A new statutory regime modernizing Canada’s bankruptcy and insolvency laws could finally come into force sometime next spring. That is likely to be welcome news for the holders of non-insurance RRSPs and their advisors, who have long sought protection for these assets should the holder go bankrupt.

There is, however, some disagreement about the form of the new rules, which still face review by the Senate. Initially, a number of conditions were proposed that would have limited the amount that could be protected from creditors, as well as the planholder’s right to use the funds for purposes other than retirement. Following input from the investment industry, those two conditions have been dropped. Other observers, however, are concerned about the implications of dropping those limitations; they argue that large amounts could be shuffled into RRSPs and then removed when the owner’s disputes with creditors have passed.

Decades in the making, the new statute, Bill C-62, has had a bumpy ride. It’s predecessor, Bill C-55, was passed in haste by the Liberals in November 2005. C-62 was introduced by the Conservatives and passed in June before the House of Commons adjourned for the summer, and was before the Senate when Prime Minister Stephen Harper prorogued Parliament on Sept. 17. Late last month, the government announced the bill will be reinstated to its status before that date, effectively setting the stage for Senate hearings after it has received third reading.

The new protections proposed for RRSP assets are part of a larger package of legislation that will amend the federal Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act, as well as introduce a new statute providing wage protection for employees. At least some who have been following the progress of the bill over the past few years believe that its time may have come at last. Robert Klotz, a bankruptcy lawyer in Toronto who has advised extensively on the bill, says it may become law next spring.

The key irritant for holders of non-insurance RRSPs has been the immunity from all credi-tors for insurance-based products, whether or not there is a bankruptcy. Virtually all other types of RRSPs lack this protection, although different rules may apply on a planholder’s death in Ontario when there is a named beneficiary. The exceptions to the rule are Saskatchewan and Prince Edward Island, where the federal government has accepted provincial legislation extending protection to the non-insurance RRSPs of bankrupts.

This uneven treatment is due to Canada’s constitutional separation of powers. The provinces have authority over insurance, and most have chosen to protect insurance RRSPs from all creditors, as long as the planholder has named certain beneficiaries, which must be a spouse, common-law partner, child, grandchild or parent. The only exception is debtors who anticipate insolvency, who may not move assets into an insurance RRSP for the purpose of frustrating creditors. In that case, a court may find the shifting of assets to be a “fraudulent conveyance.”

On the other hand, banking — including almost all other types of RRSPs — is a federal matter, as is bankruptcy. Given that Canada has not updated its legislation in decades, assets held in non-insurance RRSPs have generally been available to all creditors.

Creating consistency among the different types of RRSPs is a key goal for those who deal with non-insurance RRSPs. “In our industry, we’re trying to put all products on equal footing,” says Jamie Golombek, chairman of the Investment Funds Institute of Canada’s tax issues committee and vice president of tax and estate planning at AIM Funds Management Inc. in Toronto. “In particular, we’ve always felt that insurance products had an advantage over regular mutual fund products.”

Some observers expect that the provinces will choose to extend protection to non-insurance RRSPs outside a bankruptcy once the federal legislation is in place.

The original legislation included three main conditions on the new protections. They were: a cap on the amount that could be protected; an obligation to lock in contributions so they could be used only for retirement; and a clawback period, preventing contributors from loading assets into an RRSP to avoid credi-tors, similar to the common-law concept of fraudulent conveyance.

The first two of those conditions have since been dropped, following input from the industry. The bill retains the one-year clawback period without any possibility of a court-ordered extension (a feature of the original legislative framework). Ted Ballantyne, director of advanced tax planning at the Conference for Advanced Life Underwriting, believes the 12-month provision, with no exceptions, is reasonable: “Twelve months tends to make sense, because within 12 months of being bankrupt you should know you’re having financial difficulty.”

@page_break@The possibility of a court extension is problematic, adds Bal-lantyne: “We’re of the view that if you gave the courts the authority to override the 12-month period, then the 12-month period wouldn’t mean anything.”

Golombek is lukewarm about the proposed clawback period, believing any suspected fraudulent activity could be dealt with in the courts. “Ideally, we don’t think there should be a clawback period because there isn’t a clawback period in insurance,” he says. “And you have the normal fraudulent conveyance act and legislation across all the provinces, which should be enough to deal with that.”

Some outside the industry, however, believe the one-year period is too short. Klotz, who helped draft the recommendations put forward in 2002 by the Personal Insolvency Task Force, an advisory group that reported to a Senate standing committee reviewing bankruptcy legislation, prefers the three-year clawback provision in the old C-55. “Within three years,” Klotz says, “one must see the writing on the wall.

“Maybe you shouldn’t contribute [to your RRSP] if you can’t pay your creditors,” he adds. “We decided on three years in the task force, and the Canadian Bar Association said two.”

Among the other conditions Klotz and the insolvency task force recommended but which were excluded from C-62 is a cap on the exempt amount. “You have to have a cap so creditors don’t get disgusted that they get the shaft,” says Klotz. “You don’t want someone to walk away with a $2-million exempt RRSP.”

Klotz recommends a lock-in provision ensuring funds earmarked for retirement are not used for other purposes.

Golombek, on the other hand, is pleased the lock-in provision was excluded from C-62: “We said, ‘That’s not fair, as the insurance products again have no locking in. Plus, the administrative costs of doing that would be very burdensome.” IE