Economic turbulence, uncertainty and several years of low yields are causing people with high debt loads to arrange their estates to protect their key assets from potential creditors.  From the opposite perspective, creditors’ collection efforts are becoming more difficult.  RRSPs and RRIFs are obvious targets for creditors.

No Exemption From Seizure for RRSPs and RRIFs (With Exceptions)

In a nutshell, in Ontario RRSPs and RRIFs are not protected from the claims of creditors. However there are important exceptions for the following:

• Locked-in RRSPs, which are RRSPs established with transfers from registered pension plans

• RRSPs and RRIFs sold by insurance companies as part of a life policy in which a spouse (including a same-sex spouse), child, grandchild or parent of the life insured is named as a beneficiary, or in the case of any other beneficiary designation so long as it is an irrevocable designation.

Creditor protection planning should be an important consideration for owner-managers, professionals and other entrepreneurs.  The life insurance products which are RRSP eligible should therefore receive high consideration, but beware also that these products bear substantial fees and MERs well above comparable non-insurance products.  Since spouses are separate as to property, spousal RRSPs are another viable option.  To avoid a challenge by creditors, transfers to creditor proof plans must be undertaken early and definitely well before a person becomes insolvent or is on the eve of insolvency.

The exemption for locked-in RRSPs underscores the advantages afforded participants in registered pension plans, as compared to most Canadians who have to rely on the RRSP as their primary retirement savings vehicle.

Seizure of RRSPs and RRIFs After Death

When death occurs, creditors realize that their time for getting paid is short.  As well, many debts and obligations crystallize and become payable as a result of death. However, creditors have a harder time of it after death if they wish to seize RRSPs or RRIFs. If a beneficiary has been designated in the RRSP or RRIF, the Courts in Ontario have ruled that the deceased’s creditors can not claim against the policy. In effect, the proceeds belong to the designated beneficiary(ies) immediately after the moment of death. 

If an RRSP or RRIF is payable to the deceased’s estate because there is no beneficiary designation available to satisfy the claims of creditors.  This itself is a good reason for naming a beneficiary to an RRSP or RRIF account.  Designating anyone other than a spouse can have some quite unexpected reverberations within the estate and therefore it is very important to review your Will and obtain tax advice before naming a beneficiary other than a spouse. Provided that a person intends to benefit his or her spouse, we routinely advise clients to include a clause in their wills to designate their spouse as a beneficiary of any RRSPs and RRIFs as a precaution against the possibility that the designation in the RRSP / RRIF documents has been overlooked.

Everything Changes in Bankruptcy

As a result of amendments to the federal Bankruptcy and Insolvency Act which came into force in July, 2008, RRSPs, RRIFs and other registered plans under the Income Tax Act (such as Deferred Profit Sharing Plans) no longer form part of the bankrupt’s estate for distribution among creditors, with the exception of contributions during the 12 months before the date of the bankruptcy.

It is easy to envisage the situation where the debtor whose RRSP is substantial decides to file for bankruptcy to preserve the RRSP assets and protect them from seizure by creditors.

Ontario has no plans to pass legislation to provide that RRSPs and RRIFs are exempt from seizure although it would bring consistency between the provincial law and the federal bankruptcy law, and also help put RRSP / RRIF investors on an equal footing with participants in registered pension plans.

For more information please contact Wesley Brown at (416) 368-1744 or by email at wbrown@businesslawyers.com.

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