Your Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are yours to keep in a bankruptcy, with the exception of contributions you have made during the last 12 months.
Changes were made to the Bankruptcy and Insolvency Act in 2009 that exempt these assets from seizure by your trustee.
What this means if that if you have $15,000 in your RRSP and you have made $1,000 in contributions in the last year, your trustee can only seize $1,000.
You’re trustee can do one of two things:
- Contact your RRSP company and ask that $1,000 of your RRSP money be sent to the trustee, or
- Make arrangements with you for you to pay the trustee $1,000 during your bankruptcy in lieu of taking the money out of your RRSP.
If you choose to have the funds removed from your RRSP, your trustee will remit any taxes owing so you do not have a tax liability as a result of the withdrawal.
What happens if I redeemed some of my RRSP before going bankrupt in Ontario?
When you file for bankruptcy in Ontario, you are required to disclose to your bankruptcy trustee all assets you have disposed of or redeemed in the previous twelve months (or up to five years in certain cases). Thus if you cashed in your RRSP today, and went bankrupt tomorrow, you would have to provide your trustee with details of how much you received, and what you did with the money.
If you cashed in a $500 RRSP because you were behind on your rent and were about to be evicted, it probably won’t create any issues.
However, if you cashed in a $10,000 RRSP and gambled the money away, your creditors will probably oppose your discharge from bankruptcy and ask the bankruptcy court to extend your bankruptcy until you have paid some or all of the money back.
Since your RRSP is on file with Revenue Canada, there is no point in hiding something like this from the trustee; they will find out directly from Canada Revenue Agency. We suggest you discuss this with your trustee prior to making the decision to file for bankruptcy.
Should I Withdraw From My RRSP To Pay My Debts Rather Than File Bankruptcy?
That is up to you. Your RRSP is protected in a bankruptcy (except for contributions made in the last year), the same way a person with an employee pension plan is protected. What you choose to do may depend upon how much you have in your RRSP compared to your debts and your age when filing.
Can I Contribute To An RRSP During My Bankruptcy?
Yes, however be aware you may have to make surplus income payments and your RRSP contribution is not considered a deductible expense when calculating surplus income.
Can I Withdraw From My RRSP While I Am Bankrupt?
If you withdraw money from your RRSP while bankrupt it becomes cash. It is no longer an RRSP, so it is no longer protected from seizure by the trustee. In addition, you would be required to pay tax on the withdrawl, so you should discuss this with your trustee before taking money from your RRSP while bankrupt.
What Happens If I Have An RRSP Loan?
An RRSP loan is an unsecured loan (just like a credit card or unsecured bank loan). If you file bankruptcy the loan is included on your list of creditors. However, if you have an RRSP loan you should discuss it with your trustee prior to filing, as some less-reputable RRSP lenders may attempt to offset the loan against the funds in your RRSP.
As you can see, although the simple answer is you keep your RRSP (except for the last year’s contributions) in a bankruptcy, there are a lot of rules around RRSP transactions and your bankruptcy.
To get answers to all your questions about your investments and bankruptcy, contact an Ontario Bankruptcy Trustee today.