You’re facing financial difficulties or worried about future creditor claims. Someone suggests transferring your property to a family member or spouse to protect it from creditors. Or maybe you’re considering transferring property and then mortgaging it to access equity while keeping it out of creditors’ reach.
Stop right there. What you’re contemplating might be fraudulent conveyance, and it’s illegal. Not only will it fail to protect your assets, but it can result in criminal charges, civil penalties, and complete loss of credibility with courts and creditors.
Let me explain what fraudulent conveyance is, why these schemes don’t work, and what you can do legally to protect assets and plan for financial difficulties.
What Fraudulent Conveyance Is
Fraudulent conveyance, also called fraudulent transfer, happens when you transfer property to someone else with the intent to put it beyond the reach of creditors.
Canadian law, through various provincial statutes and bankruptcy law, allows courts to reverse transfers made to defeat creditors. Courts can bring property back into your estate so creditors can access it.
The key is intent. Did you transfer property specifically to keep it from creditors? If yes, that’s fraudulent conveyance.
Examples of Fraudulent Conveyance
Common scenarios that constitute fraudulent conveyance:
Transferring your house to your spouse or adult children when you’re facing a lawsuit or financial difficulties.
Selling property to a family member for far less than it’s worth when you have significant debts.
Transferring business assets out of your name right before filing bankruptcy.
Putting property in someone else’s name and continuing to use it as your own.
Creating complex ownership structures designed to hide assets from creditors.
These schemes are obvious to courts and creditors. They don’t work and they make your situation worse.
The Look-Back Periods
Fraudulent conveyance laws have look-back periods during which transfers can be challenged and reversed.
Under bankruptcy law, transfers within one year before bankruptcy can be reversed if made to defeat creditors. Transfers to related parties can be challenged up to five years before bankruptcy.
Provincial fraudulent conveyance laws have different limitation periods, often allowing challenges of transfers made years earlier if fraudulent intent is shown.
This means transferring property years before anticipated financial problems doesn’t necessarily protect it. If you eventually file bankruptcy or face creditor claims, old transfers can still be reversed.
Transfers for Fair Value
A key distinction: transfers made for equivalent value in an arm’s length transaction usually aren’t fraudulent, even if you have debts.
Selling your property at fair market value to a third-party buyer who pays you fair price isn’t fraudulent conveyance, even if you’re in debt. You’re exchanging one asset (property) for another (cash).
But selling property to your brother for $100 when it’s worth $500,000 is obviously fraudulent. The lack of equivalent value signals intent to defeat creditors.
Intent vs Actual Effect
Courts look at both intent and effect. If you transferred property with intent to defeat creditors, it’s fraudulent even if it didn’t actually work.
If you transferred property for legitimate reasons but the effect was to put it beyond creditors’ reach, courts examine the totality of circumstances.
Multiple factors suggest fraudulent intent:
Transferring property when insolvent or heavily indebted.
Transferring to family members or close associates.
Continuing to use property after transferring it.
Receiving little or no consideration for the transfer.
Secrecy or concealment of the transfer.
Timing close to financial difficulties or known creditor claims.
The Presumption Against Related Parties
Transfers to spouses, children, and other related parties are viewed skeptically. There’s often a rebuttable presumption that such transfers are intended to defeat creditors when made during financial difficulties.
You can overcome this presumption with evidence of legitimate purposes and fair consideration. But the burden is on you to prove the transfer was legitimate.
Sham Trusts
Some people create trusts and transfer property into them, thinking this protects assets. But courts can look through sham trusts created to defeat creditors.
A trust created for legitimate estate planning or tax purposes years before financial problems is different from a trust created when creditors are circling.
Courts examine:
When the trust was created relative to financial difficulties.
Whether you retained effective control over trust property.
Whether the trust serves purposes beyond creditor protection.
Whether the trust was funded with assets you can afford to part with.
Recent trusts created when facing debt problems are likely to be found fraudulent.
Mortgages and Fraudulent Conveyance
Here’s a scheme people try: transfer property to a family member, then have the family member mortgage it and give you the money, thinking this keeps the property and equity from creditors.
