Bankruptcy Exemptions in Ontario:

For individuals, the following are exempt from forced seizure in a bankruptcy:

1. All necessary clothing for you and your dependents with no dollar limit
2. Household furnishing and appliances up to $14,180
3. Tools and property used to earn a living to a maximum of $14,405
4. One motor vehicle not exceeding a value of $7,117
5. Equity in your home if that amount is less than $10,783
6. RRSP and RRIF savings, except contributions made within the last 12 months

It is important to understand that the prescribed limits set out by Ontario law are based on resale value on an as-is basis. Your work tools for example are likely used, and have wear and tear. For bankruptcy purposes, they are valued based on what they would sell for as-is, not based on replacement value.

The same valuation applies to your vehicle. You can keep one vehicle (a car or truck), up to the set value limit. This is based on what you could sell the car for. The trustee will usually use the black book value to estimate the value of your vehicle and determine if it is exempt.

Read Transcript

It is still possible to keep your car, truck, work tools, and other assets valued over any exemption limit. You can make an arrangement to ‘buy back’ the value over any exemption limit from the trustee. This amount is added to the cost of your bankruptcy.

Questions About Bankruptcy and Exempt Assets

What happens to my wages in bankruptcy?

You keep your wages in a bankruptcy. You will be required to submit proof of income and expenses monthly to your trustee. Your trustee will use this to determine your average net income for the purposes of calculating “surplus income”. If your income exceeds the government set threshold limit, you will be required to make surplus income payments during your bankruptcy. If your wages are being garnisheed, bankruptcy will stop most garnishments.

Can I keep my bank account if I’m bankrupt?

We strongly advise anyone considering bankruptcy to open a new bank account at a different bank prior to declaring bankruptcy. This will avoid the risk of your bank seizing funds for unpaid debts once you file.

While any funds in your bank account are not exempt assets, typically you are allowed to keep a small amount of cash on hand in your new bank account to cover living expenses like rent, food, etc. for a short period of time.

What happens to my tax refunds?

Your licensed insolvency trustee will file two tax returns for the year that you declared bankruptcy:

• a pre-bankruptcy return (Jan 1 – day before bankruptcy)
• a post-bankruptcy return (date of bankruptcy – Dec 31)

Any tax refunds applicable to the date of bankruptcy and on your post-bankruptcy return will be sent to the trustee. Any taxes owing on your pre-bankruptcy return are included in your bankruptcy. Any taxes owing on your post-bankruptcy return must be paid by you. While you lose your income tax refunds, you keep your HST cheques and Child Tax Benefits.

Can I keep my leased vehicle?

Leased vehicles are treated differently than owned vehicles. Technically you do not own your leased car. You have the right to use the car in exchange for your obligation to make lease payments. If your lease payments are current, you can keep your car, no matter the value. You can, if you prefer, also surrender your leased vehicle and include any shortfall debt as a debt to be eliminated in your bankruptcy. This is a good option if you can’t afford your lease payments.

Can I keep my house if I file bankruptcy?

In Ontario, you keep your house in bankruptcy unconditionally if the equity in your home is under $10,783 and your mortgage payments are current. Above that amount, you can arrange to buy back the equity in your home.

What happens to my RRSP in a bankruptcy?

You keep all RRSP, RRIF and DPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy. RESP, TFSA and other investment savings are not exempt.  Read more about this asset in our post: RRSP and bankruptcy law in Canada

What about lottery winnings, inheritances and other windfalls?

Inheritances received, or due to you, as a result of the death of someone during bankruptcy become an asset of the bankruptcy.

Lottery winnings and similar windfalls received during your bankruptcy also vest in the trustee for the benefit of your creditors.

Bonuses and commissions from employment would be considered income and not subject to seizure by the trustee however they will impact the calculation of surplus income.

File a Consumer Proposal and Keep Everything

If you have assets that may be subject to seizure in a bankruptcy because they are not exempt, or because their value exceeds the permitted exemption limits, you may want to consider a consumer proposal as an alternative to bankruptcy.

One of the primary benefits of a consumer proposal is that you keep all your assets. As a negotiated settlement arrangement, you make payments to repay a portion of your debt.  Your creditors receive the value of these payments, you keep what you own.

You Don’t Lose Everything

The most important thing to realize is that you do not lose all your assets if you file bankruptcy in Canada. If you do have assets that must be surrendered to the trustee, you still have options like a consumer proposal to keep those assets.

To discuss your specific situation, contact us to talk to a Licensed Insolvency Trustee about how your assets may be treated in a bankruptcy and if a consumer proposal is a better way to preserve any assets you may wish to keep.

The post Ontario Bankruptcy Exemptions: Assets You Can Keep appeared first on Hoyes, Michalos & Associates Inc..

Many people are worried that if they file personal bankruptcy they will lose their RRSP and other pension savings.

In Canada, most Registered Retirement Savings Plans (RRSPs) are protected in bankruptcy and so, in general, you can keep your RRSP savings after filing bankruptcy.

The Bankruptcy and Insolvency Act (BIA) under section 67 (1) (b.3) exempts RRSPs from seizure for your creditors except for any contributions made within the last 12 months.

The BIA also states that creditors are not entitled to any assets that are exempt from execution or seizure by provincial law. In Ontario:

• A Registered Pension Plan is governed by the Ontario Pension Benefits Act is exempt from seizure in a bankruptcy. Ontario protects company-sponsored or government-sponsored registered pension plans (RPPs). All pension assets under these plans are protected, regardless of when the contribution was made. Both employer and employee contributions are safe from seizure.
• The Insurance Act of Ontario protects RSPs that have a life insurance component if the beneficiary is a spouse, parent, child, or grandchild. In this case, all contributions are safe.

Let’s look at three common examples:

Example 1: Your employer takes 5% of your pay and puts it in a registered company pension. All contributions are yours to keep, even those made within the last year and those matched by your employer.

Example 2: You have a Registered Retirement Plan with an insurance component with a company such as Sun Life and your spouse is a beneficiary. These plans are yours to keep, including contributions made in the last year.

Example 3: You contribute 3% of your pay every payday to your own individual RRSP through an automatic savings program. Contributions made to your RRSP in the last 12 months before filing bankruptcy are at risk of seizure by the trustee.

Download our free PDF guide: How Does Bankruptcy Affect Registered Savings Accounts & RRSPs

Trustee has same rights as plan holder

The trustee cannot be granted any more rights to assets in the plan than the plan holder, including for recent payments. If the plan contains terms that prevent the plan holder from requesting payment until a specific event such as termination, death, or retirement, the trustee is not entitled to seize what the plan holder cannot withdraw.

What about transfers between RRSPs?

A transfer is not the same as a contribution. If you transfer funds from one RRSP to another company, then these are not new contributions in the last 12 months and as such cannot be seized by your trustee.

What about a spousal RRSP and bankruptcy?

The BIA applies to RRSPs you own and control. If you file bankruptcy, contributions you made to your spousal plan are not subject to seizure by the trustee. If your wife goes bankrupt, the maximum exposure for her spousal RRSP is the contributions you made in the last 12 months.

What about a RRIF and bankruptcy?

A Registered Retirement Income Fund (RRIF) is treated the same as an RRSP. Normally individuals withdrawing funds from a RIF are not making current contributions, however if they do, their maximum exposure is contributions made within the past 12 months.

