Is My RDSP an Exempt Asset?
When our debts spiral out of control, filing for Personal Bankruptcy can give you the fresh start you need and deserve.
However, there are many who are reluctant to take this step even though it could benefit them greatly.
Many mistakenly believe that filing for Bankruptcy means that they will never be able to get credit again, while some fear that it means that they will lose all of their assets.
However, there are some assets that are exempt from seizure in the event of a Bankruptcy.
Canadians with disabilities or who have disabled children will be pleased to learn that recent legal precedent implies that their RDSP will likely be protected should they file for Bankruptcy.
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What is an RDSP?
A Registered Disability Savings Plan or RDSP is a savings plan which was established in 2008 as part of the Canada Disability Savings Act.
Its purpose is to make it easier for Canadians with disabilities to save for their long-term financial needs such as medical, care and living costs.
Anyone eligible to receive the Disability Tax Credit can apply for an RDSP.
You can set one up on your own behalf as an adult or you can set one up for your child if they are diagnosed with an eligible disability.
An RDSP is similar to a RESP in that it allows disabled Canadians and immediate family members to put away funds in a separate trust account for a disabled beneficiary.
Additional government support is provided in the form of bonds and grants.
Contributions to RDSPs are not tax deductible but income earned on the funds is tax-deferred until the point of withdrawal.
Curiously, in the same year that RDSPs were introduced, the federal government made changes to the Bankruptcy and Insolvency Act.
These protected RRSP and RRIF contributions, not RDSPs.
This led many Canadians to believe that their RDSPs may be subject to seizure when declaring Bankruptcy, but precedent has shown us otherwise…
Legal precedent
It’s important to note that there’s no specific provision in the Canadian Bankruptcy and Insolvency Act specifically for RDSPs.
However, a 2016 BC Supreme Court ruling established a precedent which will be highly encouraging for those with RDSPs who are considering Bankruptcy.
The court’s ruling held that funds in an RDSP cannot be seized by a Licensed Insolvency Trustee during a declaration of bankruptcy.
The bankrupt in question had $32,250 in trust held in her RDSP, of which she was the sole beneficiary.
The trust was made up of $6,800 in parental contributions and the rest was made up of grants and income growth.
The Royal Bank refused to release the funds from the bankrupt’s RDSP claiming that the money held in the plan was exempt from seizure.
While under the terms of section 146.4 of the Income Tax Act, the money held in an RDSP is “exclusively for the benefit of the beneficiary under the plan”, the specific terms of the trust gave the court the ‘discretion’ to direct that the funds be released for the benefit of the bankrupt’s creditors.
The Judge found that she had to find a balance between the rights of the bankrupt’s creditors under the Bankruptcy & Insolvency Act and the bank’s assertion that the funds were held in trust for the sole benefit of the beneficiary.
In this case, it was deemed that if the portion of funds permitted under the terms of the trust were released, it would result in a requirement for the bankrupt to repay a significant amount in the government-assisted part of the fund.
The Judge ruled that the only “just and equitable” outcome was to refuse to order the release of any funds in the RDSP to benefit the bankrupt’s creditors.
It’s important to note that the court didn’t rule that all RDSPs are exempt from seizure.
However, in lieu of more specific legislation this is an encouraging precedent.
How we can help
Bankruptcy law can be extremely complicated, and it’s often difficult to know exactly what your rights and options are.
We can help you to find a Licensed Insolvency Trustee who can act on your behalf and negotiate with your creditors.
Our friendly team can help you through the different stages of Bankruptcy as well as suggesting potential alternatives like Consumer Proposals.
We’ve been helping Canadians from all walks of life to take control of their debts since 1999.
If you’d like to know more about what we can do for you, call us today on (877)879-4770.
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