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Exempt Property

November 12, 2019

Exempt property is simply stuff that you own that your creditors, or bankruptcy trustee, cannot seize and sell for the recovery of monies owed to pay debts.  The Execution Act is Ontario’s basic legislation setting rules that govern what and can’t be seized and sold.

Some property is exempt under other statutes such as the Pension Benefits Act or the Insurance Act, but the Execution Act is the go-to legislation for most personal property, including real property, vehicles, tools of the trade and household effects. 

The purpose of this discussion is not to provide conclusive legal answers but rather to present some of the challenges in interpretation, which is, as with all laws, subject to the findings of the various courts of law.  Having said that, often times court decisions are inconvenient or unpalatable and are ignored unless challenged.

The courts found that a licensed insolvency trustee can disclaim an interest in real property at the beginning of the administration but doing so does not disclaim an interest in after acquired property.  Sounds complicated, huh? 

In this case, the bankrupt owned a house – at the beginning of the administration the trustee determined there was no equity and decided not to pursue settlement.  However, at the end of the administration the main creditor, the CRA, objected and, successfully, argued that the house had increased in value during the administration and pled to the court that the trustee had a duty to realize on the “after acquired” property

The court agree, with the CRA’s position, that although the trustee may have disclaimed an interest in the property, as it was at the beginning of the administration, it could not simply disclaim an interest in “after acquired property” until it had been acquired.  In this instance the property was acquired by an uptick in the real estate market.  The bankrupt was ordered to make settlement for the increase in value during the administration.

The exemptions and how they are applied:

The values of the exemptions are as follows in this excerpt from Ontario Regulation 657/05:

Exemptions, prescribed amounts

1. (1) For the purposes of subsections 2 (1) and (1.1) of the Act, the following amounts are prescribed:

1. For the chattels described in paragraph 2 of subsection 2 (1) of the Act (household furnishings and appliances), $13,150.

2. For the chattels described in paragraph 3 of subsection 2 (1) of the Act (tools and other personal property used to earn income),

i. in the case of a debtor engaged solely in the tillage of the soil or farming, $29,100 for livestock, fowl, bees, books, tools and implements and other chattels ordinarily used by the debtor in the debtor’s occupation, or

ii. in any other case, $11,300.

3. For the chattels described in paragraph 4 of subsection 2 (1) of the Act (motor vehicle), $6,600. O. Reg. 289/15, s. 1.

(2) For the purposes of subsections 2 (2) and (3) of the Act (principal residence), the prescribed amount is $10,000. O. Reg. 289/15, s.

Those are the values that can be claimed but who can claim the exemptions and how are they applied:

Claiming the exemption:

Exemption claim

3. (1) A debtor may file an exemption claim with the sheriff, in a form approved by the Attorney General, within five business days of being served with a notice of exemption under section 2. O. Reg. 289/15, s. 1.

(2) Unless ordered to do so by the court, the sheriff shall not accept an exemption claim that is filed after the period of five business days has elapsed. O. Reg. 289/15, s. 1.

(3) If an exemption claim is filed with the sheriff, he or she shall determine if the chattels seized are eligible for exemption from seizure under section 2 of the Act. O. Reg. 289/15, s. 1.

Who claims the exemption:

Section 2. Of the Execution Act sets out details of what the exemptions are and what happens to them in the case of a sale of assets:

Exemptions

(1) The following personal property of a debtor that is not a corporation is, at the option of the debtor, exempt from forced seizure or sale by any process at law or in equity:

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

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

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.

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

5. Personal property prescribed by the regulations that is of a value not exceeding the prescribed amount.  2010, c. 16, Sched. 2, s. 3 (6).

Personal property exceeding exempted value

(1.1) Despite paragraphs 2, 3, 4 and 5 of subsection (1), if the value of the personal property exceeds the prescribed amount for the property, the property is subject to seizure and sale under this Act.  2010, c. 16, Sched. 2, s. 3 (6).

