New federal legislation that will shield an RRSP from creditors if a planholder goes bankrupt was passed by Parliament before the government was felled by a non-confidence vote in late November. However, industry groups are keen to attend Senate hearings to propose amendments they say are needed before the legislation comes into force in mid-2006.

The new RRSP protection is part of a legislative package of amendments to the federal Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and a new statute to provide wage- earner protection.

Before the government fell, the Senate banking committee was given permission to conduct consultations with concerned stakeholders, a group that includes representatives of both the mutual fund and insurance industries.

They were set to testify at committee hearings in November, and will be looking for the opportunity again when Parliament resumes. “We’re pleased the bill was passed,” says Jamie Golombek, chairman of the Investment Funds Institute of Canada’s tax committee and vice president of taxation and estate planning at AIM Funds Management Inc. in Toronto. “Unfortunately, we didn’t get the chance to speak to our concerns, which still exist.”

Representatives from the Ottawa-based Canadian Life and Health Insurance Association didn’t get to appear before the committee, either, says Frank Zinatelli, the CLHIA’s vice president and associate general counsel. The association is counting on having “the opportunity to review the legislation as soon as Parliament comes back,” he says.

The amendments affecting RRSP holders will provide unprecedented protection — but do not provide the same complete protection against creditors currently given to people who hold insurance-based RRSPs. In fact, the legislation, if passed as written, will scale back the protection that planholders with insurance-based RRSPs now have under provincial insurance legislation, Zinatelli says.

The federal bankruptcy legislation accepts exemptions found in provincial debtor/creditor statutes, he says. These include a bankrupt’s “tools of the trade,” car, household furniture and clothes.

The CLHIA questions why Ottawa is now attacking the well-established creditor protection provided by provincial insurance legislation. Bankrupt people with insurance-based RRSPs will have to comply with the new federal legislation, Zinatelli says. (Under the Constitution, bankruptcy is a federal matter and insurance a provincial matter.)

Meanwhile, IFIC will be approaching the amendment process from a different angle. The legislation, as drafted, only provides creditor protection if an RRSP planholder is bankrupt, says Golombek. It won’t stop creditors from obtaining a court order against a debtor who has not declared bankruptcy. IFIC would like to see creditor protection for non-insurance RRSPs that is equal to that of insurance-based RRSPs, he says

Zinatelli says the CLHIA supports IFIC’s wish: “[Ottawa should] go ahead and expand creditor protection for other institutions’ RRSPs but not reduce what is already in place.”

The protection under the new legislation imposes three conditions that are not imposed by provincial protection for insurance-based RRSPs.

First, a potential bankrupt will voluntarily have to lock in his or her RRSP. The regulations will set out how this will be achieved. Bankrupt persons shouldn’t get access to their RRSP funds, says Bob Klotz, a Toronto lawyer who specializes in bankruptcy law. The lock-in provision is in accordance with the enduring public policy that supports tax deferral within RRSPs, he says.

Second, there is a “clawback” on the amount of plan contributions that would be protected from creditors. RRSP contributions made within the 12-month period prior to bankruptcy — or longer, if a court orders — will not be protected.

Finally, the amount of RRSP monies that would be exempt from creditor attack will be capped. The cap formula will be set out in the regulations.

Neither IFIC nor the CLHIA wants the clawback nor cap provisions included the legislation. Both suggest that “fraudulent conveyance” provisions in the federal Bankruptcy and Insolvency Act should deter people from squirrelling funds into their RRSPs before they declare bankruptcy.

The provinces also have separate fraudulent conveyance statutes. One of the common ways the fraudulent conveyance legislation is used is to undo transfers of property from a husband about to declare bankruptcy to his wife in order to keep creditors’ hands off the property.

But, Klotz says, the suggestion that fraudulent conveyance law would provide sufficient anti-abuse protection against unfair asset transfers into RRSPs “is completely wrong.” There are two problems with the approach, he says. To prove fraudulent conveyance, evidence of an interaction between two parties is required.

@page_break@However, a transfer to an RRSP involves only one party — the potential bankrupt, Klotz says. Therefore, it would be practically impossible to prove fraudulent intent.

Litigation is also expensive. The cap and clawback provisions will ensure that taxpayers’ dollars won’t have to be spent to prove fraudulent conveyance, he says, adding, they are “effective anti-abuse measures” that are needed to make this legislation work.

The Senate banking committee will have to referee the differing views on how the new legislation should be amended, and it seems intent on making changes.

Records of Senate proceedings show the Senate was not happy with the way the bill was forced through Parliament. On Nov. 24, 2005, when the legislation was going through third reading in the Senate, the chairman of the banking committee, Sen. Jerahmiel Grafstein, said: “The committee was confronted with a Solomonic choice. We were told by government officials that the bill was flawed. We were further told that government officials had prepared amendments … as they were not satisfied with the bill.”

While recognizing the “extraordinary circumstances” that existed in the pending dissolution of Parliament, the committee did not have adequate “opportunity to review comprehensively such an important piece of framework legislation,” Grafstein said.

Klotz presumes the hearings will go ahead after the election. IE