It's Your Money  

It pays to be segregated

A recent judgment from the Tax Court of Canada reaffirmed the strong case to be made for creditor proofing your investments with segregated funds.

Earlier this year, the Canada Revenue Agency (CRA) attempted to seize the death benefit of a segregated fund account that was paid to the two daughters of an individual who had passed away.

The two daughters were named beneficiaries of their father’s account that was invested entirely in segregated funds.

While this account was used solely for investment purposes, being a segregated fund meant that it falls under the Insurance Act of Canada and not the Bank Act. Therefore, when it comes to taxation and estate matters, it is treated as a life insurance policy for tax purposes.

In its submissions, the CRA relied upon subsection 160 of the Income Tax Act which states, among other things, that when someone transfers property to a non-arm’s length person (such as a child) without proper consideration, the recipient may be on the hook for income taxes owing by the transferor.

When assets pass outside the estate of a deceased person, the CRA will often use section 160 to attempt to pursue the funds to pay taxes otherwise owing.

However, in this case, the investment assets were held in segregated funds and, as mentioned above, they are treated in the same manner as the proceeds from a life insurance policy.

With that in mind, the court found that the money paid out to the two daughters constituted life insurance proceeds payable to named beneficiaries and they did not form part of the father’s estate nor were they subject to pursuit through the section 160 clause.

The decision proved as a great reminder of the benefits of segregated funds and helped reaffirm the legal status of segregated funds and the features that they possess.

In addition to providing creditor protection (whether from the CRA or an outside party), they also bypass the estate as a whole which can greatly reduce estate and probate costs.

For non-registered investments, they can also provide some additional tax savings and reduced accounting costs as well.

Like most other investment options, segregated funds can be purchased in a wide variety of options and properly understanding the type of investments and fees involved is important.

While some segregated funds carry substantially higher fees, others can have the exact same fee structure as comparable mutual funds, which means you get the added benefits of creditor protection and tax savings for free.

Make sure you speak to a qualified financial advisor before investing in something new and don’t be afraid to ask a lot of questions and do your research.          


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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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