Retirement safe with C-55?: Still just a bill, but it's a step closer to creditor protection for RRSPs
Creditor protection may soon be coming to an RRSP near you.
A new federal bill, if enacted, would exempt all registered retirement
savings plans and RRIFs from being liquidated on behalf of creditors, should an
investor declare personal bankruptcy.
Currently, many life insurance-based RRSP products, such as segregated funds,
and employer-sponsored registered pension plans are exempt, while regular RRSPs
are wide open to creditors seeking repayment.
"There is incongruous treatment between people whose employers force them to
save for retirement versus those who save on their own," says insolvency expert
Natasha MacParland, a lawyer and partner with Davies Ward Phillips & Vineberg
LLP in Toronto who has been involved in various industry consultations on
amendments to the Bankruptcy and Insolvency Act (BIA) and Companies' Creditors
Arrangement Act (CCAA).
Bill C-55 proposes putting RRSP and RRIF savings on the same grounds as
registered pension plans and RRSPs issued by insurance companies.
This new legislation would also bring RRSPs in line with their U.S.
counterparts: individual retirement accounts, or IRAs. In a unanimous U.S.
Supreme Court decision in April of this year, the United States' highest court
ruled that creditors could not seize IRAs in bankruptcy proceedings.
Note that, once passed, the new legislation won't give you leave to make a
massive RRSP contribution on one day, declare bankruptcy the next and pull all
the money out a week later. There are several conditions being contemplated to
avoid just such a scenario.
First, the draft Bill proposes RRSP contributions made in the last 12 months
prior to bankruptcy will not be exempt from seizure. Second, the seizure
exemption would only apply if an individual "locks in" his or her RRSPs,
possibly similar to the current locking-in rules for monies transferred from
registered pension plans, as in a LIRA.
Finally, there will likely be 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, such that older Canadians would be permitted to protect
more of their savings than younger ones.
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 self-employed businesspeople and
In fact, professionals, especially doctors, have often been the primary
target of aggressive marketing by some life insurance advisors who heavily
promoted the creditor-protection benefits of segregated funds and other life
Parliament is expected to reconvene on Sept. 26, and the second reading of
the Bill is expected sometime this fall. That being said, given the minority
government's difficulty in passing the 2005 federal budget, it's possible the
Bill will die should an election be called in the fall.
Nonetheless, Ottawa has got the ball rolling with Bill C-55 and it's likely
just a matter of time before all RRSPs and RRIFs are afforded the same creditor
protection treatment as other products.
"It creates a level playing field," says J-P Bernier, vice-president and
general counsel with the Canadian Life and Health Insurance Association.
Ms. MacParland adds, "It's the right thing to do."
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Photo: Andrew Barr Illustration, National Post / (Bill).