How a new bill could equalize creditor-proofing for RRSPs
by Jamie Golombek
When it comes to protecting your retirement savings from creditors upon bankruptcy, not all retirement plans are created equal. But that may soon be changing thanks to new Bill C-62, which was passed by Parliament last June and is expected to proceed to the Second Reading stage at the Senate when it reconvenes this month.
Under the current rules, absent currently existing specific provincial exemptions, only employer-sponsored registered pension plans (RPPs) and insurance-based products such as segregated funds and insurance-based deposit registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) enjoy protection from the claims of creditors upon bankruptcy.
Protecting RRSPs from seizure is consistent with the public policy objective of helping Canadians save for their retirement, evidenced by the tax assistance provided to such retirement savings vehicles inherent in our tax system. This is especially important to employees who cannot participate in an employer-sponsored pension plan and for the self-employed, whether they are businesspersons or professionals.
In fact, professionals, especially doctors, have often been the focus of some advisors who have heavily touted the creditor-protection benefits of segregated funds and other life insurance products.
This new legislation would also bring RRSPs in line with their U.S. counterparts: individual retirement accounts (IRAs). In a unanimous U.S. Supreme Court decision in April 2005, the U.S.'s highest court ruled that creditors could not seize IRAs in bankruptcy proceedings.
The new Bill would exempt all RRSPs and RRIFs from being liquidated on behalf of creditors should an investor declare personal bankruptcy.
"It's a positive development - hopefully it will move through the Senate quickly", says insolvency expert Natasha MacParland, a lawyer and partner with Davies Ward Phillips & Vineberg LLP in Toronto.
Note that once passed, you won't be able to make a massive RRSP contribution on one day, declare bankruptcy and, the next day, pull all the money out. That's because the Bill states that any RRSP contributions made in the 12 months prior to bankruptcy will not be exempt from seizure, unless your provincial law states otherwise.
Bill C-62 was actually based on old Bill C-55, which was introduced in the House of Commons in June 2005. On November 25, 2005, Bill C-55 was rushed through and passed by the Senate just prior to the 2006 federal election call. The Standing Senate Committee on Banking Trade and Commerce was disappointed in the rushed process that saw the Bill pass in such a quick format but was assured through a letter from Minister of Industry David Emerson that the Bill would not come into force until a number of "implementation issues" had been properly addressed.
Just over 18 months later, old Bill C-55 had still not been proclaimed into law by the current Conservative government due, in part, to objections by the Bloc Quebecois, specifically on the 12-month look-back rule.
The Bloc was concerned that this look-back infringed on Quebec's own laws governing RRSPs upon bankruptcy, which are not subject to the 12-month restriction. Saskatchewan, Manitoba, P.E.I. and Newfoundland and Labrador have a similar rule.
The new Bill specifically excludes RRSPs and RRIFs from the 12-month look-back rule in provinces that have their own, specific RRSP or RRIF exemptions from seizure upon bankruptcy.
Bill C-62 also does away with two other requirements of the old Bill. One was the requirement to "lock in" your RRSPs upon bankruptcy and thus restrict access to the funds upon retirement.
Many in the financial services industry opposed this condition as being burdensome and expensive to administer, creating additional complexity for consumers. As the Investment Funds Institute of Canada (IFIC) wrote in its submission last year, "Such a requirement is unnecessary, will create a huge administrative burden on our members and may ultimately result in higher administration costs, which may be passed on to investors".
The prior Bill also included a cap on the amount that can be exempted, which would be tied to the bankrupt's age and the maximum RRSP contribution limit in the year of bankruptcy. This cap, which was also opposed by IFIC, has been eliminated in the new Bill such that older Canadians would be permitted to protect more of their savings than younger ones.
As IFIC wrote: "Just like RPPs and insurance products, which have no cap, there should be no limit to the protection afforded to the retirement savings of Canadians".
But not everyone's smiling. "Creditors and banks may not be happy", says Ms. MacParland, since they will now have fewer assets available to them in the event of default. "Ultimately, this may have a trickle-down effect to consumers since banks may begin to incorporate that into their credit analysis".
The desire of creditors, however, needs to be balanced with the rights of individuals. "From a consumer's perspective, it's the right thing to do", says Ms. MacParland.