Read Transcript

What about an RDSP?

While there is no specific provision in the BIA to deal with a Registered Disability Savings Plan (RDSP), a recent British Columbia Supreme Court ruling held that funds in a RDSP cannot be seized by a Licensed Insolvency Trustee in a bankruptcy for the benefit of creditors.

What happens to a DPSP and bankruptcy?

A Deferred Profit Sharing Plan (DPSP) is treated the same as an RRSP in a bankruptcy. The maximum exposure is any contributions made in the last 12 months. Most DPSP plans have terms that the employee cannot withdraw these funds while still an employee for that company, therefore the full amount in the DPSP could be protected.

Locked-in pension plans

Pension plans that are designated as a Locked-In Registered Plan are exempt from bankruptcy or seizure. The trustee has no entitlement to money in this plan, including recent contributions.

What about TFSA and bankruptcy?

While a Tax-Free Savings Account (TFSA) is a registered savings vehicle, it is not a RRSP and as such is subject to seizure.

What happens to an RESP if I file bankruptcy?

Because the plan holder (usually the parent) can cash out a Registered Education Savings Plan (RESP) at any time, an RESP is considered to be an asset of the plan-holder. Therefore, if the plan-holder is bankrupt, an RESP is subject to seizure by the trustee.

Tips to protect at risk assets even if you go bankrupt

In truth, most people who are considering personal bankruptcy have ceased to make any contributions to their RRSP because they are using most of their income to make debt payments. However, if you do have exposure to recent contributions here is how we advise clients.

Our first step is to review your RRSP documents to determine how much you have contributed in the last 12 months. If you contribute through your paycheque at work we can generally get this information from your paystub. If you have an RRSP through a bank or investment advisor, they will provide a statement.

If you have made no contributions in the last 12 months, no further action is required; you can keep your RRSP.

If  you have made contributions in the last 12 months or have other seizable assets like RESPs, you have three options:

1. You may request that the trustee contact the bank or investment company and withdraw the contributions from the prior 12 months. It is the trustee’s responsibility to pay the tax owing on that withdrawal, so you have no further costs or obligations.
2. You may decide to contribute an extra amount to your bankruptcy to “buy back” your RRSP contributions for the last 12 months. For example, if you have contributed $1,000 and you are in a 30% tax bracket, the trustee would recover a net amount of $700; so you could pay the trustee an extra $700 and keep the full amount of your RRSP.  The same applies to any assets you have in an RESP or TFSA. A payment plan matching the term of the bankruptcy can be arranged.
3. If you have significant seizable assets, you could decide to file a consumer proposal. In a consumer proposal you don’t lose your RRSP or any assets.

As a final planning point, if you are not worried about having your wages garnisheed, you could stop contributing to your RRSP now while you catch up on rent, utilities or other current bills, so that contributions in the last 12 months are reduced.

Protect your retirement from bankruptcy

One of the most common, and costly, financial mistakes we see is people who drain their RRSP savings to keep up with debt payments when they are in financial trouble.

If you have significant debts, draining your RRSP (a protected asset) to fund debt obligations only serves to delay the inevitable. You should not use your RRSP savings to pay down debt without first speaking with a Licensed Insolvency Trustee about your options. Since RRSPs are protected in a bankruptcy, it makes sense to preserve these funds for your retirement.

The post RRSP, Registered Savings Accounts and Bankruptcy Laws appeared first on Hoyes, Michalos & Associates Inc..

Bankruptcy and Real Estate

When someone files bankruptcy, their trustee is required to realize on all non-exempt assets to pay their creditors. This includes real estate, including a personal residence or cottage, whether it is owned solely by the bankrupt or jointly with a spouse, siblings, or other partners.

There are rules in Ontario that allow the bankrupt an exemption for principal residence if, and only if, the total equity in the property is less than $10,783. Not many properties fall into this category. However, in terms of your home, there are options that can allow you to keep your home even if you file bankruptcy.

Determining Fair Market Value of the Cottage

The first thing the trustee will do is determine the fair market value of the property. They will request an independent appraisal, and then deduct prior charges like mortgages and outstanding property taxes that would have to be paid if the cottage was sold. After these deductions, the equity in the property will have been determined.

If the bankrupt owns the property on their own, then this equity belongs to the creditors in full. If a property is owned jointly, or partially, the amount due to the creditors would be equal to the bankrupt’s share in the property.

Realization of Equity in Bankruptcy

Rarely are properties sold by the trustee. In the case of a jointly-owned cottage there are options:

Once the equity is determined, a negotiation will usually take place to sell the equity to the non-bankrupt owners or a third party. If the sale or amount is contentious, the trustee may obtain court approval of the sale. No one wants to take the family cottage away; the objective is to obtain the equity to pay the creditors.

Fraudulent Transfers

There are rules that prevent a person selling or transferring a property for less than fair market value on the “eve” of filing a bankruptcy. The courts will overturn and reverse these transactions. Selling or gifting your share of the cottage to your siblings to avoid having the asset realized in a bankruptcy is not advised. The bankrupt is required to answer questions about pre-bankruptcy sales of assets and could be charged with fraud if they provide false information on their bankruptcy forms.

Consider a Consumer Proposal

If the bankrupt wishes to retain ownership of his or her share of the family cottage, they could file a consumer proposal. In a proposal, the debtor maintains ownership and control over their assets. In exchange, they make a settlement offer that their creditors can agree to accept, or not. If the proposal is accepted, the debtor has a contract with his creditors to settle their debts.

As you can see, there are options to allow you and your family to retain ownership of a cottage or any shared asset even if one party needs to turn to bankruptcy to solve other debt problems.

The post Will Bankruptcy Affect Shared Ownership in a Cottage? appeared first on Hoyes, Michalos & Associates Inc..

What is an RESP?

An RESP is a registered savings plan for a child’s future education. A plan-holder makes contributions to the plan and the government will match 20% of the contribution, up to certain limits. This asset then grows and when the child withdraws the funds for educational purposes, the child is taxed on the growth. The plan-holder remains in control of the plan and may have it collapsed – net of any government contributions that are subsequently lost.

What happens to my RESP in a bankruptcy?

An RESP is generally held not to be a true trust, and is cashable by the plan-holder. Because the plan holder (usually the parent) can cash out the RESP at any time, the RESP is considered to be an asset of the plan-holder. Therefore, if the plan-holder is bankrupt, the RESP can be seized by the Trustee.

How are the costs to collapse an RESP handled in a bankruptcy?

When a trustee cashes in an RESP, there are usually plan administration fees to pay, and all government contributions are returned to the government, so the money that the trustee receives is generally far less than the value of the RESP if it is not collapsed.

Read our article on other registered savings accounts for information on how RRSPs, DPSPs, TFSAs and other registered savings vehicles are treated in a bankruptcy.

Options to protect your RESP in a Bankruptcy

If you are in financial difficulty and have an RESP that you want to protect, there are options.

• In a bankruptcy situation, the RESP can be repurchased from the trustee.  The cost is added to your monthly payments.
• If a consumer proposal is filed, the RESP will not be affected.  This is because in a consumer proposal you keep all assets, which includes any RESP funds.

As you can see it is possible to keep your RESP for your children’s benefit along with other assets and still be able to obtain debt relief. To discuss your situation in detail, please contact us for options to preserve your RESP investment.

