Until recently, an investor’s registered assets (RRSPs and RRIFs) were not subject to protection against the claims of creditors in the event of personal bankruptcy. This was a real and legitimate concern for many Canadian investors, particularly small business owners. 

With the passing into law of Bill C-12, an amendment to the federal Bankruptcy and Insolvency Act, this situation has now been addressed. As of July 7, 2008, registered investments (RRSPs and RRIFs only) held by banks, brokerages, mutual funds or in self-directed accounts are now exempt from seizure in the event of bankruptcy and will now enjoy the same creditor protection as insurance and pension investments. This protection applies to all bankruptcies initiated on or after July 7, 2008. 

This change will not protect transfers into these products within 12 months of an assignment into bankruptcy. However, provincial law may override this exemption. There are no cap limits to the amounts protected from seizure. 

The new rules provide more flexibility for everyone. Professional and business owners who often incur both business and financial risk may benefit most from the new rules. Let’s take for example a person who has saved between the ages of 25 and 50 primarily into their RRSP. 

Let’s assume that at age 50 this same person chooses to open his/her own new business. Assume unfortunately that the economy softens and the business goes bankrupt. With the old rules, when that business failed, creditors may have been entitled to make a claim against the business owner’s RRSPs. With the passing of the new legislation, creditors would likely have no ability to claim the business owner’s RRSPs. 

Prior to July 7, 2008, business owners could have reduced this risk by putting their personal savings into insurance products such as segregated funds. One of the benefits of insurance products is the potential creditor protection feature that it affords. This benefit generally comes at the price of a higher annual fee often referred to as a management expense ratio (MER). 

The new rule changes now allow investors the ability to put their cash in less costly investments and still have the same protection. 

We encourage potential investors to obtain a complete understanding of these new rules and seek the requisite professional advice. For example, a person who feels they may be encountering litigation cannot simply run out and purchase an insurance product or deposit money into an RRSP in hopes of sheltering their assets. Depositing funds into an insurance product immediately before filing for bankruptcy will likely not be permissible either. The same applies to contributions made to an RRSP in the previous 12 months, prior to a bankruptcy. 

These last minute attempts to creditor proof will likely still leave your retirement assets open to creditor claims. 

Knowing the above timeline should help investors considering a risky venture in the long term. Adding $20,000 to an RRSP for multiple years would only put the latest $20,000 contribution at risk. If no contribution is made within the last 12 months, it is a distinct possibility that your RRSP will be entirely protected.

Derek Weisbeck is a Wealth Advisor with the ScotiaMcLeod branch in Edmonton and can be reached at 1-800-661-7137. His column on investment and current financial market conditions will appear weekly in the Fitzhugh.