RRSP in Bankruptcy: Will I Lose My RRSP If I File for Bankruptcy?

Under the Bankruptcy & Insolvency Act, the federal legislation that governs the bankruptcy process, when you declare personal bankruptcy a Licensed Insolvency Trustee is appointed. One of the trustee’s tasks is to take your assets and distribute the proceeds from them to the creditors. For instance, if you owned a $200,000 house with no mortgage, the trustee would seize the house, sell it, and distribute the proceeds to the creditors. The question is what happens to your RRSP in bankruptcy? Is it treated in the same way, or is it exempt?

In case of a bankruptcy an RRSP is, as an asset, liquidated and the funds are distributed to creditors. There are, however, some exceptions to this rule.

First, if your RRSP is locked-in as a result of your previous employment, the trustee cannot seize the RRSP. The most common example of a locked-in RRSP is an employee who works for a company with a pension plan. The employee leaves the company before retirement, so the employee’s accumulated pension entitlement is converted to a locked-in RRSP.

Locked-in” here means the employee cannot cash in the RRSP, or take money out of the RRSP, until he/she retires. If the employee cannot get the money, in most cases a Licensed Insolvency Trustee is also unable to access the money in the RRSP.

Confusion is often created by the term “locked-in”. Many Canadians contribute to an RRSP at their bank, and the funds inside their RRSP are invested in a “locked-in” investment, such as a guaranteed investment certificate (“GIC”). It’s “locked-in” for a period of, say, five years, so that the investor can earn a higher interest rate.

If you own a five year GIC, in most cases you can cash it in early; by doing so you lose the interest you have earned. If you were to file for bankruptcy, the trustee would cash in your five year GIC and distribute the funds to your creditors. In this case, you would lose your RRSP in bankruptcy.

The other type of RRSP that is usually exempt in a bankruptcy is an RRSP that has a life insurance element. This is a more complicated area of the law, and a trustee’s advice should be sought to determine if your RRSP through a life insurance company is exempt in a bankruptcy.

Finally, Bill C-55, passed in November, 2005, proposed that most RRSPs would be exempt in a bankruptcy. However, as we write this, Bill C-55 has not been proclaimed into law. Again, the advice of a trustee is necessary to determine the current state of the laws in Canada relating to RRSPs and bankruptcy.

To determine whether or not your RRSP is locked in, or whether or not you would lose your RRSP in bankruptcy, you should gather all of the paperwork related to the RRSP, and contact a Licensed Insolvency Trustee for a free consultation. He/she will review your documentation and determine whether or not the RRSP is exempt.