RRSP, Registered Savings Accounts and Bankruptcy Laws in Canada: A Comprehensive Guide
Filing for bankruptcy can be an intimidating process, and one of the biggest concerns for many individuals is what will happen to their RRSP (Registered Retirement Savings Plans) and other pension savings. In this article, we’ll explore the ins and outs of RRSP bankruptcy laws in Canada, and how they impact different types of registered savings accounts.
Understanding RRSP and Bankruptcy
In Canada, the majority of RRSPs are safeguarded during bankruptcy. In most cases, you can retain your RRSP savings even after declaring bankruptcy. However, it’s crucial to understand the specific laws and regulations that govern this process.
Interpreting The Bankruptcy and Insolvency Act (BIA)
The significant legislation concerning bankruptcy in Canada is the Bankruptcy and Insolvency Act (BIA). According to section 67 (1) (b.3), RRSPs are exempt from seizure by your creditors, except for contributions made within the last 12 months. Additionally, provincial laws also play a role in determining what assets are exempt from seizure.
For instance, in Ontario, the Ontario Pension Benefits Act safeguards Registered Pension Plans from being seized in bankruptcy. Similarly, the Insurance Act of Ontario protects RSPs with a life insurance component if the beneficiary is a spouse, parent, child, or grandchild.
Common Scenarios Involving RRSP and Bankruptcy
There are several common scenarios where RRSPs and bankruptcy intersect. For instance:
- Your employer deducts 5% of your salary for a registered company pension. All these contributions, including those from the last year and those matched by your employer, are safe from seizure.
- You have a Registered Retirement Plan with an insurance component with a company like Sun Life, and your spouse is a beneficiary. In this case, all contributions, including those from the last year, are safe.
- You contribute 3% of your salary to your individual RRSP through an automatic savings program. Here, contributions made to your RRSP within the 12 months before filing bankruptcy are at risk of seizure by the trustee.
Trustee Rights and Plan Holder Rights
The trustee in a bankruptcy case cannot have more rights to the assets in the plan than the plan holder. As such, if the plan contains conditions that prevent the plan holder from requesting payment until a specific event (like retirement, termination, death), the trustee cannot seize what the plan holder cannot withdraw.
Transfers, Spousal RRSP, and RRIF
It’s essential to differentiate between a transfer and a contribution. Funds transferred from one RRSP to another are not considered new contributions, and hence, cannot be seized by your trustee.
In the case of a spousal RRSP and bankruptcy, the BIA applies to RRSPs that you own and control. Therefore, if you file for bankruptcy, contributions made to your spouse’s plan are not subject to seizure by the trustee.
A Registered Retirement Income Fund (RRIF) is treated similarly to an RRSP. If you are withdrawing funds from a RRIF and still making contributions, the maximum exposure is the contributions made within the past 12 months.
RDSP, DPSP, and Locked-In Pension Plans
The BIA doesn’t include a specific provision dealing with a Registered Disability Savings Plan (RDSP). However, a recent ruling by the British Columbia Supreme Court stated that an RDSP cannot be seized by a Licensed Insolvency Trustee in bankruptcy for the benefit of creditors.
A Deferred Profit Sharing Plan (DPSP) is treated similarly to an RRSP in bankruptcy. The maximum exposure is any contributions made in the last 12 months.
Pension plans that are designated as Locked-In Registered Plans are exempt from bankruptcy or seizure, including recent contributions.
TFSA and RESP in Bankruptcy
While a Tax-Free Savings Account (TFSA) is a registered savings vehicle, it isn’t an RRSP and is therefore subject to seizure.
In the case of a Registered Education Savings Plan (RESP), the plan holder can cash out at any time. As such, an RESP is considered an asset of the plan-holder, and if the plan-holder is bankrupt, an RESP is subject to seizure by the trustee.
Strategies to Safeguard At-Risk Assets
If you are considering personal bankruptcy, you might have stopped making contributions to your RRSP, as most of your income is being used to make debt payments. However, if your recent contributions are at risk, there are several strategies to protect your assets:
- You may request that the trustee contact the bank or investment company and withdraw the contributions from the prior 12 months. The trustee is responsible for paying the tax owing on that withdrawal, so you have no further costs or obligations.
- You may decide to contribute an extra amount to your bankruptcy to “buy back” your RRSP contributions for the last 12 months. For instance, if you have contributed $1,000 and you are in a 30% tax bracket, the trustee would recover a net amount of $700; you could pay the trustee an extra $700 and keep the full amount of your RRSP. A payment plan matching the term of the bankruptcy can be arranged.
If you have significant seizable assets, you could decide to file a consumer proposal. In a
consumer proposal, you don’t lose your RRSP or any assets.
Preserving Your Retirement Amidst Bankruptcy
One common mistake people make when in financial trouble is draining their RRSP savings to keep up with debt payments. If you have significant debts, using your RRSP (a protected asset) to fund debt obligations only serves to delay the inevitable. You should not use your RRSP savings to pay down debt without first speaking with a Licensed Insolvency Trustee about your options.
Conclusion
Understanding the intersection of RRSP, Registered Savings Accounts, and Bankruptcy Laws in Canada can be complex. However, with the right knowledge and guidance, you can navigate this challenging terrain and safeguard your financial future. Remember, it’s crucial to seek professional advice before making any decisions that could impact your financial health.
