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The Debt Doctor: RRSPs and Bankruptcy: What Happens To My Retirement Savings?

John Thompson for local2 sault ste. marie
August 21st, 2012 at 10:59am

This article is a column or editorial.
The opinions expressed here are solely those of the author and do not necessarily reflect those of LOCAL2.

DEBT DOCTORA question often asked when considering options to deal with debt is “What happens to my retirement savings if I must file bankruptcy?” “Will I be able to retire with some level of savings if bankruptcy occurs?”

Prior to July of 2008 there were significant differences in the answers to these questions depending upon the type of retirement savings plan the individual had the savings in.

A registered pension plan (RPP) has always been exempt from seizure by the trustee in bankruptcy based on provincial pension law. RPPs are also known as company pension plans and are usually available to employees of large employers who have the ability to offer this type of plan as a benefit to their workers.

A registered retirement savings plan (RRSP) set up by an individual was available to satisfy debts and therefore was not exempt from seizure by the trustee in bankruptcy for bankruptcies filed prior to July 2008. Prior to July 2008 an individual would lose their retirement savings to their creditors.

This difference in the treatment of retirement savings was not considered fair since those that did not have the ability to save for retirement using a RPP were penalized if they did save within an RRSP and were forced to declare bankruptcy. Self employed individuals and those that work for smaller employers that generally do not have the ability to offer their employees pension plans, were at a significant disadvantage when faced with financial difficulties and ultimate bankruptcy.

Effective July 2008 the Bankruptcy and Insolvency Act was amended to exempt RRSP from seizure by the trustee in bankruptcy for bankruptcies filed after July 7, 2008. This amendment recognized the inconsistency in pension law and the ability to seize RRSPs and not RPPs and equalized the treatment of both types of retirement savings plans under a bankruptcy.

In order to avoid individuals being able to use RRSP contributions made close to the time of bankruptcy as a means of defeating creditors, the July 2008 amendments allow for a claw back of any RRSP contributions made within 12 months of the date of bankruptcy. This means that the amounts in an RRSP contributed over 12 months back from the date of bankruptcy are exempt from seizure by the trustee in bankruptcy. Any contributions made within 12 months of bankruptcy are still available for creditors and are not exempt.

If you would like to discuss your specific situation and the application of bankruptcy law in relation to retirement savings we are always happy to answer your questions. Drop me an email with your question at ssm@bdodebthelp.ca or contact us for a free initial consultation.

John Thompson, BDO Canada Limited


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