Exempt Property – Simplified

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August 19, 2021

If you live in Ontario and are considering filing a Bankruptcy or a Consumer Proposal, it is important to know how your property will be treated.  Property, generally, is governed by Provincial laws, while the Bankruptcy & Insolvency Act is Federal and concerned with the overall administration of insolvency proceedings – setting down rules, directives, and regulations for Licensed Insolvency Trustee’s to follow.

The spirit of insolvency law is to allow an unfortunate debtor to find relief from the burden of debt while allowing them to be productive members of society.  If a person entrenched in debt had to turn over everything they owned, to be sold on behalf of their creditors, it would make rehabilitation and reintegration into society extremely difficult, if not impossible.  Exemptions make it clear what property the debtor can keep without being concerned that creditors can take it away.

We discussed this important topic in an earlier blog but some people found it a little too technical, so here is a simplified presentation.  To start with we will turn to Section 2. of the Execution Act (Ontario) to review the basic exemptions.  From which we understand that corporations are not entitled to claim exemptions (should they go bankrupt) only individual people can claim exemptions.

The five basic exemptions include:

1.  Necessary clothing of the debtor and debtor’s dependents.

Clearly it would be difficult to function without having clothing.  There is no longer a prescribed (limiting) value to clothing, but the wording of the Act uses the term “necessary” so one might presume that if the debtor had a lot of expensive, and unnecessary items, the may, by court order be subject to sale.  But for the average person’s wardrobe there would be no concerns in determining the exemption.

2.  Household furnishings and appliances that are of a value not exceeding the prescribed amount.

Household furnishings do not hold their value very well, and the trustee is concerned with the “fair-market value” at the time of filing the insolvency proceeding, not the insured replacement value or the initial purchase price.  Currently the exempt value is $14,180.00 – in other words if the yard-sale value of your furnishings and appliances is less than that value, they are yours to keep. 

3.  Tools and other personal property of the debtor, not exceeding the prescribed amount in value, that are used by the debtor to earn income from the debtor’s occupation.

It is clear what is meant by “tools”, particularly for tradespeople, but the definition of personal property is far broader.  However, whatever the property is, it must meet three tests to be exempt from actions by creditors or the trustee.  The first test is that it is property belonging to the (individual) debtor, the second test is that it must fall under the prescribed value, $14,405.00, and the final test is that the property must be used by the debtor earn a living.

4.  One motor vehicle that is of a value not exceeding the prescribed amount.

A debtor will need to be able to get around to function as a member of society, so some mode of transportation is important, if not essential.  An individual debtor can claim one motorized vehicle to be exempt from seizure as long as the fair market value of the vehicle falls below the prescribed value, $7,117.00.

5.  Personal property prescribed by the regulations that is of a value not exceeding the prescribed amount. 

This section is a little vague and appears to speak to other forms of personal property that may be exempt from seizure and may have prescribed values – such as medical devices, which have no prescribed value for exemption.

In addition to the four basic categories noted each debtor, who is a homeowner, can also claim an exemption of up to $10,783.00 of equity in their principal residence.  Since the exemption is given to “a debtor” if there are two, or more, debtors, as in the case of a joint insolvency filing, then each debtor may claim their respective exemption.

If property that is subject to an exemption is sold, the debtor is entitled to be paid the value of their exemption out of the proceeds.  If the value of a debtor’s property to which an exemption applies, exceeds the value of the exemption the trustee, in a bankruptcy, may ask the debtor to make a settlement for the value that exceeds the value of the exemption.

For more information about how these exemptions are applied in an insolvency proceeding give us a call at: 519-646-2222