Unlike RRSPs, there is no provision in the Bankruptcy and Insolvency Act to specifically deal with funds in a Registered Disability Savings Plan (RDSP) in the event the beneficiary files for bankruptcy. This matter was dealt with in a recent BC Supreme Court ruling that held funds in a RDSP can not be seized by a Licensed Insolvency Trustee (Trustee in Bankruptcy) for the benefit of creditors in the event the beneficiary of the RDSP declares bankruptcy.
What are RDSPs?
An RDSP is a registered savings plan designed to help Canadians with disabilities save for the long-term financial needs of a disabled person, including medical, care and living costs. Like an RESP, an RDSP allows a disabled person, and their family members, to set aside funds in a separate trust account for a designated beneficiary – in this case the disabled individual. Contributions are not tax deductible but income earned on the funds are tax-deferred until they are withdrawn. The government provides additional support through matching grants and bonds.
RDSPs are relatively new, introduced in 2008 as part of the Canada Disability Savings Act. Interestingly, in the same year the federal government made changes to the Bankruptcy and Insolvency Act to protect RRSP and RRIF contributions, but did not include RDSPs.
Facts in recent court case
Ms. Alary was disabled and entitled to the disability tax credit under section 118.3 of the Canadian Income Tax Act. Mrs. Alary had an eligible RDSP with the Royal Bank of Canada, taken out in 2010. She was was the sole beneficiary and holder of her RDSP. The fund consisted of $6,800 in private funds provided by her parents in 2012. Once income growth and grants were calculated in, her funds held a total of $32,250 in trust.
In 2015, Ms. Alary filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act. Her trustee notified the Royal Bank of her filing and requested Royal Bank to forward the private funds originally contributed to the plan to the trustee for the benefit of Mr. Alary’s creditors. The trustee made this claim because there was no specific provision in the Bankruptcy and Insolvency Act or the Income Tax Act governing how RDSPs should be treated during insolvency.
The Royal Bank refused to release the funds claiming that the money held in the plan was exempt from seizure. As such, they could not release the funds to the trustee.
Under the terms of section 146.4 of the Income Tax Act, funds held in an RDSP are held in trust “exclusively for the benefit of the beneficiary under the plan”. However the terms of the trust permitted the court the ‘discretion’ to direct that the funds be released for the benefit of creditors of the bankrupt.
Madam Justice Bruce found that there must be a balancing between the fact that the funds are held in trust for the benefit of the beneficiary and the rights of the creditors under the Bankruptcy & Insolvency Act. In this case, requesting the release of a portion of the funds permitted under the terms of the trust would trigger a requirement for Ms. Alary to repay a significant amount in the government-assisted portion of the fund. Madam Bruce found that the court should be guided by what was “just and equitable” and as such refused to order the release of any funds.
What this means for your RDSP
The court did not rule that all RDSPs are exempt from seizure. The court made its decision not to release the funds to the trustee based on the facts of this case. It is apparent that this means future cases will be dependent on the Court’s ability to exercise its discretion. In the absence of clearer legislative exemptions in the Bankruptcy & Insolvency Act, Licensed Insolvency Trustees will also likely exercise discretion in whether to seek court direction about the release on any RDSP funds to the estate.