Bankruptcy and Registered Retirement Savings Plans
The registered retirement savings plan (RRSP) was conceived as a tax deferral device. It also encourages saving for retirement. The contributions, being property of the contributor, were available to his or her creditors, subject to any exemption found in provincial law. The property of the bankrupt available to creditors under the BIA specifically excludes property exempt from execution or seizure under law (federal or provincial) applicable in a province. By legislation, some pensions (and pension benefits) are exempt from the claims of employee’s creditors.
Employer-sponsored pensions for employees are diminished or non-existent. RRSPs are personally-sponsored defined contribution self-directed pension plans. A registered retirement income fund (RRIF) provides an income during a person’s retirement.
For many years, Alberta’s Insurance Act has protected from creditors annuity products of insurance companies that comply with the required designation of a specified family member as beneficiary. An annuity with an insurance element can qualify as an RRSP under federal income tax law. In Alberta, this discriminated among RRSPs being an exempt or non-exempt asset of a debtor based upon the supplier of the product. Effective October 1, 2009 under Alberta’s Civil Enforcement Act, contributions in an RRSP and in an RRIF, as those plans are defined in Canada’s Income Tax Act, are protected from creditors, but a payment out of a registered plan to a plan holder is not exempt. These provincial laws apply in a bankruptcy.
The BIA now also protects registered retirement savings from creditors. Effective July 7, 2008, contributions in an RRSP and in an RRIF, as those plans are defined in Canada’s Income Tax Act, are protected from the bankrupt’s creditors. Contributions made before July 7, 2008 are protected. There is presently no maximum amount limit. However, under the BIA, contributions made to RRSPs or RRIFs in the 12 months prior to bankruptcy are not protected.
The Alberta Insurance Act, where applicable, and the Alberta Civil Enforcement Act exempt all contributions in an RRSP and in an RRIF including any made in the 12-month period preceding a bankruptcy. A trustee in bankruptcy or creditors could challenge a large contribution made by an insolvent debtor.
The RRSP and RRIF exemption under the BIA is for persons who became bankrupt on or after July 7, 2008. The right to an exemption is determined as of the date of the bankruptcy.
Although an RRSP and an RRIF are exempt, the bankruptcy court may consider the amount of the RRSP or the RRIF in deciding what payments the bankrupt should make as a condition of discharge from bankruptcy.
Automatic Discharge from Bankruptcy
Prior to September 18, 2009, all first-time bankrupt individuals were eligible for an automatic discharge from bankruptcy after nine months in bankruptcy unless the trustee, a creditor, or the Superintendent of Bankruptcy gives notice of an opposition to the automatic discharge. Since September 18, 2009, except for the personal income tax debtors mentioned below, an automatic discharge may be available to first-time and second time bankrupt individuals. The timing of the automatic discharge depends on whether or not there is surplus income. Surplus income is the portion of a bankrupt individual’s total income that exceeds what is necessary for the bankrupt to maintain a reasonable standard of living based on the applicable standards set by the Superintendant and by the bankrupt’s trustee.
- A first-time bankrupt individual, where there is no opposition and no surplus income payable to the trustee for the bankrupt’s estate, will be automatically discharged after nine months in bankruptcy.
- A first-time bankrupt, where there is no opposition filed and with surplus income payable to the trustee, is only eligible for an automatic discharge after 21 months.
- A second-time bankrupt, where there is no opposition filed and no surplus income payable, is only eligible for an automatic discharge after 24 months.
- A second-time bankrupt, where there is no opposition filed and with surplus income payable, is only eligible for an automatic discharge after 36 months.
The obligation to pay surplus income to the trustee ceases when the bankrupt would have been automatically discharged from bankruptcy had the opposition not been filed. The new automatic discharge provisions only apply to personal bankruptcies that start on or after September 18, 2009. First-time and second-time bankrupts may apply to the bankruptcy court for an earlier discharge.