New federal legislation that would shield RRSPs from creditors only if the planholder goes bankrupt does not go far enough to protect consumers, industry groups say.

The tax issues committee of the Investment Funds Institute of Canada wants protection from creditors extended beyond bankruptcy, says Jamie Golombek, chairman of the committee and vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto

The insurance industry shares IFIC’s concern. It is also worried that the proposed legislation, Bill C-55, will weaken the creditor protection given to people who hold insurance-based RRSPs, should they declare bankruptcy.

Concerns about Bill C-55

“We have some concern about the way this is being done,” says Frank Zinatelli, vice president and associate general counsel at the Canadian Life and Health Insurance Association in Toronto.

If C-55 is passed, it will provide most RRSP holders with unprecedented protection at the federal level; however, it doesn’t go as far as the complete protection against creditors already enjoyed by employer-sponsored registered pension plans and insurance-based RRSP plans.

Nor does it match the stronger protection from creditors that exists in Saskatchewan and Prince Edward Island. The CLHIA would like to see C-55 amended so that the federal legislation would include the broader protection that is offered in those provinces’ insurance legislation.

Insurance law would still provide protection against court judgments when the debtor is not bankrupt, but the federal legislation would apply in bankruptcy situations. That is because bankruptcy and insolvency fall under federal jurisdiction, while insurance is a provincial matter.

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 LRIFs or their provincial variations. However, the same protection has not generally been available for RRSPs and RRIFs.

The one exception to this, under provincial legislation, is life insurance-based RRSPs, whether they are offered as registered life insurance policies, annuities or segregated fund policies. Creditor protection extends to insurance-based RRIFs, as well. (The named beneficiary must be the annuitant’s spouse, common-law partner, child, grandchild or parent.)

But if the proposed federal legislation passes as is, says Zinatelli, the protection provided by insurance legislation would no longer apply to bankrupt individuals. The proposed federal clawback and cap provisions would apply instead.

The proposed clawback would govern the extent of plan contributions that would receive creditor protection under the new law. There would be no protection for any RRSP contributions made within the 12-month period prior to a bankruptcy — or longer, if a court ordered it.

Without these conditions attached to bankruptcy protection, soon-to-be bankrupts could shift large amounts of money into their RRSPs, getting the extra benefit of tax deferral.

There would also be a cap on the amount of RRSP monies that would be exempt from creditor attack. The regulations accompanying the legislation will set out the formula for the cap.

Second reading

Finally, a client who is worried about creditors getting at his or her RRSP would have to lock in the RRSP voluntarily, so the funds will not be accessible until retirement. A locked-in product does not exist right now and would have to be developed by the financial services industry.

C-55 received second reading in October and parliamentary committee hearings are scheduled to begin this month in Ottawa.

For updates on submissions to the parliamentary committee as they are posted, please see:
www.parl.gc.ca/committee/CommitteeHome.aspx?Lang=1&PARLSES=381&JNT=0&SELID=e22_.1&COM=8983&STAC=1404046)

The proposed legislation is part of a comprehensive legislative package aimed at modernizing the Bankruptcy and Insolvency Act and the Companies’ Creditors
Arrangement Act, as well as introducing a statute for wage-earner protection. It may be passed before the Christmas parliamentary break. IE