We like most of the new law on RRSPs because it rights an unfairness that exists in the different treatment of people who save for their retirement via RRSPs (often self-employed individuals) and those employees who save for their retirement via employer-sponsored plans.
The new bankruptcy laws, which were rushed into law on November 25, 2005, just before the defeat of the Liberal government on November 28, 2005, will not come into force until June 30, 2006 at the earliest. The Senate was promised the opportunity to review the legislation and hear the scores of experts and special interest groups who were scheduled to make submissions. There is the hope that this flawed legislation will not be enacted without significant changes.
We like most of the new law on RRSPs because it rights an unfairness in the existing laws.
Our Blogs on Bankruptcy Reform up to now have been critical of the legislation that was rushed into law on November 25, 2005. We like most of the new law on RRSPs because it rights an unfairness that exists in the different treatment of people who save for their retirement via RRSPs and those who save for their retirement via employer-sponsored plans.
What we do not like about the new law is that it imposes a cap (yet to be determined) on the RRSPs. We don’t think this is fair as there is no cap put on employer-sponsored plans. We do recognize the potential for abuse and support giving authority to the courts to order the recovery of any funds that they conclude meet this criterion.
Current Procedures Regarding RRSPs:
Under the current rules, registered pension plans (i.e. employer-sponsored plans) are exempt from seizure in a bankruptcy as are many RRSPs offered through insurance companies. Except in the provinces of Saskatchewan and Manitoba most other RRSPs are subject to seizure by the bankruptcy estate. This has long been viewed by trustees and others as unfair because it treated people such as self employed people who saved for their retirement by contributions to RRSPs in a harsher way (by seizing the RRSPs) than employees who had contributions in an employer-sponsored plan (These are exempt from seizure in a bankruptcy).
The New Bankruptcy Laws on RRSPs:
All registered retirement savings plans and registered retirement income funds, as defined in the Income Tax Act, will be exempt from seizure subject to conditions to be prescribed by regulations.
These conditions are necessary to ensure fairness and to curb potential for abuse so that bankrupts cannot hide assets from creditors (e.g. RRSP contributions made in the last 12 months prior to bankruptcy will not be exempt from seizure; the seizure exemption only applies if the individual locks in their RRSPs and the total amount exempt will be subject to a maximum cap.
The Canadian Association of Insolvency and Restructuring Professionals; CAIRP, supports making RRSPs exempt from seizure but would like to see contributions made in the three years prior to the bankruptcy subject to a claw back for the benefit of the bankruptcy estate, as a safe guard against abuse.
The Report of the Senate Committee on Banking, Trade and Commerce November, 2003, recommended the changes in the new law on RRSPs.