The post Personal Bankruptcy and Registered Education Saving Plans (RESP) appeared first on Hoyes, Michalos & Associates Inc..

In addition to talking about whether you lose your RDSP in a bankruptcy, we talk with Alan Whitton about the ins and outs of RDSPs. This is a subject close to Alan as he and his wife found themselves having to set up an RDSP for their son.

RDSPs Exempt From Seizure in Bankruptcy in Canada

This matter was dealt with in a recent BC Supreme Court ruling that held funds in a RDSP can not be seized by a Licensed Insolvency Trustee (Trustee in Bankruptcy) for the benefit of creditors in the event the beneficiary of the RDSP declares bankruptcy.

What are RDSPs?

An RDSP is a registered savings plan designed to help Canadians with disabilities save for the long-term financial needs of a disabled person, including medical, care and living costs. RDSPs can only be setup for someone who is eligible to receive the Disability Tax Credit.

If this is for your child, you can only begin making contributions after your child is diagnosed with an eligible disability. You can also apply for an RDSP on your own behalf as an adult.

Like an RESP, an RDSP allows a disabled person, and their family members, to set aside funds in a separate trust account for a designated beneficiary – in this case the disabled individual. Contributions are not tax deductible but income earned on the funds are tax-deferred until they are withdrawn. The government provides additional support through matching grants and bonds.

RDSPs were introduced in 2008 as part of the Canada Disability Savings Act.  Interestingly, in the same year the federal government made changes to the Bankruptcy and Insolvency Act to protect RRSP and RRIF contributions, but did not include RDSPs.

Facts in recent RDSP and bankruptcy court case

Ms. Alary was disabled and entitled to the disability tax credit under section 118.3 of the Canadian Income Tax Act. Mrs. Alary had an eligible RDSP with the Royal Bank of Canada, taken out in 2010. She was was the sole beneficiary and holder of her RDSP.  The fund consisted of $6,800 in private funds provided by her parents in 2012. Once income growth and grants were calculated in, her funds held a total of $32,250 in trust.

In 2015, Ms. Alary filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act. Her trustee notified the Royal Bank of her filing and requested Royal Bank to forward the private funds originally contributed to the plan to the trustee for the benefit of Mr. Alary’s creditors.  The trustee made this claim because there was no specific provision in the Bankruptcy and Insolvency Act or the Income Tax Act governing how RDSPs should be treated during insolvency.

The Royal Bank refused to release the funds claiming that the money held in the plan was exempt from seizure. As such, they could not release the funds to the trustee.

Under the terms of section 146.4 of the Income Tax Act, funds held in an RDSP are held in trust “exclusively for the benefit of the beneficiary under the plan”. However the terms of the trust permitted the court the ‘discretion’ to direct that the funds be released for the benefit of creditors of the bankrupt.

Madam Justice Bruce found that there must be a balancing between the fact that the funds are held in trust for the benefit of the beneficiary and the rights of the creditors under the Bankruptcy & Insolvency Act.  In this case, requesting the release of a portion of the funds permitted under the terms of the trust would trigger a requirement for Ms. Alary to repay a significant amount in the government-assisted portion of the fund. Madam Bruce found that the court should be guided by what was “just and equitable” and as such refused to order the release of any funds.

What this means for your RDSP

The court did not rule that all RDSPs are exempt from seizure. The court made its decision not to release the funds to the trustee based on the facts of this case. It is apparent that this means future cases will be dependent on the Court’s ability to exercise its discretion. In the absence of clearer legislative exemptions in the Bankruptcy & Insolvency Act, Licensed Insolvency Trustees will also likely exercise discretion in whether to seek court direction about the release on any RDSP funds to the estate.

Resources mentioned in this show:

• UPDATE: Clarifications from Alan Whitton on RDSPs
• Canajun Finances RDSP page
• Government of Canada website on RDSP Grants and Bonds
• Milburn Drysdale asdfunding.com
• Disability Tax Credit eligibility requirements
• Canada Disability Savings Act
• RDSPs and bankruptcy

FULL TRANSCRIPT show #165 About RDSPs and Seizure in Bankruptcy with Alan Whitton

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Doug Hoyes: We’ve talked many times here on Debt Free in 30 about RSPs and RESPs but we have never before addressed another savings vehicle that is also known by a four letter acronym, RDSP. What is an RDSP? What happens to an RDSP if you go bankrupt? That’s today’s topic here on Debt Free in 30.

So, to get today’s show started let’s welcome back to the show a man who I consider to be an expert on this topic, the Big Cajun Man also known as Alan Whitten, Alan welcome back. So, let’s start with the basic question, what does RDSP stand for?

Alan Whitton: Registered Disability Savings Plan.

Doug Hoyes: Oh there you go.

Alan Whitton: The literal answer is always the easy one.

Doug Hoyes: It’s always the easy one. So, okay so Registered Disability Savings Plan, okay what is it, how does it work, who’s eligible for it? Just dump me what’s in your brain on this topic.

Alan Whitton: So, I’ll precurse this with what I told you before, which is the real expert on RDSPs is my wife who has done a lot of work on the Disability Tax Credit side of things and made sure that this is all well understood by me as well because I have a son that’s on the autism spectrum. So, this is the reason I have any expertise in this area.

What’s it for? It’s for either family or parents to put money away for a disabled family member or someone who is disabled to put money away themselves. I found that one out from a reader who sent me a really good email explaining a whole bunch of stuff that he had done.

Doug Hoyes: Now so I’ll just fire some questions and you can answer yes or no if you know the answer, if you don’t then we can skip over it.

Alan Whitton: Oh there won’t be any no’s, I’m an expert.

Doug Hoyes: There you go, that’s right, whether I know the answer or not I’m going to give you the answer.

Alan Whitton: I’ll make it up.

Doug Hoyes: So my understanding is you can contribute up to the age of 49, is that correct?

Alan Whitton: Yeah, it becomes an issue with when the money gets withdrawn for the person involved and after 55 or something like that because they’re close enough to collecting CPP there’s a whole bunch of interesting stuff so 49 seems to be the stop point.

Doug Hoyes: So there are complicated rules that –

Alan Whitton: It is possibly the most interestingly complicated savings plan I’ve ever seen in my life.

Doug Hoyes: Which is why on your website you’ve got numerous articles as you kind of, you know, driven the boat through the waters trying to figure all this out, that’s really what it’s all about that’s really what it is.

Alan Whitton: Yeah we started off working with Toronto, well with TD Canada Trust, with their direct investing group with this. And this was, we were the first people to actually ask for this where we lived. And we killed like I don’t know 20 trees worth of forms and we still didn’t quite get it right. Because the poor lady working on it had never worked with this system either.

Doug Hoyes: Yeah this is not as well known as an RRSP, which every bank branch does thousands of every year and RESPs as well and even TFSAs. So, let’s take a very simple scenario here. Let’s assume that one of my dependents, my children, has been diagnosed with something where they qualify for the Disability Tax Credit.

Alan Whitton: Right.

Doug Hoyes: Because that’s the key.

Alan Whitton: That’s the crux of it.

Doug Hoyes: If you don’t qualify for the Disability Tax Credit than an RDSP is not an option. So, as you said in your case your son is on the autism spectrum so obviously there was medical evaluations and forms to fill out.

