by Stewart Lewis, Editor, STEP INSIDE

New federal bankruptcy legislation that will shield RRSPs from creditors, if the plan holder goes bankrupt, was passed before parliament was felled in late November. However, investment and insurance industry groups are keen to attend further Senate hearings to put forward much needed amendments to the legislation - before it comes into force in mid-2006.

The new RRSP protection is part of a legislative package, with amendments to the federal Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, and a new statute to provide protection for wage earners.

Before the former Liberal government fell, it promised the Senate banking committee that it will be permitted to conduct consultations with concerned stakeholders, which were set to testify at committee hearings in November. They'll be looking for that opportunity when parliament resumes.

"We're pleased that the bill was passed," says Jamie Golombek, Toronto-based chair of the Investment Funds Institute of Canada tax committee and VP of taxation and estate planning for AIM Funds Management Inc. "Unfortunately, we didn't get the chance to speak to our concerns, which still exist."

Representatives from the Canadian Life and Health Association didn't get to appear before the committee either, says Frank Zinatelli, CLHIA's VP and associate general counsel. CLHIA is counting on having "the opportunity to review the legislation as soon as parliament comes back," he says.

The amendments will provide unprecedented protection to non-insurance-based RRSPs. However, they don't provide the complete protection against creditors presently enjoyed by insurance-based RRSP holders.

The legislation, as drafted, only provides creditor protection if an RRSP plan holder is bankrupt, says Golombek. It won't stop creditors from obtaining a court order against a debtor who has not declared bankruptcy.

IFIC would like to see a "level playing-field" for both insurance-based and non-insurance based plan holders, he adds. It wants the legislation to provide creditor protection for non-insurance RRSPs that is equal to insurance-based RRSPs.

CLHIA plans to take a different tack. The legislation, if passed as it is written, will scale back the protection that insurance-based RRSP planholders now have under provincial insurance legislation, says Zinatelli.

Someone who declares bankruptcy, and has an insurance-based RRSP, says Zinatelli, will have to comply with the new federal legislation. (Under the Constitution, bankruptcy is a federal matter; insurance is a provincial matter.)

Zinatelli says CLHIA supports IFIC's wish. Ottawa should "go ahead and expand creditor protection for other institutions' RRSPs - but not reduce what is already in place." The protection under the new federal bankruptcy legislation imposes three key conditions that are not imposed by provincial insurance protection.

First, a potential bankrupt will voluntarily have to lock in his or her RRSP. The regulations will set out how this will be achieved.

Bankrupts shouldn't get access to their RRSP funds, says Bob Klotz, a Toronto lawyer who specializes in bankruptcy law. The lock-in provision accords with the enduring public policy that supports tax deferral for RRSPs, he says. (Klotz has been a key player in the development of the amendments in this legislation that involve RRSP protection. He played a significant role in drafting recommendations put forward in 2002 by the Personal Insolvency Task Force - an advisory group established by the federal finance department to reform the personal insolvency provisions of the federal Bankruptcy and Insolvency Act.)

Second, there is a "clawback" on the amount of plan contributions that would be protected from creditors. RRSP contributions made within the 12-month period prior to bankruptcy - or longer, if a court orders it - will not be protected. Finally, the amount of RRSP monies that would be exempt from creditor attack will be capped. The cap formula is to be set out in the regulations.

Neither IFIC nor CLHIA want clawback or cap provisions in the legislation.

Both suggest that "fraudulent conveyance" provisions in the federal Bankruptcy and Insolvency Act should provide sufficient deterrence for pending-bankrupts from squirreling funds into their RRSPs before they declare bankruptcy. (The provinces also have separate fraudulent conveyance statutes.)

One of the common ways this fraudulent conveyance legislation is used is to undo transfers of property from one spouse to the other spouse, which are made just prior to the spouse declaring bankruptcy - in an attempt to keep creditors from making claims against the property.

The suggestion that fraudulent conveyance law would provide sufficient anti-abuse protection against improper asset transfers into RRSPs "is completely wrong," says Klotz.

There are two problems with that approach, he says. To prove fraudulent conveyance, evidence of an interaction between two parties is required. However, a transfer to an RRSP only involves one partythe potential bankrupt, says Klotz. Therefore, it would be practically impossible to prove fraudulent intent.

Second, litigation is expensive. The cap and clawback provisions will ensure that taxpayer dollars won't have to be spent to prove fraudulent conveyance, say Klotz. They are "effective anti-abuse measures" that are needed to make this legislation work, he adds.

The Senate banking committee will have to referee these differing views on how the new legislation should be amended.

On Nov. 24, 2005, when the legislation was going through third reading in the Senate, the chairman of the banking committee, Senator Jerahmiel Grafstein, said, "The committee was confronted with a Solomonic choice ... We were told by government officials that the bill was flawed. We were further told that government officials had prepared amendments, not only to the legislation itself, but also to the regulations that were to be implemented in the future as they were not satisfied with the bill."

Graftstein got a letter sent to him by former Liberal Industry Minister, David Emerson, which stated: "The scrutiny of the detailed provisions of the bill has raised a number of implementation issues that deserve further consideration. In this regard, the Government commits not to proceed with the coming into force of Bill C-55 before June 30, 2006. As soon as possible in 2006, the government, through the Leader of the Government in the Senate will refer the matter to the committee for further study."

Klotz likens Emerson's comments to an election promise. When the government changes, "all bets are off." However, he adds, "I presume the hearings will go ahead."