How Are Segregated Funds Different from Mutual Funds in Canada?
A mutual fund is a securities product regulated under provincial securities legislation. A segregated fund is technically a variable insurance contract regulated under provincial insurance legislation. Both invest in pools of underlying securities and offer similar returns. The legal classification, not the underlying investment, is what creates the creditor protection differential.
What Creditor Protection Do Canadian Segregated Funds Provide?
When a contract holder names a family class beneficiary (spouse, child, grandchild, or parent), the entire contract value falls within the same statutory creditor exemption that applies to life insurance under the provincial insurance act. Creditors cannot reach the contract value during the holder's lifetime, and the death benefit passes outside the estate directly to the beneficiary, bypassing probate.
When Is Creditor Protection on a Canadian Segregated Fund Lost?
Naming the estate as beneficiary collapses the exemption. Naming a non-family beneficiary collapses it. Transfers into seg funds made with intent to defeat existing creditors will be reversed as fraudulent conveyances under provincial law. Plan transfers years in advance of any anticipated claim and document the planning rationale at the time.
Key Takeaways+
- Segregated funds are insurance contracts, not securities, and inherit life insurance creditor protection.
- A family class beneficiary (spouse, child, grandchild, parent) must be named.
- Naming the estate or a non-family beneficiary eliminates the protection.
- Transfers made after a creditor claim is known can be reversed as fraudulent conveyance.
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