Alan Whitton: And it’s one of the harder side of things.

Doug Hoyes: Takes forever. But eventually someone at Revenue Canada says yes you qualify on behalf of your son for the Disability Tax Credit.

Alan Whitton: Yes. Now you’ve got to get your doctor and/or another group of professionals to sign off on the T2201 evaluation forms. In the case where you have a child that’s got a physical disability it’s a lot easier because the box becomes a simple my child is in a wheelchair these kind of things.

When it comes to dealing with brain stem injuries or however they’re, my wife could say this better than I could. But especially in the autism case, doctors, especially pediatricians, are leery to fill in the forms sometimes because they’re not positive they’re filling it out right. And the CRA is really looking for very specific vocabulary about oh, what did my – my wife actually put this down somewhere so I should be careful what I say here. But, yeah so they’re going to look for significant effects on everyday life is what needs to be in the form. It needs to be proven that this disability is something that’s going to screw up your loved ones life before they’re going to start thinking about the DTC and giving it to you.

Having said that, the CRA has actually put a nurse practitioner on their Twitter feed or at least available for a consultation with other medical professionals to help them out because I get a lot of emails from people saying my doctor doesn’t know how to fill this in or I applied and my doctor didn’t fill in the form correctly or the CRA didn’t like how my doctor filled in my form, what do I do now? The answer is you reapply.

Doug Hoyes: Try again.

Alan Whitton: You can keep reapplying and trying but you better make sure you have a good story and maybe try and consult with the CRA and say why did this get turned down? Because it’s a tricky system, I mean with my own son, he was evaluated and we got the DTC and then at age 10 they said you got to do it again because we said this was for 10 years so how he’s been evaluated, nd he receives the DTC and I can put money in my RDSP because of it up to age 18. But when he turns 18 we’re going to have to do this all again. And this time you’re going to have to do it with him sort of being the driving force running through it.

Doug Hoyes: He’s an adult at that point.

Alan Whitton: Exactly.

Doug Hoyes: So can you tell me that phrase again then as to what, specifically to qualify for a Disability Tax Credit when you boil it right down to it, it’s essence it comes down to.

Alan Whitton: Significant effects on everyday life.

Doug Hoyes: Significant effects on everyday life, okay. And which is very easy to say but much more difficult to quantify.

Alan Whitton: Exactly. So the doctor has to be able to show how this disability is going to mess up their lives and why they’re going to need help from the government and get the DTC because as you said without the DTC, the RDSP doesn’t happen.

Doug Hoyes: So if I need glasses because I have bad eyesight well okay that’s not going to have significant impact on my life.

Alan Whitton: No.

Doug Hoyes: If I’m blind.

Alan Whitton: Yes.

Doug Hoyes: Then probably that will have a significant impact on my life.

Alan Whitton: Right.

Doug Hoyes: And therefore I would qualify. So, okay so and again this is a very complicated area and we’re certainly not going to try to answer every possible question on it. But you – so, if there is a disability you go through the process, get the doctors to sign off and you qualify for the Disability Tax Credit, which now makes you eligible to set up an RDSP.

Alan Whitton: Right.

Doug Hoyes: So give me a real simple example. Because I understand how it works with an RESP, a Registered Education Savings Plan. If I put $1,000 into an RESP the government gives a grant of X number of dollars, that increases the RESP. There are limits, you can only put in so much, you can only put it in for a kid up to a certain age, they have to draw it out for education, there’s clearly defined rules. An RRSP, same deal, there’s a maximum amount you can put in each year and the government doesn’t give you any money but it’s a tax deduction. With an RDSP you don’t get a tax deduction when you put the money in.

Alan Whitton: No, it’s after tax money.

Doug Hoyes: Okay, which makes it different than an RRSP. With an RRSP, a Registered Retirement Savings Plan, I get a tax deduction when I put it in and it grows tax free until I take it out. With a RDSP I don’t get a tax break when I put it in.

Alan Whitton: Nope.

Doug Hoyes: So, why would I do it?

Alan Whitton: You get grants from the government based on either the contributor’s parents, in my son’s case, income levels. So, if I was not making a lot of money but I was still able to open the RDSP there might be some money that would go in there even if I put no money in, if my income is low enough.

Doug Hoyes: Very low income, okay.

Alan Whitton: That’s very low income. In my case I make a good enough income. I have a limited amount of money I can put in that they will match and then put grants on top of that. And the grants are very generous. I mean the RDSP program is well designed in this concept of trying to help disabled people in the future so that they’re not going to be drag on society and things like that. They’re going to have some money to help them out. The problem is so many banks really don’t want to set it up because there’s not a lot of money in it.

Doug Hoyes: Yeah there’s a maximum that can go into it so there will never be a hundred million dollars in a plan.

Alan Whitton: No.

Doug Hoyes: So just give me some ballpark numbers then. So, let’s say that I was able to come up with a thousand dollars to put money in. If I am – so, what is the range of grants? I looked this up going through all the links that are on your website and it looks to me like it could be somewhere in the range of one to three times to what I put in.

Alan Whitton: Yeah in my case it’s pretty much a one to one matching. And I can put in a maximum of about $2,000 a year. So, they’ll be about $2,000 to $2,500 worth of grant on top of that that will go into what to match what I put in . But if I put more money in, there won’t be any more money from the government. But it’s still a savings plan for my son.

Doug Hoyes: And you can’t put unlimited money in though.

Alan Whitton: No.

Doug Hoyes: There’s a cap on what you can put in. So, if you put in, and again we’re just giving an example here, every situation’s going to be different as you said based on the parent’s income in the case of a minor child. But, you know, if I put $1,000 in potentially the government’s also going to put $1,000 in, you know, plus or minus. If I put $100,000 in, well I can’t, that’s more than you’re allowed to put in. But even so the maximum they put in is an extra thousand or whatever.

Alan Whitton: Exactly.

Doug Hoyes: They’re obviously clearly defined rules to it. So the reason you would set one of these up is number one, the government will in most circumstances kick some extra money in.

Alan Whitton: Right.

Doug Hoyes: And number two it is growing tax free within the plan.

Alan Whitton: Yes.

Doug Hoyes: Until you take it out.

Alan Whitton: Right.

Doug Hoyes: And in the case that you’ve described with your son, it will be your son taking the money out presumably when he’s older.

Alan Whitton: Right. And he’ll be – the money from the grants that he’s receiving will be I believe, and the growth, will be the tax portion.

Doug Hoyes: The money you put in isn’t taxed.

Alan Whitton: Because it was after tax money in the first place.

Doug Hoyes: Right, I got you. So, that’s where it’s a little different than an RRSP, every dollar you get out of an RRSP gets added to your income, which is potentially subject to tax. But an RDSP that’s not the case, the money you’ve put in then comes back out.

Alan Whitton: So it’s similar to a RESP in that kind of way.

Doug Hoyes: Got it, got you, no tax going in, modified tax coming out. So, it makes sense for somebody who has a minor child who’s been diagnosed with a disability because it allows you to build up funds for the future. But it would potentially also make sense if I happen to be 25 years old at the time that I find out I have a condition that perhaps is going to deteriorate over time. I’m still working now but it’s projected that I’ll be able to work less and less in the future so while I have income now, I’ll put it in the RDSP and therefore I’m building up money in the future. Would that be another common example?

