Before July 7, Canadians forced into bankruptcy could say goodbye to their entire retirement savings. But thanks to a new rule introduced earlier this month, creditors can no longer raid a customer’s RRSP savings. These rules also apply to RIFFs and deferred profit-sharing plans.
Terri Williams, CFP and director of educational services at DundeeWealth, says the new rules are a boon for small business owners, who often risk their financial health to launch a new entrepreneurial venture.
“Let’s say someone at age 45 wanted to start a small business and had been saving in an RRSP for years,” he says. “You put some capital into it, but then the economy collapses and you go bankrupt. In this case, the RRSPs are gone. So this is particularly good because they are very often putting their personal savings at risk.”
The new rule is also important for professionals such as doctors and lawyers who do not rely on a regular fortnightly paycheck.
Wayne Rothe, CFP at Wayne Rothe & Associates Wealth Management, says every Canadian can benefit from this regulatory change. “A customer could run a stop sign, hit someone and get sued,” he says. “Before this solution was implemented, a lifetime of savings would have been wasted.”
Not only does this rule change the financial fortunes of the bankrupt Canucks, but it could also change a client’s financial plan. Previously, pensions and savings in segregated funds were protected from creditors; now advisors can use any bankruptcy protection product. “Advisors can now look at the entire universe of investments that can be placed in an RRSP,” Williams says. “It’s very interesting for advisors.”
Customers can actually save money now that they have more choices. Segregated funds tend to have higher MER fees than mutual funds, so allowing people to put their money into less expensive investment vehicles will mean more money in their pocket – and in their RRSP.
|
Rexcited STories |
|
|
“People had to use seg funds, even though they may not have been the best investment choice,” Rothe explains. “The playing field was a bit uneven in that regard.”
Some advisors may think they can just put a bunch of money into a client’s RRSP a few days before they file for bankruptcy, but that won’t work. Any funds added to a registered savings account in the 12 months before bankruptcy may be seized by creditors.
However, if people know they are taking on something financially risky in the long run, they may consider adding a few extra dollars to their RRSP. “You can put some money into an RRSP to protect it from creditors,” Rothe says. “But if you believed you were at (more immediate) risk of bankruptcy, putting money aside probably wouldn’t help you.”
The new rule applies to jurisdictions that did not already have similar provincial rules, leveling the playing field for investors in British Columbia, Alberta, Ontario, New Brunswick and Nova Scotia who can now consider their registered accounts safe.
Posted by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(28/07/08)
