After many years of debate and delay, federal legislation to amend the Bankruptcy and Insolvency Act (BIA) finally received Royal Assent in December, 2007. It is expected to come into force later this year, although a final date has not been set.
One of the significant changes of interest to business owners will be bankruptcy protection for Registered Retirement Savings Plans (RRSPs). Under current legislation, most RRSPs and Registered Retirement Income Funds can be exposed to the claims of creditors in a bankruptcy.Â
Entrepreneurs and business owners often have most, if not all, of their liquid retirement assets put aside in registered plans. Those assets could be lost completely if a major uninsured lawsuit or other unforeseen circumstance came along.Â
It has been possible for many years to creditor-proof RRSPs by investing in certain insurance-based products, such as segregated funds. This is because insurance generally is protected from creditors under provincial legislation, whereas non-insured RRSPs fall under bankruptcy rules, which are federally regulated. Despite the creditor protection afforded to insurance-based plans, many people shy away from these investments because they typically come with higher fees and other features that may not be desired.
The current rules are seen as unfair because most workers with company-sponsored or government-sponsored pension plans get automatic creditor protection on their retirement assets. Why should RRSPs be treated any differently than employer pension plans in a bankruptcy scenario?
The new legislation will apply across Canada and will exempt amounts held in RRSPs from seizure in bankruptcy, except for a clawback of contributions made shortly before bankruptcy. Where provincial legislation exempts RRSPs from seizure, that legislation will continue to apply. Where provincial legislation is silent regarding the treatment of RRSPs, they will be exempt under the new federal legislation.Â
The clawback period for contributions made prior to bankruptcy is under debate, but is likely to be 12 months. The purpose of the clawback is to prevent individuals facing imminent bankruptcy from moving assets into an RRSP with the intention of defeating creditors.
It appears the legislation will only provide creditor protection in cases of bankruptcy. Creditors still can seek a court order against a debtor who has not declared bankruptcy.Â
Other significant changes were made to the BIA and its companion legislation, the Companies' Creditors Arrangement Act. The main goals of the changes are:
- to encourage restructuring of viable businesses as an alternative to bankruptcy;
- to improve the protection for workers in bankruptcy, including a new statute to create a Wage Earner Protection Plan; and
- to make the insolvency system more fair and reduce the potential for abuse.Â
Business owners are faced with numerous risks and should be proactive in taking steps to legally protect their assets from the unforeseen claims of creditors. Our society is becoming increasingly litigious; a lifetime of work and savings can be wiped out quickly by an unexpected legal claim.Â
There are many well-accepted ways to creditor-proof assets, including:
- incorporating a business;
- securing funds lent to one's business;
- using multiple corporations to isolate assets from creditors;
- obtaining appropriate insurance coverage; and
- sprinkling assets among family members and trusts.
Your Collins Barrow advisor can help you to navigate through the complexities of structuring your business and personal assets in a way that will maximize creditor protection and your peace of mind. The time to act is now, before a creditor comes knocking or a lawsuit lands on your desk. By then, it will be too late.
Doug Greenhow is a tax partner in the London office of Collins Barrow.
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