Are your retirement savings protected?
Canadians who own registered retirement savings plans (RRSPs) know the importance in building and maintaining value in their savings plans. In most cases, these plans slowly grow over the course of our entire lives and comprise a large part of our net worth. Fortunately, our lawmakers also agree that it is critical to preserve your retirement savings for your future.
Property in RRSPs or RRIFs are not an asset in your bankruptcy, other than contributions made to the RRSPs within 12 months prior to the date of bankruptcy.
Procedurally, your Trustee will reach out to the investment provider and ask them about contributions made within the past 12 months. Based on that, the Trustee will either cash out the contributions made over the past 12 months or ask you to pay the Trustee the amount of those contributions that it would expect to receive. Any amounts contributed older than 12 months are yours to keep.
A few exceptions apply. If your RRSP is held under a life insurance contract and certain direct family members are named as the beneficiary, the entire amount (including contributions within the past 12 months) are exempt from seizure by the Trustee.
It is important to note that if you transferred your RRSP directly from one company to another, your RRSP remains protected as you haven’t contributed to the policy. That said, if you cashed out your RRSP and re-contributed this amount to a new policy, this is considered a new contribution and the full amount would be taken by the Trustee.
Pensions in Bankruptcy
Pension plans are also exempt from seizure by the Trustee in a bankruptcy. Your pension plan is yours to keep and is not available to the Trustee or the creditors. Check with a Trustee in your province if you are not located in Ontario.
Life Insurance Policies
Term life insurance generally has no cash value and you could keep the term life insurance policy, provided you continue to make payments on this policy.
Whole life insurance, also known as universal life insurance, is exempt from seizure if a “preferred beneficiary” has been named in the policy. A preferred beneficiary is a spouse, parent, child or grand child. If your life insurance policy is not exempt, the Trustee will determine its cash-value and that amount would need to be paid to the Trustee or the policy would be cashed out by the Trustee. If you have a substantial cash-value in a non-exempt life insurance policy, you may wish to consider filing a consumer proposal.
RESPs in Bankruptcy
RESPs are generally not exempt from your creditors or your Trustee. In most provinces, your Trustee will determine the value of your RESP if it were to be cashed out (after grants are reversed and fees are added) and provide the option to have someone re-purchase the RESP from the Trustee for that value (maintaining the grant money in the policy) or will alternatively cash out the RESP.
If you have a significant RESP, you may wish to consider a consumer proposal
While an RESP is for the benefit of your child, it is property of the parent/owner until the money is paid for your child’s education. In certain provinces in Canada, such as Alberta, RESPs are exempt.
Registered Disability Savings Plan (RDSP) in Bankruptcy
The legislation is silent on creating any exemption for RDSP plans in Canada. In Ontario, no decision has been made exempting RDSPs from seizure by the Trustee. Nevertheless, a November 2016 decision of the BC Court stated that a Registered Disability Savings Plan (RDSP) could not be seized by the Licensed Insolvency Trustee of the bankrupt beneficiary to satisfy the claims of creditors.
Other Savings in Bankruptcy
Other savings accounts such as mutual funds, GICs, stocks, bonds, investments, and shares are assets in your bankruptcy and belong to the estate. The Trustee must determine the value of these assets and realize on them for the benefit of creditors. This may mean selling theses assets or making arrangements for someone to purchase these assets from the Trustee.