The Ins and Outs of RESP Contribution and Bankruptcy
A Registered Education Savings Plan (RESP) is a popular instrument utilized by parents to safeguard their child’s future education. However, what happens to an RESP contribution in the event of bankruptcy? Let’s dive in.
Registered Education Savings Plan (RESP)
An RESP is a unique form of account where parents can deposit funds for their child’s post-secondary education. However, unlike a Registered Retirement Savings Plan (RRSP), an RESP contribution can be seized if the account owner files for bankruptcy.
RESP Contribution and Bankruptcy
The rules surrounding the seizure of an RESP, a Registered Disability Savings Plan (RDSP), or an RRSP in bankruptcy is a complex interplay between federal and provincial laws. In Ontario, the province we will focus on, an RESP contribution can be seized in the event of bankruptcy.
RRSP or RRIF Exemption
Before 2008, the exemption of an RRSP from seizure relied solely on provincial law. However, the Bankruptcy and Insolvency Act (BIA) was amended to protect the assets contained in either an RRSP or a Registered Retirement Income Fund (RRIF) from seizure, with the exception of contributions made within 12 months prior to bankruptcy.
Why the Change in BIA?
The amendment to the BIA was made to level the playing field for RRSPs and RRIFs, regardless of where they were held. Additionally, it was to ensure that retired Canadians facing bankruptcy would not lose their primary source of retirement income due to financial difficulties.
RDSP and Budget 2019
An RDSP is a savings plan designed to provide long-term financial security for a person who qualifies for the disability tax credit. Unlike RRSPs, RDSPs are not exempt from seizure in bankruptcy. However, Budget 2019 proposes to change this, putting RDSPs on equal footing with RRSPs.
RESP: Not Exempt From Seizure
The reason why an RESP contribution is not exempt from seizure in bankruptcy is simple. The child does not obtain property interest in the RESP funds as the parent can collapse the plan at any time before maturity. Therefore, it does not constitute a trust or a transfer of property to the child.
The Future of RESP
On June 3, 2019, a private member’s bill, Bill C-453, was introduced to amend the BIA, so that RESPs receive the same treatment as RRSPs and RDSPs. However, as private member’s bills rarely become law, the future of this initiative remains uncertain.
Addressing Financial Distress
If you’re facing financial distress and concerned about your RESP contribution, RRSP, or RDSP, there are options available to help you navigate these difficult circumstances. As a Licensed Insolvency Trustee, the Ira Smith Team is equipped to provide advice and implement strategies to help you avoid personal bankruptcy while eliminating your debts.
Conclusion
Understanding the intricate details of an RESP contribution and its implications in bankruptcy can be challenging. However, with the right guidance and support, you can navigate these complexities and secure your financial future. Remember, it’s never too late to start over and rebuild your financial health.
