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Did you know that your dividends are not necessarily protected from creditors if you default on a loan?  This knowledge can be vital in ensuring your dividends continue to serve their intended purpose: securing your financial future.

What Is A Dividend

Dividends hold a crucial place in the landscape of investing, particularly for stocks in well-established companies. They represent a portion of a company’s earnings distributed to shareholders. It is a profit payment to you, a shareholder. It is usually in the form of cash or sometimes additional shares. 

Dividend payments can provide a steady income stream, making it a favorite among income-focused investors. However, the magic of dividends extends beyond a mere cash payout.

Consider dividend reinvestment. The cash value of the dividends buys more shares of the issuing company at the source. The money is never deposited in your account.

Reinvesting dividends can significantly grow an investor’s total returns over time. 

The concept is simple. As you reinvest your dividends to buy more shares, those additional shares can potentially earn dividends of their own. It is a snowball effect.

Over time, this can lead to exponential growth in your investment, especially when given a long-time horizon.

Can Creditors Claim Your Dividend Income?

According to Revenue Canada, dividends from investments are a form of income. So, they can potentially be claimed by creditors to settle your debts.

Let’s say you own a stock and receive regular dividends from those shares. If you have unpaid personal debts then your dividends could be within creditors’ reach. 

However, seizing your dividends is an intricate process. It depends on several factors including the type of debt, the province, and your specific circumstances.

If you are in debt, it is always a good idea to speak with a credit counsellor. They can help you pay back your debt and potentially hold on to your asset.

Dividends Is Not The First Source of Money To Repay Debt

It’s important to note that the process for creditors to claim your dividends is not straightforward. They must go through legal proceedings, usually starting with obtaining a judgment against you. 

Once they have a judgment, they can potentially garnish income sources, such as your dividends, to repay the debt.

Furthermore, creditors generally explore other avenues of recovering their money before claiming dividends. They often target more accessible assets, such as bank account balances or wage garnishment, before moving to claim dividends. 

However, the possibility of creditors claiming your dividends underscores the importance of prudent financial management and understanding your rights and responsibilities as a debtor.

Ways to Protect Your Dividend Investments

However, there are ways to safeguard your investment income. Understanding and leveraging these strategies can help protect your investment dividends.

Of course, you need to speak with an expert and confirm the best option for your situation.

One of the primary means of protecting your dividends is to hold them within a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). 

In fact, many Canadian provinces such as British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island (P.E.I.), and Newfoundland and Labrador, protect the contents of an RRSP or RRIF, including any dividends from seizure by creditors. 

In the event of bankruptcy, the Federal Government of Canada provides protection from creditors when it comes to RRSPs, RRIFs, and registered disability savings plans (RDSPs). Any dividend income in those accounts is safe from creditors. 

What About Bankruptcy Protections?

However, it’s important to note that this bankruptcy protection is not absolute and exceptions do exist from province to province and case to case. For example, if you declare bankruptcy, there is no protection for your last 12 months of contributions. 

Certain debts, as those related to family support obligations or outstanding tax debt, can also override these protections.

One of the only ways to protect your TFSA from creditors is to have it with an insurance company. Otherwise, if your dividend investments are held in a non-registered account or Tax-Free Savings Account (TFSA), tough luck.

In this case, creditor protection is unavailable, and your dividend investments could be seized. Keep this in mind before investing if your debts are looking unmanageable. 

Wrapping It Up: Dividends, Debts, and Creditors

It drains you to worry about creditors seizing your dividends. Instead, coming up with a strategy for managing your debts can help. 

As mentioned earlier, consider consulting with a financial planner or a credit counselor. These professionals can help you create a realistic and effective debt repayment plan.

The plan matches your income level and lifestyle. They also keep you informed of your rights and the relevant laws. 

In addition, remember the importance of maintaining an emergency fund and proper insurance coverage. These are income safety nets. They might protect you from unexpected expenses or loss of income.

At its core, protecting your dividends ensures their continued contribution to your financial goals.

Tony Dong, MSc, CETF avatar on Loans Canada
Tony Dong, MSc, CETF

Tony started investing in 2017. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. His investing qualifications include the Canadian Securities Institute's Canadian Securities and Equity Trading & Sales course(s), Franklin Templeton's Canadian ETF Proficiency course, Bloomberg Market Concepts, CFA Investment Foundations, and McGill University's Personal Finance Essentials. His work has also appeared in U.S. News & World Report, USA Today, NYSE ETF Central, NASDAQ Fundinsight, Cboe ETF Market, TheStreet, The Motley Fool, and Benzinga.

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