is present, the GSA will secure the loan but Holdco generally would still rank behind the bank or other secured creditors as far as payment is concerned.

The structure noted above is simple and effective. However, where the owner-manager or other family members have access to the $750,000 capital gains exemption and may potentially sell shares of the company in the future, this type of creditor proofing transaction may not be appropriate and some variation may be required. Depending upon your family and personal financial situation, it may be possible to creditor proof Opco, maintain potential access to the capital gains exemption and provide a means to income split with family members in one fell swoop by utilizing a “freeze” transaction.

This “freeze” transaction will be discussed in my blog in two weeks.

Do You Eat to Live or Live to Eat 

I love good restaurants, but I also love burger shacks, Middle Eastern shawarma and falafel restaurants and sausages from street vendors.

I list among my favorite things to eat steaks, corned beef and hot dogs in the meat area, shrimp, crab, sushi and lobster in the fish area, fries and potato chips in the fried area and ice cream and crème brulee in the dessert arena.

The above is a who’s who of the worst foods to eat cholesterol-wise (some say shellfish are not that bad for cholesterol) so in retrospect, I guess I shouldn’t have been surprised when my latest medical revealed my cholesterol had gone up. Poor food choices in conjunction with a lack of exercise due to a couple of back to back hockey injuries, finally took its toll. My wife, a very healthy eater promptly brought me into the fold and suddenly things I never heard of, or conceived of eating, like bran buds, flax seed and quiona, replaced donuts and fries. I now realize how much I am a live-to-eat person.

On the positive side, I have discovered that I actually like some foods that I would not normally look at, but in general my current diet is by no means a culinary delight. Hopefully I can get my cholesterol down and I can go back to a more balanced diet while eating smarter, but boy do I miss my bad foods.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Hi Mark,

    You mentioned "~must be physically paid ~physically loaned back".
    Does it mean that I have to issue a check? Can I just use Due to shareholder account?

    Btw, just voted for you.

    1. Hi Anon,

      Voted? For mayor to Toronto :)

      I prefer a cheque if possible. If that is not possible, then speak to your accountant and lawyers and they will probably be good with creating legal documents to reflect the transaction instead of a physical transfer.

  2. Mark - great blog. On this issue, how do professional corporations (I'm a lawyer) creditor proof themselves? The med docs are allowed to have family members be shareholders of their professional corp, but other professions require that the actual professional be the sole shareholder. I have read about IPPs being one way of creditor proofing, but what if you already have a sizable RRSP (i.e. is IPP worth it, just to creditor proof, for a 45 yr old who enjoys / intends on working - I read your blog on IPPs). Does a Holdco strategy still work for my wife/kids when I am to be the sole owner of my professional corp?

    1. Hi Anon:

      It has been my experience, that clients with large RRSPs have little appetite for IPPS, while those whose RRSPs that have taken a hit or are small are most likely to consider an IPP. I think the reality is IPPs are just more complex and if a RRSP is doing well and offers creditor proofing anyways, people do not wish to complicate their lives.

      Creditor proofing is problematic for a PC for a lawyer. I have the same issue as an accountant. It is my understanding a Holdco strategy will not work for lawyers based on the Law Society rules. You may want to discuss with your accountant whether the use of a management company or something similar would benefit you or whether you have a source of income that can be carved out of your PC as non professional.

  3. Hi Mark,
    Great blog! I have a Hold co and an Op Co. Op Co does business consulting work. So there are no significant physical assets (like machinery). If Hold Co loans money to Op Co, how can this loan be secured by Hold Co? My perception is that some physical asset needs to be pledged to do a GSA. Thanks for your help on this.

    1. Hi Russell

      This is legal advice so you need to speak to your lawyer. However, if you have retained earnings to creditor proof, I would think you must have assets in excess of liabilities and therefore assets to secure?

  4. Hi Mark, thanks for the prompt reply! Yes, the Op co has assets in the form of cash in bank and accounts receivable, not physical inventory. Is it possible to secure the loan from Hold Co by pledging Op Co's cash and AR? Thanks!

    1. You would have to ask your lawyer, I am not 100% sure, so dont want to provide a definitive answer.

  5. Hi Mark—a lot of useful information on this blog—great job!

    Can a holdco be issued non-voting shares of an opco to preserve the capital gains exemption? In this scenario, the opco's voting shares would still be held by an individual, not the holdco. Is the holdco/opco relationship, as defined by the CRA, maintained in this type of setup? Are there any consequences you foresee of setting up this way?


    1. Hi Anon

      This is a complex transaction, you need to discuss with your accountant. However, typically non-voting shares would not be used to achieve your goal.