Experts weigh in on proposal to creditor-proof RRSPs

(August 8, 2005) Proposed changes by the federal government to creditor-proof RRSPs are being called a step in the right direction. But one observer says they don’t go far enough.

New rules were tabled this past June as part of the insolvency and wage earner protection legislation, which proposes sweeping changes to secure an individual’s savings in the event of a personal or employer bankruptcy. If adopted, the bill will modernize both the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act so that RRSP savings would not be considered assets that could be liquidated to pay off a creditor.

“It’s a good start,” says Bob Hutchison, a partner with Borden Ladner Gervais in Toronto, who specializes in the financial services industry. But he notes the new rules would kick in only in the event of a bankruptcy or insolvency. While that would cover off most cases, non-insured RRSP assets would still be at risk to creditors if, for example, an individual was being sued.

“Insurance-based products that are functionally the same as RRSPs have a degree of protection that non-insurance RSP products don’t have, and that’s not fair,” he says. Still, Hutchison acknowledges that Ottawa is doing what it can within its jurisdiction. It’s an issue that affects all RRSP holders, although high-income earners who have the incentive to buy into a self-directed retirement plan and entrepreneurs are particularly at risk.

The IDA is developing a submission on this legislation. “We very much welcome the amendments to the bankruptcy act,” says Jon Cockerline, the IDA’s director of capital markets. “That is something that has been neglected and it presents an unfair playing field for products that compete directly with RRSPs and RRIFs.”

How these amendments are implemented and the types of restrictions that will be applied to RRSPs are some of the items the IDA will consider. For instance, how long will an RRSP have to be invested for before it is protected?

This is a topic of some concern amongst creditors. Back in 2002 a discussion paper by Industry Canada outlined how debtors could potentially shield their savings in bankruptcy by putting it into an RRSP. Not surprisingly, the new bill calls for protections to be extended to only those contributions made 12 month or longer before the date of bankruptcy.

The IDA is waiting to see a draft of the proposed changes before it forms its opinion on any of these questions, however Cockerline says it is reasonable to expect that there will be some kind of lock-in provision. The IDA, for its part, is seeking a level of consumer protection that doesn’t set up a tax shelter that affords an escape from bankruptcy.

Petra vanderLey, a Vancouver-based consultant and lawyer with Watson Wyatt, agrees the proposed changes will benefit consumers, although she doesn’t feel the amendment was essential. As she points out, individuals already have the choice to go with an insurance-based product or group RSP. Still, she agrees the changes will increase competition and give consumers more options.

Attention now shifts back to the provinces, which are in varying states of debate over proposed changes to their own legislation. “The provinces have a lot of different kinds of legislation that affect creditor’s rights outside bankruptcy and insolvency and it would be important to make sure they come in line with the federal proposals,” notes Hutchison.

Prince Edward Island and Saskatchewan are the most advanced in their legislation. But the country’s most populous provinces — Ontario, Quebec and British Columbia — have taken few steps towards drafting similar legislation.

It’s going to be very complicated to get the provinces to bring their legislation in line with the federal government, says Cockerline. “Ontario hasn’t really begun discussions on this,” he notes. “It has a long way to go to get to the kind of legislation that we’re looking for.”

If the change goes through, financial institutions selling RRSPs could use creditor protection as a sales tool. Still, it’s questionable whether this will work as industry insiders feel consumers are not aware of the issue. “I don’t think most people think about going into bankruptcy,” says vanderLey.

Filed by Mark Brown, Advisor.ca, mailto:mark.brown@rci.rogers.com