Are your Registered Retirement Saving Plans or Registered Retirement Income Funds safe from creditors?
Essentially, the federal government passed legislative amendments in 2007-08 to protect taxpayers from losing all types of registered investments on bankruptcy.
Under these new rules, all RRSPs and RRIFs that are properly locked in and have a registered beneficiary are exempt from seizure by creditors, except for any contributions made in the 12 months immediately before a bankruptcy.
Your investments can be seized by creditors, including the Canada Revenue Agency, if you have not declared bankruptcy and must pay off your debts as a result of a judgment in a lawsuit.
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If this happens and you are forced into collapsing your registered funds to pay off your debts, you are still liable to pay the income taxes on the withdrawals from your funds.
In most provinces, with the exception of Saskatchewan, British Columbia and Prince Edward Island, your RRSPs and RRIFs are in play if creditors come calling. These three provinces have specific legislation preventing such a move, albeit with some exceptions.
If you are a self-employed business owner, how do you protect your hard-earned registered investments from potential creditor capture during these times of financial distress?
Declaring bankruptcy might just be your best bet to fall under federal protection. Under the Bankruptcy and Insolvency Act, these investments are not available to the trustee to disperse to creditors.
If bankruptcy is not an option, the life insurance industry has other products that might meet your needs. RRSPs, RRIFs or annuities set up as life insurance policies are generally exempt from seizure under provincial insurance legislation as long as certain criteria are met. One such creditor-proofing strategy commonly recommended by financial advisers involves registering RRSPs of business owners in a segregated fund with an insurance company.
Segregated funds are really annuities that provide guaranteed returns and operate similar to mutual funds. By registering the fund in the name of a spouse or child as beneficiary, the investment is entirely protected from a creditor’s legal actions. Registered segregated fund plans act much like regular RRSPs in that they must be collapsed by the end of the year in which you turn 71. But they can also be rolled over into an annuity or RRIF.
Another way to protect your registered funds is to register at least a portion of them in the name of your spouse. The only stipulation is that your spouse must not have provided financial guarantees or have signing authority related to the business.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
