Canadian retirement savers received a strengthened safety net when the federal Bankruptcy and Insolvency Act was amended in 2009 to extend creditor protections to RRSPs and RRIFs.
“Part of the rationale for this change was to protect Canadians’ retirement years and bring them in line with registered pension plans, which (at the time provided) much better creditor protection than RRSPs and RRIFs,” said Doug Carroll , tax and real estate specialist at Aviso Wealth Inc. in Toronto.
But Carroll said people may be overestimating this level of protection: “It is still possible that an otherwise solvent person’s RRSP or RRIF could be disclosed to a creditor who obtains a court order. Whether RRSPs and RRIFs are protected in such non-bankruptcy circumstances depends on each province’s laws.
For provinces and territories without creditor protection, federal legislation protects registered plans from creditors if an annuitant files for bankruptcy. Federal bankruptcy protection is provided by RRSPs, RRIFs, RDSPs and deferred profit sharing plans (DPSPs), said Carol Bezaire, vice president of tax, real estate and strategic philanthropy at Mackenzie Investments in Toronto.
Most bankruptcy protections exclude contributions made within 12 months of bankruptcy, Bezaire said. She noted that bankruptcy rules will also take into account contributions made in previous five-year periods if the annuitant or account holder has gone bankrupt or was anticipating bankruptcy, or if there was any fraudulent activity associated with their contributions.
Jurisdictions are taking different approaches.
Grant Bazian, president of MNP Ltd., the Vancouver-based bankruptcy and insolvency arm of MNP LLP, said RRSPs and RRIFs in British Columbia are tax-free, except for contributions for the last 12 months. However, if the RRSP or RRIF is an insurance product with a properly named beneficiary – in particular a parent, spouse or common-law partner, child or grandchild – all contributions, including those made within 12 months of bankruptcy, will be covered.
However, in Alberta, all RRSPs and RRIFs are exempt from creditor tax, regardless of the timing of the contribution or the type of product, Bazian said.
Carroll noted that under the Ontario Insurance Act, if a spouse or domestic partner, child, grandchild or parent is a designated beneficiary under an insurance RRSP or RRIF, then the plan is protected from creditors for the life of the plan holder. The designation of beneficiaries for non-insurance programs in Ontario is made under the Inheritance Reform Act, which does not provide lifetime creditor protection.
Generally, pension funds in all Canadian jurisdictions are protected from creditors during the term of the plan, including defined benefit or defined contribution plans, or when the proceeds are transferred to a closed-end superannuation account (LIRA) or lifetime income fund (LIF). ), Bezaire said.
“At the provincial level, British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island and Newfoundland and Labrador offer full creditor protection for RRSPs, RRIFs and DPSPs individually for the annuitant/account holder or for their estates in BC, PEI and Ontario, – Bezaire said.
Registered investments held with an insurance company, such as a segregated fund, are generally protected from creditors and bankruptcy claims if there is an irrevocable beneficiary designation of the annuitant’s spouse or partner, child, parent or grandchild of the annuitant/designated account holder. This applies to all provinces except Quebec, Bezaire said.
In order for a registered account insurance contract to be protected from creditors in Quebec, it must qualify as an annuity contract and have a designated beneficiary who is one of the married or civilly-married spouses (spouse is not recognized), ascendants or descendants of the annuitant/holder account or irrevocable beneficiary, Bezaire said.
Creditor protection for unregistered investments and TFSAs in Quebec is available through an insurance product if the beneficiary designation complies with the rules on qualifying as an annuity contract and having a properly named beneficiary, and does not involve fraudulent activity, she added.
Quebec is the only jurisdiction in Canada that provides TFSAs with any creditor protection. No other federal and provincial/territorial legislation protects TFSAs from bankruptcy, Bezaire said.
