In 2008 the Parliament of Canada amended the Bankruptcy and Insolvency Act to protect your registered retirement savings plan (RRSP) from seizure except for contributions you have made in the last year. This new law was in addition to the protections provided under the Insurance Act of Ontario that protects any RRSP funds with some form of annuity component (RRSPs held by insurance companies). The government’s goal was to preserve Canadians’ retirement savings for later use.
What if you have already filed for bankruptcy and find yourself thinking about withdrawing RRSP funds to cover a cash shortfall? What happens to the money?
Funds you withdraw from your RRSP during your bankruptcy are not protected in the same way that they were while they remained invested. Once you remove any amount from your RRSP, the money becomes cash just like every other dollar you may have in your bank account.
You are required to disclose to your trustee the fact that you have withdrawn money from your RRSP. Your trustee will do one of two things.
- Either your trustee will instruct you to treat the withdrawal as income that is subject to the surplus income rules (just like an extra paycheque), or
- your trustee might simply seize 100% of the net withdrawal.
Bankruptcy law allows for either interpretation and your trustee’s decision often comes down to the facts in your particular case.
You should also know that, no matter which option your trustee follows, you are still responsible to pay the required income taxes on the withdrawal. When you file your next tax return, either your post-bankruptcy return if the withdrawal is in the same year as your bankruptcy, or the next year’s return, the total amount of the withdrawal will be added to your taxable income and if additional income taxes are payable you are responsible for this new debt. It will not be included in your bankruptcy.
Be very careful and consider all of your options before you make an RRSP withdrawal if you have already filed for bankruptcy. Speak to your trustee to make certain you understand how your trustee will treat the withdrawal – as income subject to surplus rules or by seizing it all – before you decide what you are going to do.