IFIC weighs in on bankruptcy protection proposals

In the final days of the Liberal government, members of parliament and the senate pushed through an interesting bit of legislation that could have a significant effect on retirement planning strategies for business owners.

The Wage Earner Protection Program Act was given royal assent on November 25, 2005, without public consultation or amendments, just two days before a non-confidence motion collapsed the minority Liberal government.

The bill was passed so quickly that the Senate standing committee returned the bill, without amendments, on the condition that it would not go into effect until June 30, 2006 in order to allow time to study the bill and hold public consultations on related regulation proposals.

“It went through the house very quickly because it was a very popular bill. Politically, obviously, it’s a very positive bill. The theory behind it is good,” says Ralf Hensel, IFIC’s senior counsel.

Among other things, the act amends the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act, the Canadian equivalent of Chapter 11 in the United States, to protect unpaid employee wages in the event a company declares bankruptcy.

Most notable for financial planners, however, is the fact that the bill also makes RRSPs and RRIFs exempt from the list of assets that can be seized by creditors in bankruptcy.

The act blocks any premeditated sheltering on the part of anyone about to declare bankruptcy. The claw-back provision says any assets transferred into the RRSP in the year preceding the bankruptcy declaration, are not protected from creditors.

Along with this claw-back, the act included two anti-avoidance proposals, including a cap on how much could be sheltered in an RRSP in the event a client declares bankruptcy and possible “locking-in” mechanisms that could be added into regulations at a later date, once the Senate has the chance to review them. The details of both proposals — whether the cap is a “hard cap”, a figure set out in regulations, or one based on a mathematical formula; and rules outlining how clients could unwind locked-in assets, have not been determined.

This review is expected to begin next month. This week, IFIC submitted a letter to the Standing Senate Committee on Banking, Trade and Commerce to outline its position, endorse the act and make recommendations regarding the proposed regulations.

IFIC says the act “begins the process of putting all registered retirement savings plans and registered retirement income funds on the same level-playing field as both employer-sponsored registered pension plans (RPPs) and insurance based products like segregated funds and insurance-based deposit RRSPs and RRIFs. That being said, we are concerned that the act, in its present form, does not go far enough.”

In its list of recommendations, the fund industry group says all RRSPs and RRIFs should be exempt from seizure generally and the exemption should not be restricted to situations when the debtor is bankrupt.

Hensel admits that of the recommendations, this first provision likely won’t be addressed in the consultation process. “The only one in our letter that isn’t going to be dealt with too quickly, I think, is the first [recommendation], which is where we think protection should be extended to cover non-bankruptcy insolvency situations,” he says. “But that’s a provincial matter. To what extent does the Senate have authority to influence the provinces? We put it in there because we want to make sure that it’s understood that pensions and insurance products still have greater protections.”

The remaining two recommendations address the proposed locking-in requirements — a move that IFIC says is unnecessary and creates a huge administrative burden that will result in added costs.

“This is simply a proposal. It may get added into the regulation, it may not. I think it’s likely that you won’t see them [enacted],” says Hensel. “We believe that there is enough general bankruptcy creditor protection. The fraudulent conveyance, preference and reviewable transaction rules, there are already a lot of them out there.”

“We think that any potential abuse by debtors is already adequately covered by that. To build a complicated lock in system, in our view there aren’t even mutual funds or banking products out there now, that could be locked in this way. You would need to create a whole new set of products. It’s just too much of a hassle.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com