This doesn’t work. The transfer is fraudulent conveyance. Courts will reverse the transfer, and the mortgage the family member took might be set aside too.
Even if the mortgage isn’t set aside, you’ve now helped a family member take on debt backed by property that will be taken back from them. You’ve made things worse for everyone.
After-Acquired Property in Bankruptcy
If you transfer property before bankruptcy and the court reverses it, the property comes back into your bankruptcy estate. Creditors can access it.
But there’s another issue: property you acquire after bankruptcy, through inheritance or gifts within a certain period, can also become property of your estate in some circumstances.
You can’t avoid creditors by having family transfer property back to you after bankruptcy. Anti-avoidance rules address these schemes.
Legitimate Asset Protection
There are legitimate ways to protect assets, but they need to be implemented long before financial problems arise:
Using corporate structures for business operations to limit personal liability.
Obtaining adequate insurance to protect against liability claims.
Estate planning that provides for your family while you’re solvent.
Holding property as tenants in common rather than joint tenants in some situations (though this is complex).
Establishing legitimate trusts for estate and tax planning.
The key is these structures must be established for legitimate purposes when you’re solvent, not as reactions to financial difficulties.
Timing Is Critical
Asset protection planning done years before problems arise, for legitimate reasons, generally works. Planning done when problems are looming or present generally fails and creates bigger problems.
If you’re concerned about future liability from your business or profession, structure things properly now while you’re solvent and have no current creditor issues.
Don’t wait until you’re being sued or facing bankruptcy. At that point, options are limited and trying to move assets is fraudulent.
Joint Ownership Issues
Adding a spouse to property title when you have no debts and no financial problems is usually fine, especially if you’re doing it for estate planning reasons.
Adding a spouse to title when you’re being sued or facing creditor claims looks like fraudulent conveyance. Courts can determine you retained a beneficial interest that creditors can access.
Joint ownership with your spouse doesn’t necessarily protect property from your creditors anyway. In many provinces, creditors can force sale of jointly owned property to access your share.
Homestead Exemptions
Some provinces provide homestead exemptions protecting a certain amount of home equity from creditors. These exemptions are small, typically $10,000 to $40,000.
Using exemptions you’re legally entitled to isn’t fraudulent. But trying to manipulate property ownership to increase exemptions or hide equity is.
Family Law Considerations
Transferring property to a spouse can create family law issues if you later separate. Property that was yours might now be considered family property subject to division.
You might think you’re protecting assets from business creditors but end up giving your spouse rights to property they wouldn’t have had.
Always consider how asset transfers affect family law rights and obligations.
Tax Consequences
Fraudulent conveyance aside, transferring property has tax consequences.
Transferring appreciated property usually triggers capital gains tax. You might have a huge tax bill for transferring property that you then can’t keep anyway because courts reverse the transfer.
Transferring property to family members might also trigger attribution rules where income or gains are attributed back to you for tax purposes.
Consult with accountants about tax consequences before any property transfers.
Creditor Remedies
When creditors discover fraudulent conveyance, they can:
Apply to court to reverse the transfer.
Seek judgment against the person who received the property if they knew or should have known it was fraudulent.
In bankruptcy, the trustee can reverse transfers and bring property into the estate.
Pursue criminal charges in egregious cases.
You’re not just risking having the transfer reversed. You might face personal liability and legal consequences.
Impact on Family Members
When you fraudulently transfer property to family members:
They might be sued by your creditors.
Property they thought they owned will be taken from them.
They might face legal costs defending against creditor claims.
Family relationships are damaged by the stress and conflict.
Don’t drag family into your financial problems by involving them in fraudulent schemes.
The Better Approach
If you’re facing financial difficulties:
Consult with a lawyer experienced in insolvency and restructuring.
Consider options like proposals or negotiated settlements with creditors.
Be honest with creditors about your situation.
Use legitimate legal processes like bankruptcy if necessary.
These approaches actually work and keep you within the law.
Fraudulent conveyance schemes don’t work, damage your credibility, and often make situations worse.
Mortgaging to Pay Creditors
A related question: if you mortgage property and use the proceeds to pay creditors, is that fraudulent?
