Prior to July 7, Canadians forced into bankruptcy could kiss their entire retirement savings goodbye. But thanks to a new rule implemented at the beginning of the month, creditors can no longer raid a client’s RRSP savings. The rules also apply to RIFFs and deferred profit sharing plans.

Terri Williams, CFP and director of educational services at DundeeWealth, says the new rules are a boon to small business owners, who often risk their financial health to start up a new entrepreneurial endeavour.

“Say someone wanted to start a small business at 45 and they’ve been saving in an RRSP over the years,” she says. “You put some capital in it, but then the economy fails and you go bankrupt. In that case, the RRSPs are gone. So this is really good in particular because very often they put their personal savings at risk.”

The new rule is also important for professionals, such as doctors and lawyers, who don’t rely on a regular bi-weekly paycheque.

Wayne Rothe, a CFP with Wayne Rothe & Associates Wealth Management, says every Canadian can benefit from this rule change. “A client could drive through a stop sign and hit someone and be sued,” he says. “Prior to this development, a lifetime of savings would go to waste.”

The rule doesn’t just alter the financial fortunes of bankrupt Canucks, it can also alter a client’s financial plan. Previously, pension and savings in segregated funds were sheltered from creditors; now advisors can use any product to protect against bankruptcy. “Advisors can now look at the entire world of investments that can be put in an RRSP,” says Williams. “This is very interesting for advisors.”

Clients might actually save money now that they have more choice. Segregated funds usually have higher MER fees than mutual funds, so allowing people to put their cash in less costly investment vehicles will mean more money in the pocket — and in the RRSP.

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    • “People had to use seg funds when maybe they weren’t the best investment choice,” Rothe explains. “It’s been a bit of an uneven playing field in that respect.”

    Some advisors might be thinking they can just plough a bunch of money into a client’s RRSP a few days before they file for bankruptcy, but that won’t work. Any money added to a registered savings account in the 12 months prior to a bankruptcy can be taken by creditors.

    Still, if people know they’re embarking on something financial risky in the long term, they might consider adding a few extra bucks to an RRSP. “You can put some money into an RRSP so it’s safe from creditors,” says Rothe. “But if you believed you might be running [a more immediate] risk of going bankrupt, putting money away probably wouldn’t help you.”

    The new rule applies to jurisdictions that did not already have similar provincial rules, leveling the playing field for investors in B.C., Alberta, Ontario, New Brunswick and Nova Scotia can now consider their registered accounts safe.

    Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

    (07/28/08)