Is my client’s RRSP protected if they go bankrupt?

Canadian retirement savers were provided with an enhanced safety net when the federal Bankruptcy and Insolvency Act was revised in 2009 to extend creditor protection to RRSPs and RRIFs.

“Part of the reasoning behind that change was to protect Canadians’ retirement years and put the level of protection they receive on a reasonably level footing with registered pension plans that [then offered] much greater creditor protection than RRSPs and RRIFs,” said Doug Carroll, a tax and estate specialist with Aviso Wealth Inc. in Toronto.

However, people can overestimate that level of protection, Carroll said: “It is still possible that the RRSP or RRIF of an otherwise solvent person could be exposed to a creditor who obtains a court order. It depends on each province’s rules whether RRSPs and RRIFs are protected in such non-bankruptcy circumstances.”

For provinces and territories without creditor protection, federal legislation protects registered plans from creditors if the annuitant declares bankruptcy. Protection under bankruptcy at the federal level is provided for RRSPs, RRIFs, RDSPs and deferred profit-sharing plans (DPSPs), said Carol Bezaire, vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto.

Most bankruptcy protection will exclude contributions made within 12 months of declaring bankruptcy, Bezaire said. Bankruptcy laws will also look at contributions made in the previous five-year period if the annuitant or account holder was bankrupt or anticipated declaring bankruptcy, or if there were any fraudulent activities connected to their contributions, she noted.

Jurisdictions take different approaches.

Grant Bazian, president of MNP Ltd., the bankruptcy and insolvency arm of MNP LLP, in Vancouver, said that RRSPs and RRIFs in British Columbia are exempt except for the last 12 months of contributions. However, if the RRSP or RRIF is an insurance product with a properly named beneficiary — specifically a parent, spouse or common-law partner, child, or grandchild — all contributions, including those made within 12 months of bankruptcy, would be protected.

But in Alberta, all RRSPs and RRIFs are creditor exempt, regardless of the timing of contributions or the type of product, Bazian said.

Carroll noted that under Ontario’s Insurance Act, if a spouse or common-law partner, child, grandchild or parent is a named beneficiary in an insurance-based RRSP or RRIF, then the plan is protected from creditors during the plan holder’s lifetime. Beneficiary designations for non-insurance plans in Ontario are made under the Succession Law Reform Act, which does not provide lifetime creditor protection.

Generally, pension monies in all Canadian jurisdictions are protected from creditors while in the plan, including defined-benefit or defined-contribution plans, or when the proceeds are transferred to a locked-in retirement account (LIRA) or a life income fund (LIF), Bezaire said.

“Provincially, British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island and Newfoundland and Labrador offer full protection from creditors for RRSPs, RRIFs, and DPSPs for the annuitant/account holder individually, or for their estate in B.C., PEI and Ontario,” said Bezaire.

Registered investments held with an insurance company, such as a segregated fund, are generally protected from creditors and from bankruptcy claims if there is an irrevocable beneficiary designation of a spouse or common-law partner, child, parent or grandchild of the annuitant/account holder designated. That applies to all provinces except Quebec, said Bezaire.

For an insurance contract in a registered account to be creditor-protected in Quebec, it must qualify as an annuity contract and have a named beneficiary who is one of a married or civil union spouse (a common-law spouse is not recognized), ascendants or descendants of the annuitant/account holder, or an irrevocable beneficiary, Bezaire said.

Creditor protection for non-registered investments and TFSAs in Quebec is available through an insurance product if the beneficiary designation follows the rules with respect to qualifying as an annuity contract and having a properly named beneficiary, and there is no fraudulent activity involved, she added.

Quebec is the only jurisdiction in Canada that offers any creditor protection for TFSAs. All other federal and provincial/territorial legislation does not cover TFSAs from bankruptcy, Bezaire said.