Insurer Retirement Funds Creditor-Proof
High Court Declares, Feb 23/96 · by John Geddes, Ottawa Bureau, The Financial Post
The Supreme Court ruled yesterday that insurance company registered retirement funds are creditor proof, a decision analysts expected to be good news for insurer marketing campaigns.
The court upheld and expanded a legal interpretation that shields many insurance company registered retirement savings plans and registered retirement income funds from the claims of creditors.
Retirement investment vehicles sold by other institutions do not offer the same security in cases where the RRSP or RRIF holder goes bankrupt.
"Where extremely pleased with the Supreme Courts decision, and it certainly confirms the importance of having life insurance retirement products," said Eric Singer, senior counsel at ManuLife Financial.
The ruling came in a complex case involving a doctor in Saskatchewan, Balvir Singh Ramgotra who went bankrupt in 1992. Creditors tried to get access to his life insurance RRIF, into which Ramgotra had transferred his RRSP funds less than three years before going broke.
The legal dispute brought into question the way the federal bankruptcy laws that protect life insurance products from the claims of creditors.
While lawyers are still sorting out the implications of the decision, experts say yesterday's ruling clearly bolsters provincial protections against creditors claims.
A key point in the case was that Ramgotra had transferred the money into his RRIF less than five years before falling into bankruptcy. Under federal law, transactions made within the five year period can be declared void from the standpoint of a bankruptcy trustee's distributing assets to creditors.
But the high court's ruling, written by Justice Charles Gonthier, found the RRIF remained legally out of the reach of creditors despite the timing of the investment. "This is very good news for the insurance industry," said Peter Biro, a bankruptcy lawyer with Goodman & Carr in Toronto.
In cases where an individual shifts money to an insurance company fund in bad faith to avoid creditors, the protections do not hold.
Generally, only life insurer's RRSPs and RRIFs are shielded from creditors under provincial laws, and only in cases where an immediate family member is named the beneficiary of the plan. (Prince Edward Island gives all RRSPs and RRIFs the same creditor-proof status.)
Federal bankruptcy law disallows the protection for transfers made within one year of bankruptcy.