Principal residence of debtor

(2) The principal residence of a debtor is exempt from forced seizure or sale by any process at law or in equity if the value of the debtor’s equity in the principal residence does not exceed the prescribed amount.  2010, c. 16, Sched. 2, s. 3 (5).

Principal residence exceeding exempted value

(3) Despite subsection (2), if the value of the debtor’s principal residence exceeds the prescribed amount, the principal residence is subject to seizure and sale under this Act.  2010, c. 16, Sched. 2, s. 3 (5).

Medical devices, etc.

(4) Aids and devices owned by a debtor that are required by the debtor or the debtor’s dependants to assist with a disability or a medical or dental condition are exempt from forced seizure or sale by any process at law or in equity.  2010, c. 16, Sched. 2, s. 3 (5).

The exemption, by the reading of the Execution Act belongs to “a debtor” the exemption doesn’t appear to belong to “an asset”.  In the case of a motor vehicle (and I chose this asset because this is not how most trustees view the application of the exemption) a debtor may claim an exemption on one vehicle with a value of up to the prescribed value $6,600.  If the debtor owns two vehicles, she may only apply the exemption to one of them.

If the debtor applies the exemption to a vehicle worth say $10,000, he may be required to make settlement to the trustee for the value, $3,600, that exceeds the emption.  In the alternative the trustee may seize the vehicle and sell it but will be required to reimburse the bankrupt for the value of the exemption.

The Act is silent on the issue of dual ownership, so if a husband and wife are both registered owners of the vehicle and both “debtors” they can each claim “a debtor’s” exemption on their asset – in effect double dipping.  I have been unable to find a case to the contrary, and logically the exemption is the debtor’s, by the language of the Act, and although the amount of the exemption varies based on the type of the asset the exemption is not the asset’s exemption.

Similarly, the Debtor may claim an exemption for up to the prescribed amount, $10,000, for their equity in real property.  Again, let’s suppose there are two debtors and they are joint tenants, it would appear that, as with the previous example, they may each claim their exemption.  If the value of equity in the property does not exceed the value of the exemption the property cannot be seized and sold.  However, if the value of equity exceeds the value of the exemption the property can be sold.

But what is to become of the debtor’s share equity to which the exemption applied?  The Act specifically states that:

Sale and refund of amount of exemption, household furnishings, etc.

3 (1) If an exemption is claimed for household furnishings or an appliance that has a sale value in excess of the sum of the amount prescribed for the purpose of paragraph 2 of subsection 2 (1) and the costs of the sale, and other personal property is not available for seizure and sale, the furnishings or appliance are subject to seizure and sale under a writ of execution and the prescribed amount referred to in that paragraph shall be paid to the debtor out of the proceeds of the sale. 2010, c. 16, Sched. 2, s. 3 (7).

Same, motor vehicle

(2) If an exemption is claimed for a motor vehicle that has a sale value in excess of the sum of the amount prescribed for the purpose of paragraph 4 of subsection 2 (1) and the costs of the sale, the motor vehicle is subject to seizure and sale under a writ of execution and the prescribed amount referred to in that paragraph shall be paid to the debtor out of the proceeds of the sale. 2010, c. 16, Sched. 2, s. 3 (7).

Election to receive proceeds from sale of tools

(3) A debtor may, in lieu of claiming an exemption for tools or other personal property referred to in paragraph 3 of subsection 2 (1), elect to receive the proceeds from the sale of the tools or property up to the prescribed amount referred to in that paragraph. 2010, c. 16, Sched. 2, s. 3 (7).

In other words, if the value of the assets listed above exceeds the exempt value the property may be sold, and the exemption(s) amount(s) refunded to the debtor(s).  But what of real property?  The Act is silent on that point but logically following the treatment of the exemption in all other cases the debtor(s) would still be entitled to claim the exemption(s) due.  There have been few attempts, that we are aware of, by the courts to interpret the disposition of property in respect of exemptions but in time some will surely emerge.