Suggestions that would make RRSPs creditor-proof
Republished from The Financial Post
By Bruce Cohen

Let's revisit a risk relatively few people seem to be aware of: the risk of having your RRSP seized to pay a bad debtor court judgment. My Sept. 30 column on RRSP creditor-proofing drew some thoughtful comments from Edmonton lawyer Philip Renaud, a partner in Duncan & Craig. "Any professional, entrepreneur, small business person or director of a corporation should be concerned about risking their personal assets in their business," he advised- noting the common quick fix of putting assets in a spouse's name won't work with RRSPs since surrogate ownership is not allowed.

Renaud is doubly interested in this matter. First, an RRSP is his only pension plan and he wants to protect it. "Why should I have to rely upon insurance company products in order to creditor-proof my retirement security?" he asks. "I would like to have the option of investing in other financial institutions or direct my investments through a self-directed plan. RRSPs set up through life insurers are generally the only ones shielded from creditors, thanks to a loophole under which they get the same status as life insurance policies. An exception is Prince Edward Island, where RRSPs form all vendors are creditor-proof.

Renaud also cares about the issue because of his experience as a lawyer. "I have seen examples in my estate planning practice of persons losing everything in their later years due to an improvident investment or a failed business due to poor economics times. Many times it is too late in that person's life to reestablish themselves and they may spend their final years in poverty, living off government assistance." That will become even more important, he predicts, as governments dismantle the cradle-to-grave safety net: "The onus is shifting back to the individual to provide for his or her own support in old age." Limits on yearly contributions mean it takes a long time for someone to build a sizable RRSP, Renaud points out. He wonders why, if you dutifully put in money for 20 years and then run into trouble, the whole plan should be up for grabs.

His suggestion: "Surely only the last year should be subject to seizure {or} only that portion which was contributed during the period of insolvency." That would parallel the treatment of insurance company plans under the federal Bankruptcy and Insolvency Act. Those plans lose their shield on deposits within one year of bankruptcy and within five years if creditors prove insolvency at the time a transfer was made.

His second suggestion would put RRSPs on a par with employer-sponsored registered pension plans that have the strongest creditor-proofing of all. RRSPs are becoming surrogates for RPPs but creditors distinguish between the two. RPP money really is locked in until retirement age, they note, while an RRSP can be cashed any time. They particularly find it unfair that a debtor, could shield money in an RRSP, wait until bankruptcy rules prevent creditors from seeking any more, and then cash the plan. Renaud's suggestion: Give the bankrupt a one-time option. He or she could shield the RRSP by having it locked in until the same retirement age as a pension plan. Renaud formulated his thoughts recently when Alberta's justice department circulated proposed RRSP creditor-proofing regulations for discussion. Those proposals would shield all RRSPs in Alberta but Leslie Gronow of the provincial justice department said no action is likely until next year, at the earliest. That's because lawyers from across the country are considering tackling the matter together through the Uniform Law Conference of Canada. The Alberta proposals dealt only with RRSPs, leading Renaud to suggest that any shield also cover other vehicles such as RRIFs, registered retirement income funds.