Usually no. Borrowing against your property and using the money to pay legitimate debts is fine. You’re simply choosing which creditors to pay.
But if you mortgage property and transfer the proceeds to family members to hide the money from other creditors, that could be fraudulent.
Preferential Payments
Different from fraudulent conveyance but related: preferential payments happen when you pay some creditors in full while leaving others unpaid, shortly before bankruptcy.
Bankruptcy trustees can reverse preferential payments made within three months before bankruptcy (twelve months for related parties).
This prevents you from paying family members or favored creditors while stiffing others right before going bankrupt.
Statutory Trusts and Deemed Trusts
Some debts, like unremitted employee source deductions or HST collected but not remitted, create statutory trusts or deemed trusts. This money is deemed to be held in trust for the government.
Transferring property bought with money that should have been held in trust can be attacked on this basis, separate from fraudulent conveyance.
If you owe CRA for unremitted trust amounts, transferring assets won’t protect them.
U.S. Fraudulent Conveyance Laws
If you have U.S. connections or U.S. creditors, understand that U.S. fraudulent conveyance laws are similar but not identical to Canadian laws.
U.S. law includes the Uniform Fraudulent Transfer Act (or its replacement, the Uniform Voidable Transactions Act) which allows creditors to reverse fraudulent transfers.
Cross-border fraudulent conveyance issues are complex. Don’t assume transferring property across borders provides protection.
Professional Advice
If you’re considering transferring property for any reason, especially if you have financial difficulties or potential creditor issues:
Consult with a lawyer who specializes in insolvency and creditor rights.
Be completely honest about your situation and intentions.
Get written advice about whether the planned transfer is legal and effective.
Don’t proceed without professional advice if there’s any creditor issue.
Lawyers can help you understand what you legally can do versus what will be considered fraudulent.
What Courts Consider
When deciding whether a transfer was fraudulent, courts consider:
Your financial condition at the time of transfer.
Whether you received equivalent value.
Your relationship with the transferee.
Whether you retained use or benefit of the property.
Timing relative to creditor claims or financial problems.
Whether you have other assets to pay debts.
Whether the transfer was disclosed or concealed.
Statements you made about your intentions.
The overall circumstances and common sense.
Courts aren’t easily fooled by schemes to defeat creditors.
The Ethical Consideration
Beyond the legal issues, there’s an ethical consideration. You incurred debts and obligations. Trying to hide assets to avoid paying what you owe is fundamentally dishonest.
People fall into financial difficulties for many reasons, not all their fault. But trying to defeat legitimate creditor claims through fraud compounds the problem.
The honest approach is to acknowledge financial difficulties and work through them legitimately, even if that means bankruptcy.
Life After Fraudulent Conveyance
If you’ve already made a transfer that might be fraudulent:
Consult a lawyer immediately.
Consider reversing the transfer voluntarily before creditors or a trustee forces it.
Disclose the transfer if filing bankruptcy or a proposal.
Don’t compound the problem by hiding it.
Voluntary disclosure and remediation is better than being caught in fraudulent conveyance.
The Bottom Line
Fraudulent conveyance schemes don’t work. They’re illegal, easily detected, and make your situation worse.
If you’re facing financial difficulties, use legitimate legal processes. If you want asset protection, implement proper structures years in advance for legitimate purposes.
Don’t try to hide assets from creditors. Don’t drag family members into fraudulent schemes. Don’t assume you’re smarter than courts and trustees who’ve seen these schemes thousands of times.
Get professional legal advice and do things properly.
At Creek Road Financial Inc., we finance commercial and agricultural properties for legitimate business purposes. We don’t participate in schemes designed to defeat creditors or hide assets.
If you have legitimate financing needs, we’re here to help. If you’re trying to hide assets or defeat creditors, we’re not the right lender for you, and we’ll decline your application.
We believe in honest business dealings and legitimate financial structures. We work with professionals who share these values.
Contact Creek Road Financial Inc. today if you have legitimate commercial or agricultural financing needs. We’ll treat you fairly and help you achieve your goals within proper legal and ethical boundaries.