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How to protect retirement funds from creditors

Professionals and the self-employed can use life insurance contracts and federal bankruptcy law to shield themselves

Special to The Globe and Mail

Canadians who own registered retirement savings plans recognize the critical importance of building and maintaining value within their RRSPs. But comparatively few think about the need to protect their RRSP against potential creditors, or understand the degree to which they are covered could depend on the jurisdiction in which they reside.

Those most at risk are likely the self-employed, owners of corporations and professionals who might be subject to unlimited liability, said chartered accountant Robert Snowdon, who runs a CA firm in Kanata, Ont. "Even those professionals who are incorporated are still subject to personal liability," he said.

Cognizant of that reality, and recognizing the prudence of planning ahead for unforeseen events, Mr. Snowdon protected his own RRSP assets in the past by putting them into a segregated fund as part of a 10-year life insurance contract.

RRSP and registered retirement income fund (RRIF) proceeds held under any life insurance contract are generally fully protected from creditors, provided the proceeds have not been deposited fraudulently to avoid paying creditors, and so long as the insurance policy names a beneficiary.

Certain RRSP and RRIF holdings are also protected from creditors under a provision of Canada's federal Bankruptcy and Insolvency Act, which came into force in July of 2008. This act provides protection under specific circumstances involving bankruptcy.

It covers situations where "a trustee takes over an individual's financial affairs once they have been petitioned into bankruptcy by their creditors, or the individual makes a voluntary assignment in bankruptcy because they can't pay all their creditors," said Jack Courtney, assistant vice-president of advanced financial planning with Investors Group Inc. in Winnipeg.

However, this act also contains an important timing proviso. A trustee can claw back, or seize, RRSP or RRIF proceeds contributed within 12 months of the date of bankruptcy.

Somewhat complicating the matter is the existence of provincial legislation in jurisdictions such as British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, and Newfoundland and Labrador that also specifies RRSP and RRIF assets are generally protected from creditors. Other jurisdictions might provide protection under certain circumstances. However, most of these provincial laws do not contain a time provision exempting certain deposits (B.C. is an exception, mirroring the 12-month federal period).

Insurance, or segregated fund?

"In most provinces that exempt RRSPs from seizure, the clawback will not apply. So if you're in a province that always exempted RRSPs, the fact that federal law in bankruptcy has now changed does not alter the status of the injection of RRSP money in those provinces in the previous 12 months," Toronto lawyer Fred Tayar said.

When Mr. Snowdon's segregated-fund insurance contract expired, after the Bankruptcy and Insolvency Act was in force, he decided against establishing a new insurance contract to cover his RRSP proceeds, electing instead to transfer the full amount to a new self-administered RRSP.

There were a couple of other things he wanted to change. Within the insurance contract, Mr. Snowdon felt his management fees for transactions were higher than those of other RRSPs, as a result of guaranteeing at least 75 per cent of the value in the segregated fund. He also felt restricted to a selection of only five or six mutual funds.

There is a trade-off for the added protection, experts say.

"The more guarantee you buy, the more expensive the underlying fee associated with the product will be," Mr. Courtney explains. "You can buy segregated fund products that have very minimal guarantees where the pricing is very comparable to mutual funds, and many of them will almost mimic an underlying mutual fund in their investment mandate and the way they are managed," he said.

Principal sum is protected

"When you look at the segregated fund, you have to recognize the contract includes very special guarantees that we think have value for consumers," said Ron Sanderson, the Toronto-based director of policy holder taxation and pensions for the Canadian Life and Health Insurance Association Inc.

"Typically a segregated fund policy provides that if the value of the investment has fallen over a 10-year period, there would be a top-up to restore that value to the consumer. That might be a fractional top-up, so we could say, for instance, 'if you've lost more than 25 per cent of your value, then we'll top it up to 75 per cent of the amount deposited.'

Or the contract might say something like, 'we'll restore every penny if you've lost money over that 10-year period.' And similar guaranteed top-ups apply upon death," Mr. Sanderson explained.

Those who do elect to put their funds into an insurance product have all the same flexibilities built in as they would in an RRSP held with any other financial institution. Plan holders can take out money for an emergency. At age 71, they can also make the same choices available to RRSP holders with a bank or elsewhere; convert their RRSP proceeds into their choice of a RRIF (if they want to continue managing their funds with a similar degree of autonomy and risk, with the same investment portfolio), or convert the proceeds into the certainty of a fixed income annuity.

"A segregated fund will typically have a maturity date within the contract. That's going to be at the end of the year that you're 71, but the investment is open ended until that time. "They really are designed as lifetime arrangements, and [they are] liquid at any time," said Mr. Sanderson.

© 2007 The Globe and Mail. All rights reserved.

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