Alan Whitton: Yeah and that’s what I’m hearing from as well. I mean I’ve written really from the perspective of parent but I’m hearing more from people that are disabled and there’s questions about well, if I find out about my disability when I’m 30, is it worth setting up an RDSP? The answer of course is it depends on the situation. But, you know, as you said if the limit is at 49 to put money in and you find out you’re disabled at 48 well maybe this is not the way you’re supposed to be going.

Doug Hoyes: Right. You got to really crunch the numbers. So, I’m going to put myself in your shoes and I’ve got a child who is let’s say 10, 12, 15 years old and I’ve got $500 to invest, should I put it in a RDSP or should I put it in a RESP or should I pick some of the other initials RRSP, TFSA, how do I decide what I should do with it?

Alan Whitton: And luckily there’s so many choices. It ends up being the ternary of choice but you, with the RDSP, depending on your income, like if you’re a lower income person and you have $500 to spare the RDSP would definitely be the place to put it. Because I mean you’ve got the disability bond, you’ve got really low income. So there will be free money going into the RDSP anyway. But the grant money will be much, will increase more if you put it in the RDSP. You’ll get more bang for your buck on the RDSP side of things to begin with.

In my instance I have an RDSP for my son but I have an RESP as well. I put as much as I can into the RDSP because I will get the most growth out of that just from government grants. Putting money into the RESP is a well if he does make it to a university or a college or, you know, some post-graduate or post-secondary program that helps him out, that money is there too.

Doug Hoyes: Yeah so it is a tricky one. The first dollar it probably does make sense to go into the RDSP because unless your income is massively high you’re probably getting, you know, one times, two times maybe even three times as much from the government.

Alan Whitton: Exactly.

Doug Hoyes: But there is a limit as to what you can put in and which point you start –

Alan Whitton: See, you’ve got to be careful with that. And I mean that’s where the TFSA can come in as well. But the RDSP again if the program was better understood, better advertised and easier for folks to be able to use it and get into it, I think life would become a lot simpler. And I think that’s where I became an expert on this because I just saw how hard it was for a lot of people.

Doug Hoyes: Well and so it seems to be if there was something out there that is really good but also really complicated then there’d be a whole lot of I don’t know crooks out there who would here, I’ll help you out, I’ll give you advice, give me some money and I’ll navigate you through the shark infested waters here. And I don’t want you to start mentioning names because I don’t want to get sued, but is that the case, are there things we should be watching out for?

Alan Whitton: There are a lot of firms out there that are helping people.

Doug Hoyes: Helping people, okay.

Alan Whitton: So, the different, you know, they offer services, they’ll give you a doctor to help you out, fill in your forms correctly so that you can get your DDC. And what they’re really going after is the settlement you’ll get from the CRA if your disability gets say moved back to –

Doug Hoyes: Retroactive to five years ago, so now there’s five years worth of payments.

Alan Whitton: Yeah. So you’re getting say $10,000 in money back from the CRA. They’re going to take anywhere from 10% to 25% of that money. Now I’ve had a few people from those firms talk to me and say 25% less is better than nothing.

Doug Hoyes: Yeah, you’re still getting 75%.

Alan Whitton: But speaking of someone who’s got a family member with a disability every dollar counts and giving away that kind of money, there’s just too many of these firms out there that are trying to make money on this for me to think that, you know, they’re just after the wellbeing of people. Now yeah there are some organizations that are out there to help. And I’m not tarring everyone with the same brush but if you’re taking 25% off the top and I don’t even know if that’s 25% of the settlement or 25% of whatever you’re going to make in perpetuity off that.

I couldn’t find out on some of these sites, the websites that I’ve been looking at. And it’s – I’m not happy with the situation and I’ve written a bunch of posts saying please do it yourself, get help. Hospitals will help you do it, your doctor should help you how to do it. If they can’t find a nurse practitioner that was just added to the RDSP and DTC rules that you can actually talk to a nurse practitioner and have her fill out the T20, or him, sorry don’t want to sound sexist, T2201 forms.

So, the government’s trying to make it easier for you. If you really feel you can’t get it done or you’ve failed a whole bunch of times, okay get help but don’t give up that much of your money. That’s crazy.

Doug Hoyes: Yeah, paying someone like an accountant or whatever for an hour or two or five of their time is one thing, paying a percentage of the whole thing is –

Alan Whitton: Yeah and every time I see a service that says you don’t have to pay a dime for this until your settlement comes in, I don’t know, I get cold shivers down my back and I start wondering –

Doug Hoyes: Yeah. Well and so, our advice for people then, and you just said it, is to do it yourself. So, you have a lot of this information on your website.

Alan Whitton: Yep.

Doug Hoyes: And what I really like about it is you’ve got a ton of links.

Alan Whitton: Yes.

Doug Hoyes: So it’s not here’s what I think, here’s the CRA pages and a whole bunch of other resources.

Alan Whitton: Well, there’s a really good resource out in BC person called Milburn Drysdale at asdfunding.com who has page by page explanations of what you can do and how you get this stuff done. And I mean it makes life so much simpler, I’ve used it because this is a fantastic resource.

Doug Hoyes: So, what is the address of your website where people can find all these links?

Alan Whitton: So http://canajunfinances.com. And yeah, if you just type that in and then put /RDSP then you’ll find my RDSP page, which has not just information about RDSP but about disabilities, about DTCs, the whole nine yards.

Doug Hoyes: All sorts of stuff. So, that’s canajunfinances.com and if you put /RDSP you’ll get all these articles. So, that’s fantastic. I appreciate you coming back to talk about that.

We’re going to take a quick break and then I’m going to go through what happens to an RDSP if you go bankrupt? So, if you’ve got an RDSP set up for your child for example, you’ve put money into it over a few years and then you yourself end up having to go bankrupt, what happens to it? There’s some implications there.

Alan Whitton: I’ll be listening closely to that one myself.

Doug Hoyes: We’ll take a quick break and be right back with that, thanks Alan.

Alan Whitton: Thank you.

Doug Hoyes: So now that we know what an RDSP is what happens if you have an RDSP and you go bankrupt? This is a tricky question. Section 67 of the bankruptcy and insolvency act says that if you go bankrupt you lose all of your assets expect for assets that are otherwise expect from seizure. Section 67 specifically says that RRSPs and RIFS are exempt except for contributions in the last 12 months.

Some assets like most clothing, household goods and inexpensive car are exempt from seizure due to provincial legislation. But there is nothing in the bankruptcy and insolvency act about RESPs, TFSAs or RDSPs. They are not specifically exempt from seizure if you go bankrupt. That’s a problem if you’re considering bankruptcy.

However there was a recent court case where the judge determined that the trustee could not seize a RDSP from a bankrupt. In this particular case the RDSP was started in 2010 and the bankrupt’s parents contributed around $7,000 to her RDSP back in 2012 and by 2015 with income growth and grants the RDSP had funds of over $32,000.

This person filed for bankruptcy in 2015 and since there are no specific provisions in the law to make an RDSP exempt, the trustee attempted to seize the money but The Royal Bank, who held the funds, said no, so it went to court. The court decided that if the trustee was permitted to seize the funds the bankrupt would be required to pay a significant amount of the government assistance in the fund and so the court decided that it was just an equitable to now allow the trustee to seize any of the funds.

