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Federal bill provides partial creditor protection for RRSPs

by Wayne Cheveldayoff, 2005-07-21

Regular RRSPs are currently not protected from creditors in the event of bankruptcy in most provinces. This will change if federal legislation introduced in June becomes law, but since it provides only partial protection, Canadians may still resort to other techniques to protect their retirement savings.

The lack of creditor protection for RRSPs has long been a shortcoming in Canadian law.

It has put Canadian entrepreneurs and self-employed business people at a significant disadvantage with respect to protecting retirement monies in the event of business failure.

It is a growing problem because an increasing proportion of the population is self-employed or operating small companies where creditors, such as banks providing business loans, demand personal guarantees.

Even those not involved in business can be at risk. There are many examples of people losing their life savings because of law suits, including those related to car accidents where liability coverage was inadequate.

The present exposure of regular RRSPs is inequitable given that all retirement funds held for employees in employer pension plans receive full creditor protection under Canadian law.

Canadians concerned about creditor protection have mainly been attracted to the segregated-fund RRSPs. Because these are structured within an insurance policy, they receive complete creditor protection.

In the United States, where most individuals are one illness away from bankruptcy, individual retirement accounts (IRAs) receive automatic creditor protection up to US $1 million.

In Canada, only Saskatchewan and Prince Edward Island have enacted laws in recent years to creditor-proof RRSPs.

Existing federal bankruptcy legislation permits provinces to determine the exemptions from creditors. But only these two provinces have taken action on the RRSP front on behalf of their citizens.

The new federal legislation would basically take this right to exempt RRSPs away from the provinces and standardize treatment across the country.

The federal government press release declared the changes to the Bankruptcy and Insolvency Act would exempt “all RRSPs from seizure in brankruptcy.”

But digging deeper into the details yields a more limited perspective with a number of conditions attached. Unfortunately, the partial protection would overrule and roll back the full-blown protection offered currently in Saskatchewan and Prince Edward Island.

The news release says these conditions “are necessary to ensure fairness and to curb potential for abuse so that bankrupts cannot hide assets from creditors.”

First, the legislation provides that all contributions made into an RRSP within a year prior to bankruptcy would be available to creditors.

Second, the legislation itemizes two other areas that will be subject to government regulations, which have not yet been finalized.

One is that there will be a maximum cap on what can be protected within an RRSP. One model suggested by a task force that examined this issue in 2002 and a Senate committee that subsequently published a report is to set the maximum at the current annual RRSP contribution limit ($14,500) times the number of years the individual is over age 18. Someone who is 48 years old would have creditor protection for only $435,000.

Another is how creditor protection is triggered. The federal regulations being contemplated would insist that at the time of bankruptcy, an individual wishing to protect RRSP funds up to the maximum cap, would have to lock in the RRSP until retirement, following current rules for locked-in RRSPs which aren’t accessed by individuals until converted into either annuities or RRIFs.

The maximum cap and lock-in requirement are still open for discussion. They seem unnecessary and unnecessarily complicated, but it may be, in the Canadian context where financial institutions often prevail, the only way that cross-country creditor protection for RRSPs will occur.

The proposed federal bill is a step in the right direction. Canadians need creditor-protection for regular RRSPs, which offer greater flexibility and lower fees than segregated funds offered by insurance companies.

But given the compromise restrictions being imposed on the creditor proofing of RRSPs, it will probably be wise for individuals to still use to some degree segregated funds and other techniques to protect their retirement savings, such as straight-interest deferred annuity contracts, the life insurance industry’s version of bank GICs.

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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©2005 Wayne Cheveldayoff