The federal government is finally taking steps to shield RRSPs somewhat from creditors.
A bill now going through the legislative process would give RRSPs almost the same protection given to employer-sponsored registered pension plans, and insurance-based RRSPs.

The proposed bill is good news for clients putting their savings into non-employer plans, says Jamie Golombek, vice president of taxation and estate planning for Toronto-based AIM Funds Management Inc. and chairman of the Investment Funds Institute of Canada’s tax issues committee. “It’s a step in the right direction,” he says.

Golombek notes, however, that insurance-based plans are exempt in most instances from creditors, whereas the creditor protection proposed by Ottawa for non-insurance plans would kick in only if the planholder is bankrupt. A creditor could still get a court order against a debtor that doesn’t involve petitioning the debtor into bankruptcy and, therefore, gain access to the debtor’s RRSP.

The legislation is part of a comprehensive insolvency reform package introduced in June by the federal government to modernize the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act.

Golombek intends to put the proposed legislation on the agenda of IFIC’s tax committee.
“I want to see if we’ll be drafting a response,” he says.

Meanwhile, he suggests advisors contact their members of Parliament and the federal finance minister by writing letters of support for the legislation and suggesting any amendments.

Historically, registered pension plan assets have been protected from the claims of creditors in the event of bankruptcy. This protection extends to products purchased with RPP funds, such as a LIRAs, LIFs or L/RIFs or their provincial variations. However, the same protection has not generally been available to RRSPs and RRIFs.

The exception to this — under provincial legislation — is life insurance-based RRSPs, whether offered as a registered life insurance policy, annuity or segregated fund policy.
This protection extends to RRIFs. There is one key condition, however: the named beneficiary must be the annuitant’s spouse, common-law partner, child, grandchild or parent.

The protection under the proposed federal legislation has a number of conditions. First, the proposed creditor protection provisions contain a “clawback” on the extent of plan contributions that would receive creditor protection under the new law. This means there would be no protection for any RRSP contributions made within the 12-month period prior to bankruptcy — or longer, if a court orders it.

“The public is going to be disgusted if a person is allowed to put millions into his or her RRSP and get away without paying his or her creditors,” says Bob Klotz, a Toronto lawyer who specializes in bankruptcy law. Klotz was a key player in drafting the recommendations put forward in 2002 by the personal insolvency task force, an advisory group established to reform the personal insolvency provisions of the federal Bankruptcy and Insolvency Act.

Second, a client concerned about creditor protection will voluntarily have to lock in his or her RRSP. The regulations — to follow — will set out the how locking-in is be achieved.

Klotz suggests the investment world will have to develop a product similar to the locked-in products that are already available under RPPs. “The banks will do it. The government will just have to corral them,” he adds.

Third, there would be a “cap” on the amount of RRSP monies that would be exempt from creditor attack. The personal insolvency task force has suggested the following formula to determine the amount for bankrupts up to the age of 65: the maximum RRSP contribution amount during the year of bankruptcy, multiplied by the age of the bankrupt minus 21. Again, the cap formula will be set out in the regulations.

The proposed legislation, Bill C-55, was introduced in June before the House of Commons rose for the summer. It is still in the early stages of the legislative process, and it might not make it through the House of Commons before the next election.
(Parliamentarians are expected to return to work in late September, but the prime minister has promised to call an election within 30 days of the release of the report on the so-called “sponsorship scandal.” The report is expected in mid-December.) The proposed C-55 may make it through the second reading before the election is called, Klotz says.

@page_break@After the election, a majority government — Liberal or Conservative — is likely to reintroduce the legislation. And it will have “a mature bill” to work with, says Klotz.

If Ottawa passes this legislation, it will be following a trail set by two Canadian provinces, Prince Edward Island and Saskatchewan.

Provinces have the constitutional power to make laws involving property rights and to pass their own debtor/creditor legislation, but bankruptcy and insolvency is a federal responsibility. Due to this overlap, a co-ordinated legislative approach for RRSP protection is necessary.

Since 1992, P.E.I. has given all RRSPs and RRIFs the same creditorproof status, regardless of issuer. It’s called the Designation of Beneficiaries under the Benefits Plan Act, and protects designated beneficiaries, not planholders.

In March 2003, Saskatchewan adopted the Registered Plan (Retirement Income) Exemption Act. This legislation extends protection to RRSPs. It also applies to RRIFs, based on the exempt funds transferred to them.

“I believe Ontario will turn its attention to this once the federal exempting legislation is in place,” Klotz says. “So will the other provinces.”

Following up on Golombek’s point that the federal proposals protect planholders only when they are bankrupt, Klotz says that the provinces need to enact RRSP exemptions to apply outside bankruptcy, too.

This federal proposal follows several court cases that have examined the issue of creditor protection for RRSPs and RRIFs.

From a life insurance industry perspective, says Ted Ballantyne, director of advanced tax policy at Ottawa-based Conference for Advanced Life Underwriting, the initial key decision came from a Supreme Court of Canada case in 1996 involving bankrupt Balvir Singh Ramgotra of Saskatchewan. Creditors tried to get access to his life insurance-based RRIF. The defendant had transferred funds to the RRIF from his RRSP less than three years before declaring bankruptcy.

Under federal law, says Ballantyne, transactions made within five years prior to bankruptcy can be declared void and the assets can be paid to the bankrupt’s creditors. “But since the RRIF was a life insurance product, the Supreme Court found that the funds were creditor-proof,” he notes.

(It should be noted, however, that when an individual is proven to have moved funds to a life insurance company in contemplation of bankruptcy, this protection does not hold. This action is seen by the courts as a fraudulent conveyance.)

The most recent non-insurance RRSP case was the SCC’s decision in February 2005 to dismiss an application for leave to appeal the Ontario Court of Appeal decision in Amherst Crane Rentals Ltd. v. Perring.

The OCA decided in that case that when the planholder of a non-insurance RRSP has designated a beneficiary, the proceeds, when paid out at the planholder’s death, do not form part of his or her estate and are immune from his or her creditors.

It remains to be seen whether courts in other provinces will extend the same protection. Perhaps Ottawa’s new legislation and provincial uptake will make court protection unnecessary. IE