So, what does this court case mean if you go bankrupt? Well, it means that the court could decide to let you keep the funds in your RDSP or it may decide the other way. It’s not clear. All we know is that in this specific case the court did not allow the trustee to seize the funds.

Now in my experience it is relatively rare for someone going bankrupt to have funds in an RDSP at the time of bankruptcy. RDSPs are not well known. While I see people with RRSPs all the time RDSPs are relatively rare. And as we learned earlier in the show you can only contribute funds to an RDSP for someone who is eligible to receive the Disability Tax Credit.

So, unlike an RESP that you can contribute to as soon as your child is born you typically would not begin to contribute to a RDSP for at least a few years after your child is born and only when they are diagnosed with an eligible disability. So, that again makes them less common.

However if you own an RDSP either for yourself or on behalf of your minor children what should you do if you’re considering bankruptcy? Well, the obvious answer is that you should immediately talk to a Licensed Insolvency Trustee. We can review your RDSP paperwork and review your options. One obvious option may be to file a consumer proposal because in a consumer proposal you don’t lose your RDSP bankor anything else so for many that’s the obvious solution.

I suspect there will be more court cases on this topic and I also suspect that the government will eventually change the rules to give RDSPs the same treatment as RRSPs so that there is no confusion as to what happens in a bankruptcy. However we aren’t there yet so that’s why expert advice is essential.

That’s our show for today. Full show notes including a transcript and links to everything we discussed today can be found at hoyes.com that’s h-o-y-e-s-dot-com. I’ll include some great links to the big Canajun man’s Canadian personal finance blog which has the best source of information on RDSPs anywhere on the internet, at least in my opinion. You can find it at canajunfinances.com. And again full links are in the show notes over at hoyes.com.

I’m Doug Hoyes, until next week thanks for listening that was our special RDSP edition right here on Debt Free in 30.

The post Do I Lose My RDSP If I File Bankruptcy in Canada? appeared first on Hoyes, Michalos & Associates Inc..

I’m joined once again by licensed insolvency trustee, and co-founder of Hoyes Michalos, Ted Michalos, to discuss how the changes, as well as the Supreme Court’s ruling, will affect Ontarians looking to deal with their debts.

Disclaimer: Our discussion about updates to the Execution Act are the interpretation of ourselves and the lawyers we’ve spoken with about the new rules. This is new legislation that has not yet been tested in court, and as such, a judge could rule differently than we’ve interpreted the information on today’s show.

What Is The Execution Act?

The Ontario Execution Act sets limits as to what can and cannot be seized and provides protections for people who have been sued or filed a consumer proposal or bankruptcy. When a person is sued, the court issues a Writ of Seizure or Writ of Execution that allows the person suing to freeze a bank account or seize the individual’s car. However, the Execution Act places limits and protections on another person’s ability to take everything you own. Ted explains that

if there was no Execution Act, if there were no protections and that piece of paper from the court would let you basically go to somebody’s house and clean it out.

Changes to the Act include areas like motor vehicles, clothing, household furnishings and appliances, and protection of home equity in a bankruptcy.

Where certain protections existed before December 1, 2015, “necessary and ordinary apparel” as an example, it has become unclear whether specific items fall under new “necessary clothing” category, such as a wedding band. Keep in mind that in a bankruptcy or consumer proposal it is unlikely that something like a wedding band, that generally has little financial value and holds significant sentimental value would ever be seized.

The Supreme Court of Canada Ruling About 407 ETR Debts

On November 13, 2015, the Supreme Court of Canada ruled that 407 ETR debts can be discharged in a bankruptcy. You may be wondering why these debts, that are similar to others including credit card debts, income tax debts, or personal loan debts, could not be included in a bankruptcy to begin with. The answer is, they have always been dischargeable in a bankruptcy, but until now, the privately own company put pressure on debtors to pay up, even after filing.

They did this by making it a practice to refuse the renewal of a license plate for non-payment – even if the individual filed bankruptcy. Ted argues that

the 407 has always taken the opinion that, well sure, the debt may be dischargeable, but using our road is a privilege and we’ve got the right to deny that privilege to you if you don’t pay it. And that fundamentally thwarts the protection of the Bankruptcy Act.

If you’re a current client or if you’re considering debt relief options and have questions about any of the information in today’s show, we recommend contacting a Licensed Insolvency Trustee to discuss how these Ontario Bankruptcy changes might affect you.

Listen to the full podcast for more about specific exemption changes including:

• Motor vehicle exemption changes
• Clothing exemption changes
• Household furnishings and appliances exemption changes
• Tools of the trade exemption changes

Or you can read the transcript for episode 78 below.

Resources Mentioned in the Show:

• Ontario Execution Act
• Letter to the Attorney General and response from Ms. Meilleur.
• Doug Hoyes comments on 407 ETR ruling in the Toronto Star

FULL TRANSCRIPT show #78 with Ted Michalos

Doug Hoyes: Over the last three months there were many significant changes to the law in Ontario. And so, today we’re going to discuss both of them. To help me through it I’ve got my partner and Hoyes Michalos co-founder Ted Michalos here. Ted, how are you doing today?

Ted Michalos: Fine, Doug, thanks for having me.

Doug Hoyes: So, issue number one. On December 1st there were changes made to the Execution Act of Ontario. Why should anyone care? What’s the Execution Act? What’s it all about? What’s the story there?

Ted Michalos: Well, so the most important thing about the Execution Act is that it sets limits or rather protections for individuals when they’ve been either sued, or I guess when they file bankruptcy it’s the same sort of thing. So, the Execution Act says these are the things that cannot be taken away from you the basic minimum, I guess needs for living if you want to take it that way, that every person’s entitled to keep regardless of who they owe money to or what they owe money for.

Doug Hoyes: So, we’re not just talking about bankruptcy. We are talking about someone who isn’t bankrupt may still fall under the purview of the Execution Act if they were to get sued for example.

Ted Michalos: Yeah, like the most common application of the Execution Act is somebody owes another person a debt, they are sued. So, the person doing the suing receives a judgment against the individual that they sued. The court then issues a Writ of Seizure or Writ of Execution. And that allows the person that did the suing to try and freeze a bank account, or clean a bank account out, seize somebody’s car I suppose. I mean if there were no, if there was no Execution Act, if there were no protections, then that piece of paper from the court would let you basically go to somebody’s house and clean it out.

Doug Hoyes: So, Joe owes me money, I take him to court, I get a judgment against him, which is just a piece of paper signed by the judge that says Joe owes me $10,000 and I see that Joe has $1,000 car in his driveway an old beater, if there was no Execution Act then theoretically I could just go take it.

Ted Michalos: That’s exactly right.

Doug Hoyes: Okay, so the execution act if it’s $1,000 car I’m not going to be able to take it. If it’s a million dollar, I don’t know, brand new Tesla or something if there is such a thing as a million dollar car, then I assume I’m not able to take it. So, obviously the Execution Act sets limits.

Ted Michalos: Exactly. It provides people with protection under the law.

Doug Hoyes: So, let’s talk about changes then. So, let’s start with the example you just gave a car or a motor vehicle as they call it. So, first of all the act says motor vehicle, which is more than just a car I guess.

