Understanding the Impact of Bankruptcy or a Consumer Proposal on RRSPs, RESPs & Pension Plans
In the financial world, it’s not uncommon for people to face distressing times. Financial troubles may have led you to consider bankruptcy or a consumer proposal as a solution. However, you might be wondering, “What happens to RRSPs, RESPs and Pension Plans in Bankruptcy or a Consumer Proposal?” It’s a valid question, and in this article, we will try to provide a comprehensive answer.
1. Overview: RRSPs, RESPs & Pension Plans
Before diving into the details, let’s first understand what these terms represent.
- Registered Retirement Savings Plan (RRSP): An RRSP is a retirement savings plan that you establish, that is registered with the Canada Revenue Agency, and to which you or your spouse or common-law partner contribute.
- Registered Education Savings Plan (RESP): An RESP is a tax-sheltered education savings account that can help you, your family, or friends save for a child’s post-secondary education.
- Pension Plans: A pension plan is a type of retirement plan where employers promise to pay a defined benefit to employees upon retirement.
2. RRSPs in Bankruptcy and Consumer Proposal
2.1 RRSPs and Bankruptcy
In the case of Bankruptcy, RRSPs and RRIFs (Registered Retirement Income Funds) are largely considered exempt assets in Canada. This implies that they can’t be seized for clearing your debts. However, your trustee must reclaim any contributions you made to an RRSP or RRIF in the 12 months before filing for bankruptcy.
2.2 RRSPs and a Consumer Proposal
When filing a consumer proposal, you retain full control over your RRSPs and RRIFs. This signifies that your RRSPs will remain untouched.
3. RESPs in Bankruptcy and Consumer Proposal
3.1 RESPs in Bankruptcy
Contrary to popular belief, RESPs are not protected in bankruptcy. Even though these funds are set aside for children’s education, they are not considered a true trust account. Therefore, RESPs are treated as assets, and your insolvency trustee can seize them.
3.2 RESPs in a Consumer Proposal
In a consumer proposal, you maintain full control over your RESPs. This is because, unlike bankruptcy, a consumer proposal doesn’t involve the seizure of assets.
4. Pension Plans in Bankruptcy and Consumer Proposal
4.1 Pension Plans in Bankruptcy
Pension savings invested in an RRSP or RRIF are exempt from seizure. Most provincial laws also provide protection for pension plans outside of RRSPs. However, any pension benefits you might be receiving are considered income for purposes of determining surplus income.
4.2 Pension Plans in a Consumer Proposal
In a consumer proposal, pension plans are generally considered exempt, and they cannot be seized by your trustee. You’ll remain in control of them.
5. Transfers between RRSPs
A transfer is different from a contribution. If you move funds from one RRSP to another, these are not considered new contributions in the last 12 months, and so they cannot be seized by the trustee.
6. Spousal RRSP and Bankruptcy
The BIA applies to RRSPs you own and control. If you file bankruptcy, contributions made to your spousal plan are not subject to seizure by the trustee.
7. RRIF and Bankruptcy
A RRIF is treated similarly to an RRSP. Normally, individuals withdrawing funds from a RRIF are not making current contributions. However, if they do, their maximum exposure is contributions made within the past 12 months.
8. RDSP and Bankruptcy
While there’s no specific provision in the BIA to deal with a Registered Disability Savings Plan (RDSP), recent rulings suggest that funds in an RDSP cannot be seized by a Licensed Insolvency Trustee in a bankruptcy for the benefit of creditors.
9. DPSP and Bankruptcy
A Deferred Profit Sharing Plan (DPSP) is treated the same as an RRSP in a bankruptcy. The maximum exposure is any contributions made in the last 12 months.
10. Locked-in Pension Plans
Locked-In Registered Plans are exempt from bankruptcy or seizure. Therefore, the trustee has no entitlement to money in this plan, including recent contributions.
11. TFSA and Bankruptcy
While a Tax-Free Savings Account (TFSA) is a registered savings vehicle, it is not an RRSP and as such is subject to seizure in a bankruptcy.
12. RESP and Bankruptcy
An RESP is considered to be an asset of the plan-holder. Therefore, if the plan-holder is bankrupt, an RESP is subject to seizure by the trustee.
13. Tips to Protect at-risk Assets in Bankruptcy
If you have made contributions in the last 12 months or have other seizable assets like RESPs, you have three options:
- You may request the trustee to contact the bank or investment company and withdraw the contributions from the prior 12 months.
- You may decide to contribute an extra amount to your bankruptcy to “buy back” your RRSP contributions for the last 12 months.
- 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.
14. Protect Your Retirement from Bankruptcy
One of the most common financial mistakes is draining RRSP savings to keep up with debt payments when in financial trouble. Since RRSPs are protected in a bankruptcy, it makes sense to preserve these funds for your retirement.
In summary, bankruptcy or a consumer proposal can have varying effects on your RRSPs, RESPs, and Pension Plans. Therefore, it’s essential to understand these implications before making a decision. If you are in financial distress, it is advisable to seek professional guidance to help navigate through these complex financial situations.
