Protecting RRSPs from creditors

Many people in the financial industry take the view that Registered Retirement Savings Plans (RRSPs) are inferior to registered pension plans (RPPs). The reason? Creditor protection.

Members of RPPs have historically been able to sleep a little better at night, knowing their retirement plans cannot be seized by any personal creditors they may have, unless the creditor is the Canada Revenue Agency (CRA) or in some provinces, an estranged spouse. However, this past summer, the federal government announced amendments to the Federal Bankruptcy and Insolvency Act that begin putting non-insurance RRSPs on a more level playing field with RPPs, when it comes to creditor protection.

Effective July 7, 2008, creditor protection is now universally available for a bankrupt’ person’s assets held in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or a Deferred Profit Sharing Plan (DPSP).

The new legislation will affect your clients, so I’ve outlined the most important aspects of this law and how it applies to them.

Bankruptcy

This new federal law only applies to clients who enter formal bankruptcy proceedings, and is effective for all bankruptcy claims initiated on and after July 7, 2008. Unfortunately, this law does not exempt RRSP and RRIF assets outside of a bankruptcy context. Therefore, clients who may be suffering financial hardship that do not wish to declare bankruptcy will not benefit from this new law and may still have their RRSPs/RRIFs seized by creditors. Segregated funds are still the optimal strategy for providing clients with blanket creditor protection in both registered and non-registered plans.

Clawback period

The new law includes a clawback period, which means creditors may still attack and successfully seize any property contributed to an RRSP, RRIF or DPSP within the 12 months preceding the date of bankruptcy. A trustee can also seize a registered plan in bankruptcy within five years of a transfer to the plan, if the client was insolvent at the time of the transfer. Therefore, any attempt to transfer property into a registered plan in anticipation of entering bankruptcy will not provide your clients with protection.

Provincial precedence

Since creditor protection is regulated provincially, many provinces have already moved forward and have enforced laws to protect RRSPs. The new federal rules apply only to those provinces that do not yet have this type of legislation. That is, where provincial legislation exists to protect RRSPs from creditors in bankruptcy, these laws will have precedence over the federal laws. Currently, if your clients reside in Saskatchewan, Manitoba, Quebec, Prince Edward Island or Newfoundland and Labrador, provincial law will protect their RRSPs from creditors in the event of bankruptcy, and possibly in other situations as well, such as financial hardship. If your client lives in any other province or territory not mentioned (British Columbia, Alberta, Ontario, New Brunswick, Nova Scotia and the territories) the new federal law would provide creditor protection for your clients’ RRSPs, RRIFs and DPSPs in case of bankruptcy.

Some provinces also have specific legislation that provides creditor protection in the case of death. Specifically, BC and PEI have laws in place that exclude the value of an RRSP or RRIF from an estate where the annuitant has passed away and, as a result, no estate creditor can seize the registered plans. In Ontario, no legislation exists; however, there have been high profile court cases that have provided the RRSP/RRIF annuitant with creditor protection on death. In Ontario, the result of the Amherst Crane Rental v. Perrin decision by the Ontario Court of Appeal in 2004 provides creditor protection as long as the estate is not named the beneficiary. Since every province is different, it is important to review the laws for the client’s province of residence to ensure the requirements for creditor protection are met, if applicable.

Locked- in and insurance plans

The new laws have a direct impact only on those clients with non-insurance RRSPs, RRIFs and other similar plans. Locked-in plans, including the property in LIRAs, LIFs, and LRIFs, enjoy the same creditor protection as RPPs under their respective provincial and territorial pension legislation. Similarly, the new federal rules have no application to insurance-based RRSPs and RRIFs, because insurance legislation protects insurance policies, including those held in RRSPs and RRIFs, from the claims of the policy owner or annuitant’s creditors, as long as a spouse, child, grandchild or parent of the annuitant is named as the beneficiary.

Helping clients manage risk is a vital role of a financial advisor. The risk of future creditors seizing your clients’ hard-earned assets is one that would be detrimental to the client’s financial well-being. Understanding how these new federal laws intertwine with any existing provincial/territorial legislation to provide creditor protection for RRSPs will go a long way toward developing the appropriate strategies in reducing risk and easing clients through turbulent times.

Frank Di Pietro

Tax & Estate

Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at fdipietr@mackenzieinvestments.com.