RRSP and bankruptcy
i have a co-worker who filed for bankruptcy in late december 2005. he had RRSP that were employer sponsered. He received a letter a few days ago stating that the RRSP that he had were seized and would not be exempt from his bankruptcy. As well because they were cashed/seized they are now seen as dispossible income and therefore he owes money on those RRSP. His problem is that it was over $ 30000 in RRSP and lost everything including his home and is unable to pay the amount owed for cashing these RRSP’s. My question is i was under the impression that employer sponsored RRSP are exempt from seizure if you file for bankruptcy, are they aloud to seized his RRSP’s
There are a number of ways that the trustee would find out about it, but the main one is tax department. The tax department carefully scrutinizes all those who file a bankruptcy and alert the trustee to any abnormalities or actions that appear to be contrary to the Bankruptcy and Insolvency Act. Furthermore, it is not uncommon to receive a phone call from another banking institution that has record of you various holdings. Whether these records come from application materials you have filled out or other sources I cannot say, but it is a very regular occurrence to have a bank alert us to transactions of this nature. The key thing to take away is there is substantial risk, if you file a bankruptcy and were found to be involved in a transaction of this type the courts can apply a variety of sanctions and I would expect that you would have to pay substantially more than most and your bankruptcy would take substantially longer.
In most cases, unless you have a RRSP which is written through an insurance company, or is locked in as a pension rollover, it would be turned over to the trustee in a bankruptcy. Unfortunately there is no special provision for employer sponsored RRSP’s. However, exemption rules are slightly different in every province.
As for the tax issue, if the Trustee cashed in an RRSP, normally an “in-bankruptcy†return will be prepared and the tax owing on these funds will be paid out of the RRSP moneys received by the trustee.