(December 2005) Creditor protection may soon be available to your nearest RRSP. This is great news for small business owners or professionals such as doctors and lawyers, because when it comes to estate planning, these clients often cite creditor protection as their top concern.
Although insurance products in most provinces already provide various creditor protection benefits, whether your clients’ non-insurance RRSPs are protected from creditors depends on where they live and whether they are alive or dead. Generally, a creditor can seize the debtor’s property unless the debtor is deemed discharged in that province or territory.
Under current regulations, only Saskatchewan and Prince Edward Island have adopted laws exempting non-insurable RRSPs and RRIFs from creditors during the lifetime of the annuitant. The rules change slightly for a deceased RRSP annuitant. For example, British Columbia and PEI have laws that exempt RRSPs from being part of an estate.
Latest case law
Last year, two important court decisions brought the issue of creditor protection to the fore. The first case was a Supreme Court of Canada decision in May 2004 Bank of Nova Scotia v. Thibaultwhich ruled that creditors in Quebec could seize the debtor’s RRSP because the terms of the RRSP did not meet the conditions necessary under Quebec legislation to release those assets from creditors.
The second case, a month later, was the decision of the Ontario Court of Appeal in Amherst Crane Rentals Limited v Arlene Clare Perringwhich upheld a lower court decision exempting a deceased retiree’s RRSP from garnishment by creditors, even though there is no law in Ontario that expressly protects RRSPs from creditors.
Until Amherst Crane The prevailing view in this case was that in most common law provinces, non-insured RRSPs could be foreclosed upon by the decedent’s annuitant creditors, even if the RRSP had named beneficiaries.
However, on June 3, 2005, Bill C-55 was introduced in the House of Commons. The bill, which proposes, among other things, amending the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), will pave the way for creditor protection for all RRSPs.
History
RRSPs were first introduced by the federal government in 1957, but the first major progress toward extending creditor protection to non-insurance RRSPs came 30 years later in Quebec. In 1987, Quebec law was amended to exempt fixed-term annuities purchased from trust companies from garnishment under the same conditions as annuities obtained from life insurers.
In 1990, the Manitoba Law Reform Commission proposed that RRSPs should not be part of a deceased person’s estate and not be subject to seizure by creditors during the person’s lifetime. This bill was not passed, but later that year BC introduced a new law that provided that RRSPs would not form part of the deceased annuitant’s estate and, as a result, would not be available to creditors of the estate.
PEI took a bold step in 1992 by introducing the “Beneficiary Designation Under a Benefit Plan Act,” which provided that RRSPs could not form part of an estate and therefore could be immune from claims by estate creditors upon death. Furthermore, it was provided that the plan’s assets would be exempt from attachment throughout the life of the annuity.
In 1998, the Canadian Uniform Law Commission issued a report calling for the immunity of all RRSPs from creditor claims. Two years later, the Superintendent of Bankruptcy created the Personal Insolvency Task Force to consider changes to the Bankruptcy and Insolvency Act. In 2002, the task force released its final report, which recommended that RRSPs be released from creditors in the event of bankruptcy. That same year, Saskatchewan introduced important legislation that expressly exempts plan assets from seizure by creditors.
Last year, the Alberta Law Reform Institute released two reports calling for RRSPs to be exempt from seizure by creditors during the annuity’s lifetime and to be barred from claims by estate creditors upon death. Legislation in Alberta has not yet been introduced.
In November 2003, the Senate Committee on Banking, Trade and Commerce released a comprehensive report entitled “Debtors and Creditors Sharing the Burden” which concluded that RRSPs should be exempt from garnishment in bankruptcy, under several conditions. This report formed the basis of Bill C-55 in 2005, which would have made RRSP assets exempt from creditors in the event of bankruptcy – except for contributions made within 12 months of bankruptcy.
Interestingly, the report also proposed excluding RESP funds from seizure in bankruptcy proceedings, but this recommendation was not included in the draft legislation published in June.
New bill
The introduction of Bill C-55 surprised some legal experts. This was “unexpected, although we were aware that significant changes were on the horizon in Canadian insolvency legislation,” says insolvency expert Natasha MacParland, a lawyer and partner at Davies Ward Phillips & Vineberg in Toronto, who has been involved in various industry consultations on changes to the BIA and CCAA.
Currently, many life insurance-based RRSPs and employer-sponsored RPPs are exempt from bankruptcy liquidation, while regular RRSPs can be liquidated for the benefit of creditors.
“We’re dealing with a mismatch between people whose employers force them to save for retirement and those who save on their own,” says MacParland.
If the new proposal becomes law, it will exempt all RRSPs and RRIFs from the obligation to liquidate on behalf of creditors in the event of bankruptcy and put them on par with insurance RRSPs and RPPs. “It creates a level playing field,” says JP Bernier, vice-president and general counsel of the Canadian Life and Health Insurance Association.
It’s important to remember that the new laws don’t mean that once they’re passed, you can put a huge amount into an RRSP one day, file for bankruptcy the next, and take all the money out a week later. Several conditions are being considered to prevent this.
First, the bill proposes that RRSP contributions made in the last 12 months before the bankruptcy filing would not be exempt from garnishment. Second, although not included in the bill itself, the garnishment exemption would only apply when a person “locks” their RRSP. No details have been given as to the form of this blocking, but it may be very similar to the current rules for blocking money transferred from registered pension schemes. These rules set annual maximum withdrawal rates based on age.
Finally, there will likely be a cap on the amount covered by the exemption, which will be tied to the bankrupt’s age and the maximum limit on RRSP contributions in the year of bankruptcy. This would allow older Canadians to protect a greater share of their savings than younger people.
Protecting RRSPs from garnishment is consistent with the public policy goal of helping Canadians save for retirement, as evidenced by the tax assistance provided to such savings institutions as part of our tax system. This is especially important for employees who cannot participate in an employer-sponsored retirement plan and for self-employed people, whether they are business owners or other professionals. In fact, professionals, especially physicians, have often been the primary target of aggressive marketing by some life insurance advisors, who have heavily promoted the creditor protection benefits of segregated funds and other life insurance products.
This new legislation would also unify RRSPs with their U.S. counterparts: individual retirement accounts (IRAs). In a unanimous U.S. Supreme Court decision in April of this year, the U.S. Supreme Court ruled that creditors cannot seize IRA accounts in bankruptcy proceedings.
The bill went to second reading on October 6 and was referred to the committee for further submissions and consultations. The Canadian Investment Fund Institute has already signaled that it will join with other lobby groups in asking for the bill’s reach to be further expanded to allow RRSPs to be released from creditors beyond bankruptcy.
Even if no changes are made, the ball is rolling under Bill C-55 and it is likely only a matter of time before all RRSPs and RRIFs are afforded similar creditor protection treatment to other products.
UPDATE – BILL C55 receives Royal Assent – but not yet in force…
On November 25, 2005, the Senate passed Bill C-55, which subsequently received Royal Assent. However, the new law will enter into force on June 30, 2006 at the earliest. The Senate Standing Committee on Trade and Commerce was disappointed by the rushed process that resulted in Bill pass in such a quick format but was provided by letter from Minister of Industry David Emerson that the bill will not enter into force until a number of “implementation issues” have been adequately resolved.
This article originally appeared on Advisor’s Edge. Jamie Golombek, CA, CPA, CFP, CLU, TEP, is vice president of tax and estate planning at AIM Trimark Investments in Toronto. advisorsedge@rmpublishing.com
(12/01/05)
