Investment and insur- ance industry groups are concerned that federal legislation providing protection from creditors for RRSPs has been left in limbo. Passed last November by the Liberals during the final hours of their minority government, the legislation has yet to proclaimed.

“It’s most unfortunate,” says Jamie Golombek, chairman of the Investment Funds Institute of Canada’s tax issues committee and vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto.

As part of the last-minute process of passing the legislation, the Senate committee obtained a ministerial undertaking that it would not be proclaimed — at least, not until June 30, 2006 — in order to give the committee the opportunity to hold hearings.

Both the investment funds and insurance industries have problems with the legislation as it is currently written. IFIC, while “very encouraged” by the proposed legislation, was looking forward to making its case about potential amendments before the Senate banking committee, says Golombek.

But June 30 has come and gone, he adds, and no word on hearings has come from Ottawa.

“It’s pretty dead,” says Bob Klotz, a Toronto lawyer who specializes in bankruptcy law. “None of my contacts are optimistic that anything will happen until, perhaps, after the next election.” Klotz was a key member on the personal insolvency task force, an advisory group established to help Ottawa reform the federal Bankruptcy and Insolvency Act.

RRSP protection is part of a larger package of legislation that will amend the federal Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act, and introduce a new statute providing wage-earner protection. The latter statute contains a controversial section that will establish a fund for wage earners whose companies have gone bankrupt.

As a result, says Klotz, amending the legislation will probably involve making undesirable political compromises. Meanwhile, he adds, the legislation “is replete with flaws and outright errors.”

Letters have been written to senior government officials, says Ted Ballantyne, director of advanced tax planning at the Conference for Advanced Life Underwriting. A meeting was held with Industry Canada, the government department responsible for the legislation. “We’ve suggested remedies that they’ve agreed to consider,” says Ballantyne. CALU is still waiting for a response.

“The government is still reviewing the legislation,” says Frank Zinatelli, vice president and associate counsel with the Canadian Life and Health Insurance Association. “I expect hearings will be held.”

The CLHIA, CALU and IFIC are all keen to appear at hearings. IFIC welcomes the new protection offered in the legislation, but notes it only applies to bankruptcies. It doesn’t give the broad protection from creditors that insurance-based RRSPs and RRIFs now have under provincial insurance legislation.

The flaws will have to be corrected by amending legislation that would be proclaimed at the same time as the present legislation is proclaimed, says Ballantyne.

A Constitutional divide is part of the problem involved in working out protection from creditors for RRSPs. Ottawa is responsible for bankruptcy and insolvency, while insurance is the domain of the provinces. And, under existing provincial insurance legislation, RRSPs and RRIFs receive blanket protection from creditors as long as the planholder has named a beneficiary, which must be a spouse, common-law partner, child, grandchild or parent.

Purchasing a life insurance RRSP is an asset-protection strategy when done in good faith, former CALU chairwoman Diane McCurdy noted in a February 2006 letter to Industry Minister Maxime Bernier. “Many policyholders may be small-business owners who purchased life insurance-based RRSPs in good faith to protect assets in the event their businesses failed. But they did not purchase life insurance RRSPs in contemplation of bankruptcy.”

The exception to the protection provided by provincial insurance legislation is if an individual, who is in the shadow of pending bankruptcy, moves funds to a life insurance company. Both federal and provincial legislation would prohibit such a move, deeming it to be a “fraudulent conveyance.”

Therefore, wrote McCurdy, additional limitations on RRSP/RRIF creditor protection in the Bankruptcy and Insolvency Act “would seem redundant.”

If passed as presently written, the federal legislation would impose restrictions that are not imposed by provincial insurance legislation. First, a planholder would have to lock in the RRSP so he or she would not have access to the funds until retirement.

Second, contributions made within 12 months of bankruptcy would not be protected from creditors. The “clawback” could extend even further back than a year if a court decided it was warranted.

@page_break@Third, the amount that would be protected would be capped. Details of the cap have not been set out in the legislation.

CALU is against a cap, Ballantyne says. Rather than limiting the amount protected from creditors, CALU suggests all RRSP monies be protected from creditors to the extent that protection is now available to life insurance-based products. IE