Recently Alberta added registered education saving plans (RESPs) to their list of assets that are protected from a person’s creditors either through a Writ of Seizure and Execution or an Assignment in Bankruptcy. Immediately the call went out to add RESPs to the exemptions in every province across Canada. The purpose of this article is to explore the topic in greater detail.
Anecdotally, I can tell you that RESPs are seldom seized when people file for bankruptcy. I think the reasons for this are twofold. First, RESPs are not as common as registered retirement savings plans (RRSPs) or as popular as tax free saving accounts (TFSA). Second, the balances in most RESPs are such that it is easier for people to “buy them back” as opposed to cash them out. Buying them back is where you pay an amount equal to the RESPs cash-out value to your creditors, instead of collapsing the plan.
Here are some numbers I was able to glean from the internet. In 2012 Canadians made about $3.7 billion dollars in contributions to RESPs. The total value of all RESPs was approximately $36 billion. In 2012 Canadians made $36 billion worth of contributions to their RRSPs. The total value of all RRSPs exceeded $1 trillion dollars. The numbers don’t add anything to the discussion, but it does give us some perspective on the dollars involved.
Interestingly, in September 2009 the Federal government amended the Bankruptcy and Insolvency Act to protect funds on deposit in RRSPs for those filing bankruptcy or a consumer proposal. They excluded money deposited in the 12 months immediately prior to filing bankruptcy – these funds may still be seized, but all other RRSPs money is now protected. Many people assumed this protection would be extended to RESPs, but to date that has not happened.
Will the legislation change nationally? It becomes a question of the social benefit derived from families saving money to pay for higher education versus the social benefit of companies being able to recover as much as possible when people default on their debts. Said more simply, do we bias the law towards children or creditors. I think we all know which side the politicians will come down on.
My initial reaction to Alberta’s move was to suggest that they protect RESPs with the same 12 month exclusion that exists for RRSPs today. At least that stops people from loading up a protected asset at the last minute. This sort of rule would have the added benefit of consistency across the various registered savings plans.
One of our trustees suggested the RESP funds become locked-in upon an assignment in bankruptcy. The funds would be protected, but the individual could not withdraw the funds except for their child’s education, or a transfer to an RRSP. This doesn’t sound onerous to administer or on the families involved.
From a practical standpoint I don’t know that the dollars involved in any specific case will be large enough to warrant the creditor community from taking enough interest to argue against a change that would protect RESP’s in a bankruptcy or proposal. With no one arguing against a change, it seems likely some form of protection will be adopted nation wide.