Insolvency is generally the condition of not being able to meet one’s debts as they come due. In turn, bankruptcy is the legal status under which such a person’s insolvency may be managed through the courts.Bankruptcy rules balance the interests of creditors seeking their just due, against the policy goal that no person should be condemned to an inescapable spiral of debt. By going through this process, the bankrupt looks forward to an eventual discharge in order to make a clean start.
It is for these reasons that full and frank disclosure must be made of a bankrupt’s finances. This disclosure also helps identify property such as RRSP and RRIF savings that are protected from bankruptcy, dependent in part upon timing issues.
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), s. 67(1)(b.3)
It benefits our whole society to have individuals take responsibility to provide for their own retirement income. The BIA formally reinforces this public policy interest in s.67(1) where certain assets are exempt from division among creditors, including:
(b.3) … property in a registered retirement savings plan or a registered retirement income fund, as those expressions are defined in the Income Tax Act, or in any prescribed plan, other than property contributed to any such plan or fund in the 12 months before the date of bankruptcy. [Emphasis added.]
The 12 month look-back protects against a person manipulating this privilege by making a large deposit immediately prior to a planned assignment into bankruptcy.
If the dealings with the RRSP/RRIF were only one way during that preceding 12 months – ie., deposits only – the application of this constraint is straightforward. However, how does it apply if both deposits and withdrawals occur over that period?
Re Miadovnik (2), 2013 ONSC 1758
Sheldon Miadovnik had been making regular withdrawals from his RRSP in 2008 and 2009 to fund living expenses while going through separation proceedings from his wife. In February 2009 when his RRSP balance was about $100,000, he contributed a further $15,000, allowing him to reduce his taxable income for 2008. The withdrawals resumed in March and April, totaling to approximately $15,000, and a voluntary assignment into bankruptcy was made on May 1.
The bankruptcy ended up before a Master who was tasked to interpret s.67(1)(b.3). (It is the Master’s emphasis in the judgment that is repeated above.) The trustee claimed that the $15,000 deposit should be available to it, and it also claimed the balance of a bank account which the Master found comprised the net proceeds of the subsequent withdrawals.
Having no case authorities as guidance, the Master faced a conundrum as to whether the RRSP withdrawals were to be considered FIFO (first-in-first-out), LIFO (last-in-first-out), or some kind of proportionate calculation.
Conscious of the potential for double-counting assets, the Master determined that “LIFO should apply and the funds removed thus be regarded as withdrawals of the most recent contributions.” This conclusion rested on the history of Mr. Miadovnik’s withdrawals and the legitimate intention to reduce 2008 taxable income by making the February 2009 RRSP deposit.
- Generally, RRSP deposits made in the 12 months preceding an assignment into bankruptcy will be available to a bankruptcy trustee to satisfy creditor claims.
- Where there are RRSP withdrawals as well as deposits, an analysis of the circumstances will be necessary to determine what may be claimed by the trustee.
- The LIFO determination in Miadovnik rested on the particular facts, and should not be assumed to be apply in all circumstances.