Trusts – Asset Protection & Bankruptcy Law

By Andrew Rogerson LLB (Hons) TEP

Historically, trusts evolved as a means of protecting assets. This was achieved by having another trusted person hold legal title of assets on behalf of (or in trust for) another. Tax considerations aside, asset protection is still by far and away the most important reason for establishing an offshore trust. Persons of substantial means who are, or may be, at risk in the future from unwelcome litigation should give consideration to establishing a trust. Once assets are transferred into the name of the trustees then, after a prescribed period, creditors are no longer able to execute against such assets. This is because the settlor has divested himself of legal ownership. Asset protection may be obtained by establishing trusts both in Canada and offshore. The advantage of establishing a trust in one of the offshore finance centres is their prevalent debtor friendly regimes.

Putting assets out of harm’s way can help to discourage frivolous lawsuits and to encourage reasonable settlement offers from more legitimate complainants

Unless skill is utilised in establishing asset protection structures, they may be at risk of being set aside under the following legislation: Bankruptcy and Insolvency Act (1985) (“BIA”); Fraudulent Conveyances Act (1990(“FCA”) and Assignments and Preferences Act (1990 (“APA”).

Where the debtor is not bankrupt, creditors may attack fraudulent conveyances pursuant to FCA and unjust preferences pursuant to APA. Where the debtor is bankrupt, the trustee may use BIA (ss91-3) as well as FCA and ABA to attack fraudulent conveyances as well as BIA (ss94-6) to attack unjust preferences. A brief traverse of the relevant provisions of these Acts appears below.


Section 91(1) provides that any settlement of property within one year of the settlor being adjudged bankrupt falls into the bankrupt’s estate. This is regardless of his solvency at the time. Secondly, s91(2) voids any such transaction within 5 years of bankruptcy, if the trustee can prove that settlor was unable to pay his debts without the aid of the property comprised in the settlement.

Section 95(1) provides that any preference granted to an arms length creditor within 3 months of bankruptcy shall be deemed fraudulent and shall be void against the trustee. Section 96 extends this period to 12 months in respect of a preference granted to a person related to the bankrupt.


This renders voidable any conveyance made with intent to defeat, hinder, delay or defraud creditors or others. The intent is normally inferred from circumstances known as ‘badges of fraud’. The list is not exhaustive but includes conveyances that are:  secret, made in the face of a law suit, made with power to revoke, non-arms-length transactions, deeds containing false statements, and those where the transferor retained possession and used the goods as his own. The provisions do not render voidable conveyances to bona fide purchasers without notice. In Ontario, the Limitation Period is normally two years for FCA claims.  It is possibly ten years for conveyances of real property that are covered by the Real Property Limitations Act, but the law is somewhat unsettled as to the nature of the property covered by that Act.[1]


This renders voidable transfers by the debtor, when the debtor is in insolvent circumstances, is unable to pay his debts in full or is on the eve of bankruptcy and that are made with the intent to give the transferee an unjust preference over other creditors.  Again, there are exceptions for bona fide transactions. The Limitation Period is two years, but as with all limitation periods, this can be substantially extended if the plaintiff can argue that the claim was not discoverable earlier.

The way to avoid asset protection settlements being set aside, is to plan well in advance and structure them for purposes unconnected to asset protection. This is so, even if asset protection is an inevitable and beneficial consequence of the transaction. The settlement should be made at a time when the settlor is clearly not insolvent, or on the eve of insolvency. See the article elsewhere on this website on the case of Ramgotra.

[1] Wilfert v McCallum, 2017 ONSC 3853.