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An RRSP is an asset of a bankruptcy estate, however subject to exemptions provided by both provincial and federal legislation. It is the exemptions afforded a bankrupt that permits an individual to retain certain assets, while permitting them to access bankruptcy proceedings and obtain relief from their burdening debt.
The Bankruptcy & Insolvency Act exempts RRSPs, with the exception of contributions made within the 12 months prior to bankruptcy. A trustee will request a withdrawal of funds from the plan contributed within the 12 month period and pay any income tax due on the withdrawal or alternatively, permit a bankrupt to pay in the amount to the bankruptcy estate, therefore leaving the plan intact for the bankrupt’s long-term benefit.
In some provinces RRSPs are exempt under provincial legislation in their entirety and therefore the Bankruptcy and Insolvency Act’s 12 month “claw back” provision does not apply.
RRSPs can originate from a number of sources, such as employer pension plans, deposits to a bank or credit union RRSP account, investment firm or RRSPs on deposit with life insurance companies. Accordingly, various federal and provincial legislation applies when dealing with RRSPs and determining exemptions available to an individual.
Funds held within a pension plan that are vested funds (typically referred to as “locked-in”; only available upon retirement) are exempt from seizure under Pension Plan legislation and not subject to the “claw back” provision of the Bankruptcy & Insolvency Act.
RRSPs on deposit with insurance companies typically are also exempt from seizure under provincial Insurance Act legislation, if there is a preferred beneficiary designated on the RRSP. An RRSP, if exempt under Insurance Act provisions, is not subject to the “claw back” provision under the Bankruptcy & Insolvency Act.
In the case of an individual who has RRSP monies which are not exempt from seizure, a Consumer Proposal to creditors through a Licensed Insolvency Trustee may be a viable option versus a bankruptcy.
Despite being in a state of insolvency and the need to access debt solutions, legislated exemptions ensure that an individual’s long term financial wellbeing is not eroded and they are able to continue to fund their eventual retirement, balancing the challenges of today while looking forward to the future.
Should you have any questions regarding investment plans in relation to bankruptcy or insolvency proceedings, contact your local MNP office. A list of our conveniently located offices can be found at MNPdebt.ca.
Based out of Saint John, Tara Silliker is a Licensed Insolvency Trustee and Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 506.799.5820 or toll-free at 310.DEBT (310.3328).
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*310-DEBT doesn’t operate in MB, NW ON and QC.
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