Just when it looked like new federal insolvency laws protecting RRSPs from creditors would go into force, more debate has erupted. Financial advisors have conflicting views on the merits of the provisions for retirement savings plans. And some legal bankruptcy specialists are confused and upset by the process that will see the Senate conducting hearings on the legislation, even though it was passed last month.

“To say I’m disappointed is the least of it. I’m appalled by it,” says Robert Klotz, a Toronto bankruptcy lawyer who has been advising the federal government for several years on its package of amendments to various pieces of legislation governing bankruptcy and insolvency. Klotz and other experts are uncertain as to what will happen next after a set of amendments, developed and revised over a four-year period under two different governments, was rushed through Parliament without Senate hearings last month with the understanding that hearings will proceed before the legislation comes into force.

“My understanding is that we are looking at a period of six months to a year in limbo until the provisions come into force,” says Ted Ballantyne, director of advanced tax planning at the Conference for Advanced Life Underwriting, one of several industry groups that has been monitoring the progress of Bill C-12, an act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005.

A complex piece of legislation dealing with numerous aspects of bankruptcy law, Bill C-12 has drawn public attention and scrutiny for two main reasons. One relates to the new protections for wage earners in the event employers go bankrupt, ensuring they receive up to approximately $3,000 in unpaid salary and vacation pay. These popular provisions, supported in Parliament by all three major parties, are widely seen as addressing an urgent need to provide workers with relief from the potentially devastating impact of losing their jobs and their backpay.

The second is a more controversial set of amendments relating to RRSPs and RRIFs. Under previous bankruptcy legislation — which will continue to apply until Bill-12 comes into force — registered pension plans and RRSPs that are issued by insurance companies receive a higher degree of protection from creditors in the event of a bankruptcy than RRSPs and RRIFs issued by banks and other financial institutions.

This is because these products have been governed by various federal and provincial laws. The new legislation represents an attempt to “level the playing field” by extending protection from creditors to RRSPs and RRIFs.

AVOIDING CREDITORS

The RRSP and RRIF provisions are controversial, not only because experts disagree on how much protection investors should receive from creditors, but also because the amendments incorporated in Bill C-12 are, according to Klotz, “a profound departure” from the scheme originally developed by the Personal Insolvency Task Force, a broad-based group of key stakeholders, appointed by the Superintendent of Bankruptcy in 2000, to advise the government on proposed reforms. These recommendations were approved by the Senate in 2003, incorporated into legislation prior to the last election, but never enforced due to the subsequent change in government.

The new amendments — much simpler than the 2003 scheme — provide protection from creditors to all contributions made to RRSPs or RRIFs prior to one year before declaring bankruptcy. Contributions made within a year of bankruptcy will be clawed back, except in provinces such as Manitoba and Saskatchewan in which RRSPs have a higher level of protection, by agreement with the federal government.

This has been welcomed by many in the investment community as a way of redressing the inequity whereby people who do not have the benefit of a company pension plan and choose not to invest in insurance-related RRSPs face the prospect of losing substantial portions of their retirement savings if they go bankrupt.

Jamie Golombek, vice president, tax and estate planning at Toronto’s AIM Funds Management Inc. and chairman of the Investment Funds Institute of Canada’s tax issues committee, says his only concern is that this change has been slow to come and should not be debated and delayed any longer. “From my perspective, this legislation has dragged on long enough and in the meantime, Canadians who don’t have the benefit of registered pension plans and who save for retirement through their RRSPs are at a significant disadvantage when it comes to creditor-protected retirement savings upon bankruptcy. I believe that it’s in Canadians’ best interests to have at least this portion of the legislation come into force at the earliest opportunity.”

@page_break@Insolvency and restructuring specialist Marla Adams, on the other hand, says many people in her field are concerned about what they see as major flaws in the new legislation. Adams, a Toronto partner and senior vice president at Deloitte & Touche LLP, who oversees the firm’s personal reorganization service, says the 12-month clawback period is too limited and gives no discretion to the trustee or the courts in situations in which people appear to be using the RRSP as a way of hiding money from creditors. “So it really almost encourages debtors to make large contributions and then wait out the 12 months until their bankruptcy. That’s not the behaviour we want and it’s not the perception we want. We don’t want to see trustees’ ability limited that way.”

Furthermore, Adams says the legislation does not require that RRSPs be locked in until retirement, so that there is nothing to stop someone cashing in an RRSP as soon as he or she is discharged from bankruptcy. She notes that in this respect, people with RRSPs will have an advantage over those with locked-in corporate pension plans, so that the federal government’s attempt to level the playing field may have tilted it in another direction. She maintains that the unfairness of this situation could be compounded by the fact that it is possible for someone to borrow money from a bank to top up an RRSP, making the bank an unsecured creditor in the event of a bankruptcy and creating “an even bigger miscarriage of justice.”

Klotz has prepared a submission on behalf of the Canadian Bar Association outlining these and other concerns and says he was expecting to present this to the Senate at hearings that were to have been held before the bill was passed into law. A draft of this submission states that the RRSP exemption is “deeply flawed and violates bankruptcy policy at many levels.”

CHANGES STILL POSSIBLE

However, when the Standing Senate Committee on Banking, Trade and Commerce met to consider the legislation at the end of November, it was faced with what its chairman, Senator David Angus, called “a Catch-22.” The federal labour minister, Jean-Pierre Blackburn, was very strongly urging the committee to pass the bill immediately because there were rumours that a federal election was in the air and no one wanted to risk letting the wage-earner protection measures die on the order table. Angus responded by saying, “We would like to get the bill through, but we want to ensure it is either ready for prime time, and if not, that we have a process in place to fix it.”

The solution that the Senate committee came up with was to pass the bill and schedule hearings on it in February or March, allowing for the possibility that suggestions for change could be incorporated into future regulations.

Klotz maintains these hearings will be “meaningless.” He says the committee decision has “put the Senate into disrepute as far as I’m concerned.”

In any event, the federal labour ministry has indicated that it will take about six months to iron out some details in the Wage Earner Protection Plan.

So, until then and depending on what happens as a result of the Senate committee hearings, investors and their advisors must continue to rely on the old legislation with regard to creditor protection for RRSPs and RRIFs. IE