Ted Michalos: Yeah, it could be a car, it could be a truck, it could be a motorcycle. It can’t be something like a trailer, it can’t be something like, well actually no, I don’t believe it can be something like a jet ski. I think it’s got to be a motor vehicle for the purposes of transportation on public highways.

Doug Hoyes: So, a motor vehicle obviously has to have a motor, that’s why a trailer doesn’t count.

Ted Michalos: Right, or a bicycle for that matter.

Doug Hoyes: Doesn’t have a motor. So, if I have a truck with a trailer, well the trailer doesn’t fall under this because it doesn’t have a motor. So, under the old rules the exemption limit was $5,650, what’s the new limit?

Ted Michalos: $6,600 even.

Doug Hoyes: Okay, so what does that mean?

Ted Michalos: So, it means that an individual is entitled to keep a motor vehicle worth up to $6,600. Now, that’s actually a bit of a misdirection, too. They’re allowed to have value in the vehicle up to $6,600. And I’ll tell you what the distinction is. So, if I’ve got a $2,500 beater, that’s worth less than $6,600. Obviously I get to keep it; it’s protected under the law. Let’s say I’ve got a $20,000 car and I’ve got a loan outstanding against it. So, if the loan is for $15,000, effectively I’ve got $5,00 worth of value in that car. Well, $5,000 is still less than the $6,600 so I get to keep it. It’s protected under the law.

Doug Hoyes: So, the loan is an important distinction, then. So, it’s not the value of the car that matters, it’s the equity in the car that matters.

Ted Michalos: That’s right, it’s the amount of your ownership interest – how much of that car do you actually own?

Doug Hoyes: Which means if I sold the car, how much would I actually get? So, if I have a $15,000 car with a $10,000 bank loan, I could sell the car but I’d first have to pay off the $10,000 bank loan. I’d end up with $5,000, therefore, it’s exempt.

Ted Michalos: That’s right. Now the law’s a little funny. It says that the car could be seized, so a creditor could come along and take the car. But then they’re required to first pay out any other registered liens, so the loan would get paid first and then the up to $6,600 would be paid to the fellow that had the car. And so, why would a creditor go and take a car that had less than $6,600 worth of value in it? ‘Cause they’d get nothing for doing all that work.

Doug Hoyes: Which is why in real life we very rarely – we never see that. That’s not something that happens.

Ted Michalos: That’s right, particularly in bankruptcies now, cars are almost never seized from people because they’re either driving something lower than $6,600 value or they’ve got a loan outstanding on it and they want to keep the car, so they keep making their loan payments.

Doug Hoyes: Yeah, it would be very unusual for someone with a brand new $30,000 car to be going bankrupt because if they had $30,000 to buy the car then presumably they wouldn’t be in that same financial situation. So, okay so, someone goes bankrupt then, how do you know what the car’s worth?

Ted Michalos: Well, so we start by the individual’s got to tell us what it’s worth. And so they’ll get probably something called a fair market letter. A used car dealer or someone will tell them what they think they would give them to take that car off their hands. We’ll then cross check that to things like the Black Book, which tells you the wholesale value of a car to see if it’s reasonable. At the end of the day the only way you really know what something is worth is by actually selling it. But frankly, if there’s any doubt, it’s – the bias goes toward the individual who has the car. ‘Cause if a trustee ever seizes and sells something we always get less than what they think it’s worth because it’s a trustee selling it and people are looking to get a deal.

Doug Hoyes: Yeah and we’re selling it at an auction or something like that, we’re not getting full value. And in most cases there’s not a whole lot of judgment involved. If you’re driving a 20 year old car with 200,000 clicks on it, it’s unlikely that it’s worth more than a couple of grand. And so, it’s only if it’s right around the limit that it would matter.

Ted Michalos: There is one way that people get caught. This exemption allies to a single vehicle. So, somebody that’s got two vehicles registered in their name maybe I’ve got a pickup truck that’s worth $2,500 and I’ve got a motorcycle that’s worth $1,500 I can only apply the exemption to one vehicle. So, I apply it to the pickup truck, the motorcycle is still at risk because that’s a second vehicle. Doug Hoyes: So, one motor vehicle is what applies. So, I could have two old cars worth $2,000 each, only one of them is exempt under this legislation. Ted Michalos: Yep.

Doug Hoyes: Okay. So, if anyone’s listening and they have a car, then the thought process is what’s it worth? So, check the Black Book, get an appraisal, ask the car dealer what they’d give you for it if they returned it. If it’s worth less than $6,600 there’s no issue. If there’s a loan against it, well what’s the payout on the loan, you deduct that from what the value of the vehicle is if that’s less than $6,600 in a bankruptcy we’re not going to take it.

Ted Michalos: Right. It’s almost always less than zero when you do the math you were just talking about.

Doug Hoyes: Yeah. I can’t remember too many cases where someone has a loan or a lease agreement that leaves a whole lot of equity at the end. Okay, so that’s cars now there’s other things mentioned in the Execution Act. One of them that I find interesting is clothing. So, under the rules as they existed before December 1st, 2015, ‘necessary and ordinary apparel” was exempt up to $5,650. Under the new rules there’s no limit. But the rules say necessary clothing. So, what’s the difference, tell me about that.

Ted Michalos: Well, the problem we’re having with this is necessary clothing hasn’t been defined anywhere. So, under the old regimen, we assumed things like jewelry, athletic equipment, things that you could put on your person, could be broadly spoken and included in that exemption. Now, saying necessary clothing I don’t think you could justifiably say somebody’s jeweler is somebody’s clothing. I don’t think you could say that somebody’s hockey equipment is necessary clothing.

Doug Hoyes: Yeah the word is clothing. So, what is clothing? Well, I guess we’d have to get the lawyers involved to figure it out. And the reason we don’t know the answer to this is because it’s never gone to court to be figured out.

Ted Michalos: It’s just too new a law. I mean the change was made December 1st, 2015.

Doug Hoyes: Well, and even the word clothing, which existed in the – well, I guess the word was apparel before. But even though that word has existed, it’s unlikely that anyone is going to have enough clothing that it’s worth if for some creditor to go to court and spend a bunch of money on lawyers to figure this out.

Ted Michalos: That’s right.

Doug Hoyes: So, our interpretation of the rules, and again I want to stress that, this is our interpretation, it’s a new rule, like you said, and it has not been tested in court. So, someone could go to court and the judge could say something different than what we think. But our interpretation of it is if it’s clothing and if it’s necessary clothing, well then you don’t have to worry about it. It doesn’t matter how much it’s worth.

Ted Michalos: That’s right.

Doug Hoyes: If it’s apparel then, too bad, you’re out of luck. So, that’s something you’re going to definitely want to discuss with us now. I don’t think your old hockey equipment is something we’re going to ever take anyways.

Ted Michalos: It seems unlikely.

Doug Hoyes: Because we don’t want it. But it is an issue that needs to be raised. Now I guess the logical question then would have to do with jewelry, then. So, is there a place where jewelry comes under the Execution Act?

Ted Michalos: Yeah. I’m of the opinion that it isn’t protected anymore. At one point there was a general exemption for personal possessions. That’s been out of the law for quite a long time. But people have still been using the concept. So, you could simply say these are my personal items that I want to protect. And things like a wedding band would fall under that. I don’t think there’s any place in the Act now where a wedding band would fall.

