ST THOMAS, ON--(Marketwired - September 16, 2016) - According to John Adamson of Adamson & Associates Inc. (www.adamsontrustee.com), Ontario's Homestead Exemption provides little if any protection in Bankruptcy. Adamson, a Licensed Insolvency Trustee, Accountant (CMA), Chartered Insolvency and Restructuring Practitioner (CIRP), explains how the Ontario government's new exemptions to the Executions Act has created a watered-down version of the generous homestead exemptions offered in other provinces:
"When a person files bankruptcy their property vests in the trustee for the benefit of the bankrupt's creditors. This means that all of the bankrupt's property passes to the trustee and in theory, the trustee realizes (sells) the property for the benefit of the creditors. However, each province has exemptions which set out certain assets that can't be seized as they are considered to be exempt assets. The exact section of the Federal Bankruptcy & Insolvency Act, which deals with what property vests in the Licensed Insolvency Trustee (formerly called a Trustee in Bankruptcy)
Accordingly, Section 67(1) (b) of the Bankruptcy & Insolvency Act states that if the property is exempt from seizure under provincial laws, it will be exempt from seizure by the trustee for the benefit of the creditors. This leads to provincial differences regarding what property a person in bankruptcy can keep while in bankruptcy. In Ontario, there are provincial statutes that exempt things like the cash surrender value of life insurance policies (in certain situations), and exempts a person's pension; then there are court cases that have created exemptions, such as proceeds received for pain and suffering awards from an accident. But the common exemptions that are most widely relied upon are those set out in the Executions Act, the Pension Benefits Act, and the Insurance Act. These exemptions include things like:
- Personal effects ~ amount waived for family effects per the Executions Act
- Household Furniture ~ up to $11,300.00 exempt per the Executions Act
- Motor Vehicle ~ up to $6,600.00 exempt per the Executions Act
- RRSP ~ not locked in (except contributions made in the 12 months prior to the date of bankruptcy) exempt per the Executions Act
- RRSP ~ locked in ~ exempt per the Pension Benefit Act
- Pension ~ exempt per the Pension Benefit Act
- Life Insurance ~ exempt per the Insurance Act (if beneficiary is the spouse, child, grandchild or same sex partner)
- House ~ principal residence ~ equity ($10,000) exempt per the Executions Act
Prior to December 1, 2015, there was no exemption for the equity in a person's home. Although there was no exemption protecting the equity in a person's home, many people still filed bankruptcy and kept their homes. This is because Section 84.2(1) states: Certain Rights Limited - No person may terminate or amend or claim an accelerated payment or forfeiture of the term under any agreement, including a security agreement, with a bankrupt individual by reason only of the individual's bankruptcy or insolvency. So, if the payments on the mortgage are up to date, the lender cannot call the loan merely because the person became bankrupt. However, if there is equity in the property, (the difference between the value of the house and the amount owing on the mortgage) the equity would vest in the trustee (pass to the trustee) and the homeowner would have to settle for the equity. For example, if the person had $20,000 worth of equity, they would not be granted a discharge (released) from bankruptcy until their equity had been settled for. This would often be achieved by a person making monthly payments over a given period of time. Generally, the larger the amount of equity, the more of an issue it is for the person with the financial challenge. However, most people with significant equity usually opt for a proposal and restructure their debts in order to avoid bankruptcy.
On December 1, 2015, the Ontario Government introduced a new exemption to the Executions Act, which applies to home equity in a principal residence. There has been much speculation and confusion surrounding how this new exemption would apply in a bankruptcy situation.
The wording used in the Ontario legislation is significantly different from the wording used in the homestead exemptions in western provinces, and is not nearly as favourable for the person filing bankruptcy, as what is extended in Alberta. It seems that the Province of Ontario has created a watered down version of the generous Western homestead exemptions which apply in western provinces.
It is unclear if the intention was to create such a watered down exemption or if in fact the government errored in writing the law as the amendments to the Executions Act formed a small part of an omnibus reform bill, and there were no legislative debates and consultations before passing the bill into law. One can only speculate what the true intention of the exemption was. Based upon the wording, if the debtor's equity in the principal residence is worth $10,000 or less, the trustee does not have the ability to seize the equity and accordingly, the person who filed bankruptcy would keep their property and not have to settle for that equity. The problem comes in when the equity exceeds $10,000. Based upon the wording of the Execution Act, which states:
Principal residence of debtor
2. (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.
Principal residence exceeding exempted value
2. (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.
Accordingly, in the absence of case law to clarify how the exemption is to be applied, the actual wording of the legislation suggests that if the equity in the property exceeds $10,000, there is no exemption. Note; there is a significant difference on how the legislation applies when the equity is either $10,000 versus $10,001. Further, without case law on the point, there is speculation as to whether the exemption applies to the property as a whole or to the interest of each person having ownership within the property. Compare that to the motor vehicle exemption where each person who files bankruptcy has an exemption for a vehicle to a total of $6,600. So in the case of a husband and wife, each will have an exemption for their vehicle. But in the case of a house owned jointly by a husband and wife, there may not be a $10,000 exemption for the husband and a second $10,000 exemption for the wife to be applied against the real property.
It is interesting that the wording of this exemption is similar to the old wording of the original Motor Vehicle Exemption. Before being amended, the exemption only applied to vehicles having a value under the prescribed amount (back then it was $5,650), but the exemption didn't apply if the vehicle was worth more than the prescribed amount. The Ontario government later amended the wording, and now a $6,600 exemption applies regardless of the vehicle's value.
It will be interesting to see if, in fact, the government amends the wording of the homestead exemption in a similar fashion to what it did with the motor vehicle exemption. It will also be interesting to see what challenges to the exemption will come before the Courts and how the case law will determine how the exemption is to be applied. Therefore, a more desirable way for a person with equity to resolve their financial challenge may be to do a consumer proposal instead of a bankruptcy, thereby not risking their property/equity vesting in a trustee and the risk of a court challenge to the equity."
About Adamson & Associates Inc.: John Adamson, Licensed Insolvency Trustee (LIT), Chartered Insolvency and Restructuring Practitioner (CIRP), and Accountant (CMA), assists individuals and businesses in financial distress. As experienced and respected Ontario trustees, Adamson and Associates provide personal and commercial bankruptcy services, credit counseling, receivership liquidation services, business restructuring, and proposals. Serving Southwestern Ontario, Adamson & Associates has offices in St. Thomas, Kitchener/Waterloo, London South, London North, Chatham, and Windsor. They offer free consultations, evening and weekend appointments, and flexible fee payment arrangements. If you have any questions regarding bankruptcy or proposal matters, please contact Adamson & Associates Inc. at 519-310-JOHN (5646), or visit their website www.adamsontrustee.com.