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Self-employed get modest help from recent court case in keeping creditors away from retirement money

by Wayne Cheveldayoff, 2004-07-08

An unfortunate shortcoming in Canadian law puts self-employed business people and entrepreneurs at a disadvantage with respect to protecting retirement monies from creditors.

This group relies heavily on building retirement savings through RRSPs, which, except in Saskatchewan and Prince Edward Island, are not given legal protection from creditors.

In contrast, all retirement funds held in registered pension plans offered by employers receive full creditor protection under Canadian law.

Because of this legal anomaly, financial planners usually counsel business people who may be at risk of law suits, bankruptcy or business failure at some point in the future to place RRSP money in segregated funds.

Since segregated funds are an insurance product and since insurance with a designated beneficiary is protected from creditors, segregated-fund RRSPs will not be seized in the event of bankruptcy or other financial difficulty (unless fraudulent activity has taken place).

While investors have a great variety of segregated funds from different insurance companies to choose from, the annual management fees are between 0.5 and 1 percentage point higher than for comparable mutual funds and this puts a drag on investment return –putting segregated-fund investors at a definite disadvantage.

Additionally, unlike other investors, those with large amounts in their RRSPs wanting protection from creditors are not able to take advantage of the variety of lower-cost wrap accounts with annual management fees in the 1 to 1.5 per cent range. Annual management fees for segregated funds investing in equities are typically around 3 per cent.

For those seeking creditor protection and their families, a recent court case has made a small step towards bringing about greater fairness.

In a June 16 decision (Amhearst Crane Rentals vs. Arlene Clare Perring), the Court of Appeal of Ontario confirmed a lower-court ruling that RRSPs with designated beneficiaries are inaccessible to creditors seeing repayment from an estate. The ruling said first that RRSPs do not form part of the estate of the deceased in Ontario and instead devolve to the beneficiary, and second that the creditor has no right to seek repayment from the beneficiary.

This is an important victory and will ease the concerns of some, if the case is not appealed and overturned by a higher court. Business people sometimes have incurred high debt and creditors have been known to surface to make claims from an estate. In such cases, at least the funds held by the deceased in RRSPs will be protected for family members who are beneficiaries.

One expert who has studied the case, Jamie Golombek, vice president, taxation and estate planning for AIM Funds Management, believes this case may have implications for provinces with similarly worded legislation, namely Alberta, Manitoba, Saskatchewan, Newfoundland and Labrador and Nova Scotia.

But in other jurisdictions or for those who feel they may need creditor protection while they are still living, there is no relief arising from this legal case.

The obvious unfairness of the situation has been recognized in legal circles and at the political level. The 1999 Uniform Law Conference of legal experts from different governments recommended that RRSPs be creditor-protected.

A personal insolvency task force set up by the federal government recommended it in 2002 and last November the Senate also came out in favour.

Prince Edward Island has had legislation on the books since 1992 but in response to the recent urgings for change, only Saskatchewan has implemented the necessary changes, through its Registered Plan Exemption Act in March 2003, to protect RRSPs and RRIFs.

Until other provinces, or perhaps the federal government, weigh in, most investors in Canada will only have segregated funds or such things as straight-interest deferred annuity contracts, the life insurance industry’s version of bank GICs, to work with in achieving creditor protection for RRSP monies.

But those taking steps in this direction should be aware that last-minute contributions to these products when bankruptcy is already looming will very likely not be protected. Under fraudulent conveyance legislation in various provinces, money hidden in this way when creditors are closing in can be clawed back.

This is why it is important for anyone who may have exposure to business risk to consult with a financial planner and make the moves needed for protection of retirement funds when times are good.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2004 Wayne Cheveldayoff