When it comes to protecting your retirement savings from creditors in the
event of bankruptcy, not all retirement plans are created equal. But that may
soon change, thanks to the new Bill C-62 that was passed by Parliament last week
and is now before the Senate.
Under 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
RRSPs and RRIFs enjoy protection from the claims of creditors upon bankruptcy.
The new bill would exempt all RRSPs and RRIFs from being liquidated on behalf
of creditors in a 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.
Once passed, you won't be able to make a massive RRSP contribution on one
day, declare bankruptcy the next and then 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
Bill C-62 is based on old Bill C-55, which was passed by the Liberal
government just prior to the 2006 federal election but never proclaimed law by
the current Conservative government due, in part, to objections by the Bloc
Quebecois, specifically on this last point.
The Bloc was concerned that the one-year look-back infringed 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
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 burdensome
and expensive to administer, creating additional complexity and cost for
consumers. 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 opposed by the Investment Funds Institute of Canada, has
been eliminated in the new bill so that non-insurance RRSPs and RRIFs are put on
a level playing field as far as bankruptcy protection with insurance products,
which have no caps.
But not everyone's smiling. "Creditors and banks may not be happy," says
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
Jamie Golombek, CA, CPA, CFP, CLU, TEP is vice-president, taxation and
estate planning, at AIM Trimark Investments in Toronto.