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Transferring Property – on the eve of insolvency

October 24, 2022

Transferring property can cause problems for people facing insolvency.  As Licensed Insolvency Trustees (“LITs”), we are often asked if it makes sense to transfer ownership in real property to a spouse, child, or other family member to protect the property from creditors.  The short answer is categorically no!

Your Estate:

All of the property that you own, regardless of its nature, constitutes your “estate”.  Part of your LIT’s job is to make enquiry into the value of your assets to see what might be available, from your estate, to make some form of restitution to your creditors.

Consequences:

If you know you are about to file a bankruptcy, or a proposal, you must be careful about property transfers done solely to protect your interests in the property.  A common theme seems to be transferring an interest in a car or real property.

Transfers of property can have serious repercussions and may be attacked by either the LIT a creditor or lawyer acting for himself or another party and of course the CRA.  If you transfer property to your spouse or another related party the CRA can reverse the transaction, under Section 160 of the Income Tax Act, and have the property revested in your name, they may pursue your spouse for the amount of debt, plus interest and penalties, that was owing at the time of the transfer.

Section 95 – Preferences:

Payments or transfers made to an arms length party, that have the effect of giving that creditor preferential treatment, within three months of filing an insolvency proceeding, may be reviewed, and reversed.  Similarly, if the other party is non-arms length, the time for review is one year.  In these cases, if the transfer took place within the stated timeframes there is a presumption that the transaction is a preference, and it becomes reversable.

Section 96 – Transfer at Undervalue:

When property is transferred for little or no consideration (payment) it is called a “transfer at undervalue”.  A transfer at undervalue can be set aside by the court if the recipient party to the transfer was dealing at arms length with the debtor, and if the transfer took place within one year of the date of the initial insolvency event (filing).  If the transfer was to a spouse or other non-arms length party the transfer can be overturned if it occurred within five years of the initial insolvency event.

Scenario:

Bob and Sally are married, they own a house together as joint tenants.  Bob had a small business but was forced to close during the lockdowns, he has a lot of debt including tax debt, CEBA loans, lines of credit and credit cards.  Bob is fearful of losing the family home if he goes bankrupt, so he met with his lawyer and transferred his interest in the property to Sally.  It only cost him $2,000 and Bob feels it was worth it if it protects the family home.

Bob meets with an LIT and files a bankruptcy to resolve his debt issues, he did not tell the LIT about his actions.  A creditor calls and alerts the LIT to Bob’s transfer and provides a copy of the deed transfer.  As a result, the LIT must act, which may include asking the Superintendent of Bankruptcy to conduct an examination of the Bankrupt under oath, ultimately applying to court to have the transaction reversed and the Bankrupt’s name restored on the deed title.

Once the Bankrupt’s name is restored to the title the LIT can sell the Bankrupt’s interest in the property in one of a variety of ways; the LIT could apply to court for an order of participation and sale, the LIT could sell the Bankrupt’s interest to the Bankrupt or the Bankrupt’s spouse, or to another third party.

The bottom line is that Bob is out $2,000 and will also end up losing his interest in the property in spite of his actions.  The best solution is to disclose all of your details to the LIT, that way you can get the best advice.  If there a way of legally preserving your assets the LIT will advise you accordingly.