RRSP & Bankruptcy: Do I Lose My RRSP After Filing Bankruptcy?

Do I Lose My RRSP After Filing Bankruptcy?

In general, an R.R.S.P. is "property" as defined by section 2(1) of the Bankruptcy and Insolvency Act, and by section 71(2) vests in the trustee in bankruptcy. In simple terms, a person will lose his/her RRSP after filing bankruptcy.

However, there are two notable exceptions were the bankrupt does not lose his/her RRSP in bankruptcy.

First, if an RRSP is:

In the form of a contract between the bankrupt and a life insurance company; and
The contract provides for payment of an annuity to the bankrupt; and
Under the contract a designation of a beneficiary is made in favour of a spouse, child, parent, grandparent, or grandchild of the bankrupt, then:

The RRSP is exempt from seizure by the trustee.

For RRSP to be considered a bankruptcy exemption each of the above three conditions must be met. If the RRSP is not with a life insurance company, or if there is no "annuity" component, the RRSP will not be exempt and the bankrupt will lose RRSP in bankruptcy. Similarly, if the plan designates the holders' estate as the beneficiary, or names his brother as a beneficiary, the plan will not be exempt.

Second, if an RRSP is locked-in, usually due to previous employment, the RRSP may be exempt from seizure. The trustee may be prevented from de-registering a plan by a term of the RRSP which prohibits the bankrupt from terminating it for a stated period of time. The trustee "steps into the shoes" of the bankrupt, and therefore only acquires the rights of the bankrupt. If the plan is locked-in at the date of bankruptcy, the trustee will probably be bound by the locking-in provisions of the plan.

We should note, however, that even though the RRSP is exempt from seizure by the trustee in this case, the amount of funds in the RRSP may be taken into account by the court when deciding what surplus income payments should be made by the bankrupt as a condition of their discharge.

How do we advise a potential bankrupt with an RRSP?

Our standard procedure at Hoyes, Michalos & Associates Inc. is to collapse the RRSP, and file a trust tax return to pay the taxes owing on the collapse; the net proceeds are remitted to the Estate. (Since the RRSP is collapsed after the date of personal bankruptcy, the taxes owing would otherwise be included on the bankrupt's post-bankruptcy tax return, and the bankrupt would pay the tax on the collapse, even though they did not receive any of the money).

In all cases we recommend that the trustee review all applicable RRSP plan documents prior to the debtor filing an assignment to determine the status of the RRSP.