Fraudulent transfer (fraudulent conveyance): If a contract owner moved assets into a segregated fund at a time when they knew -- or ought to have known -- they faced financial difficulty or a specific creditor claim, a court may void the protection. Provincial legislation (such as the Fraudulent Conveyances Act (Ontario)) and the Bankruptcy and Insolvency Act (Canada) empower courts to set aside transactions made to defeat creditors.
Canada Revenue Agency (CRA) tax debts: Creditor protection under provincial Insurance Acts does not apply to CRA tax debts in non-bankruptcy situations. The federal Crown liability framework gives the CRA powers that are not subject to provincial insurance exemptions.
Bankruptcy timing: Under the Bankruptcy and Insolvency Act, preferential transactions made within a specified period before bankruptcy may be challenged. The length of the review period depends on whether the beneficiary is an arm's-length party.
Exam trap: Creditor protection under a segregated fund is not a guaranteed shield against all creditors. The four circumstances above -- estate beneficiary, fraudulent transfer, CRA tax debts, and bankruptcy timing rules -- are the standard exceptions the exam tests.