Doug Hoyes: No and I agree with you. In fact I sent a letter to the Attorney General for Ontario who is the person who is responsible for laws. And she did write me back a perfectly nice letter saying –

Ted Michalos: She doesn’t know either.

Doug Hoyes: You can go to our website at hoyes.com and do a search for that letter. I’ve posted it up there. Essentially what she said is, well, this is something that is handled through the courts and I can’t advise on any specific situation. So, again it’s very unusual for someone to come in to see us who has a million dollars worth of jewelry. And even your wedding ring, which obviously has great sentimental value and which you paid full retail for, in a liquidation scenario it’s worth a lot less anyways.

Ted Michalos: It’s no worth much to anybody except for you and your spouse.

Doug Hoyes: Yeah and I mean you sell it to a jeweler and they’re melting it down and it’s worth whatever the gold content is. So, our advice then is when you come into see us well tell us what you’ve got. We’re going to ask you that anyways, what jewelry do you have? And in most cases it’s not going to be a significant enough number to worry about.

Ted Michalos: Yeah, the goal of this part of the conversation isn’t to scare people. I don’t want you to start thinking we’re going to start cleaning out your jewelry boxes. It’s just to make you aware that the law was changed, and unfortunately, the changes weren’t drafted very well. There’s a lot of ambiguity in this new law and we’re going to talk about some more of them right now, I’m sure.

Doug Hoyes: Well, okay so let’s hit really quickly two other ones. There used to be household furniture, utensils, equipment, food and fuel – which is exempt up to $11,300. That limits been up to $13,150 but now it includes household furnishings and appliances. I guess that’s really not a whole lot different than what the first rule was.

Ted Michalos: Yeah, my concern is that, well, so again things like your children’s toys, is that an appliance of furnishings? The sports equipment, if it didn’t fall under clothing so maybe you’ve got a mountain bike or something that you use for keeping yourself fit, I don’t think that’s furnishing or an appliance. It’s just I’m not sure where things like that fall. Now, somebody could be saying well, if you’re falling on hard times or you’ve got a debt and somebody sued you maybe they should have the right to take those things. I’m not sure I agree with that. If you take away an individual’s minimum requirements to live, and we’ll argue over what that is, it’s less likely that they’re going to comply with the law and I don’t know, that’s not the kind of caring society that we all think we live in.

Doug Hoyes: Yeah. Who are you serving by doing that? And I think again, the law says what it say but in real life when I look at your used hockey equipment, I’m saying to myself, you know what? It’s not worth it, it’s certainly not with it for me to take it. So, our advice is be upfront with us but let’s work out a way to make this all work out. So, tell me about tools of the trade, then, what does that mean? What’s the deal there?

Ted Michalos: So, tools of the trade are things, assets, stuff that you own that you actively use to generate income. So, I’ll give you a great example. Let’s say I’m a courier. I pick up and deliver packages for people. Well, a tool that’s right for me would be my car, probably my cell phone, my computer. Now let’s say instead of being a courier, I work down at the auto parts plant, I make widgets. I use my car to go back and forth to work. If I don’t have my car I can’t get to work but it’s not a tool of the trade. I don’t use it at work, I use it to get to work and that’s a pretty big distinction.

Doug Hoyes: So, a tool of the trade is something you are using to earn an income while you’re earning that income.

Ted Michalos: That’s correct.

Doug Hoyes: So, if I’m an Uber driver.

Ted Michalos: Well, if you’re an Uber driver I’d argue that your cell phone, your computer and your car presumably could be a tool of the trade.

Doug Hoyes: Now presumably I’ve got the exemption of the car anyway so it may not be an issue.

Ted Michalos:  So, you’ll notice this is a higher exemption so you might want to use this.

Doug Hoyes: Yeah, so it would depend I guess if I’ve got a $10,000 car. And again, we are merely speculating here. There has never been to my knowledge a court case in Ontario under the new rules with an Uber driver’s car. It has never happened and it will be a year or two or three before something like that could even appear in court. So, our job is to – we’ve done a lot of research on this, we’ve spoken to many lawyers and revised our opinions as we learned more and talked to more people. This is what we think. Right now we’re in February of 2016 as we record this, this is what we think the law is today but we want you to come in and talk to us about your specific situations so we can give you the most up to date guidance. Now there was one more change in the rules that was probably the biggest change so we’re kind of burying the lead here talking about it last, but that is the principle residence. And I don’t want to call it the principle residence exemption ’cause I don’t think that’s the right way to say it. But in Alberta for example, they have what’s called a homestead exemption. And so, if you go bankrupt or have any of these other legal situations that we talked about, your homestead, which would be your house and some land associated with it is exempt up to I believe it’s $40,000 but don’t quote me on that number.

Ted Michalos: That’s right.

Doug Hoyes: In Ontario, we’ve never had anything like that. So, if you went bankrupt and you had a house that had $1 of equity, well you had to give us the dollar or give us the house, that was the rule. Don’t think we ever took a dollar from someone for their house, but legally that’s what the rule said. Now, what do the new rules say?

Ted Michalos: So, the new rules say that a creditor cannot seize or force a sale or property that has $10,000 or less of equity in it. So, when the law was first announced in December, people read that and said great there’s a $10,000 exemption protected in Ontario now. That’s not the case, at least that’s not the way we see it or the lawyers that we’ve talked to. What it says is if you have $10,000 or less of equity in your house than a creditor, or a bankruptcy trustee, can’t force you to sell the house. So, they can’t go after that less than $10,00 in equity. If you have $10,000 or $10,001 of equity then the creditor can force the sale of a house, or the trustee has to deal with it if you file bankruptcy.

Doug Hoyes: So, why did they do it that way? And I know I’m asking you to explain the government, so this is going to be impossible for you to do.

Ted Michalos: I’ll try to keep it polite.

Doug Hoyes: But I’ll ask anyway. So, you’re describing two different methodologies here. If I own a car, a motor vehicle, you said that if it’s worth a little more than $6,600 I get to keep the first $6,600. But in the case of a house, if it’s worth $1 more than $10,000 I don’t get to keep the first $10,000, the whole thing is at risk. So, what’s the deal there?

Ted Michalos: Yeah, I don’t quite get why the government worded it this way. Obviously, it was done deliberately; they could have simply copied the homesteader law from Alberta or some other places across the country. They only thing I can consider is that they wanted to either protect very low income Canadians who got into a home that’s not worth a lot of money or new home buyers. So, they haven’t built up any equity in their house yet. Because it took them a lot of effort and time to get that down payment to buy the house, if it was immediately taken from him then who knows how long it would take them to do it again. Those are the only two explanations that I could come up with. I don’t like either of them.

Doug Hoyes: Yeah and it could also be that they didn’t think it through completely.

Ted Michalos: Well, that’s the real answer.

Doug Hoyes: Yeah. I mean it would sound like yes it is protection for the person who is just starting out, who has very little equity. Do we really want to be having a creditor faced with somebody who has a couple of thousand bucks worth of equity in their house going to court, going through the whole foreclosure proceedings, kicking them out, you know, for a couple of grand, really? It almost doesn’t make any sense. Now, in the past, if someone came into see us and they had equity in their house, our natural thought would be, okay, you don’t want to go bankrupt ’cause that puts it at risk, we would suggest file a proposal. File a consumer proposal. And in a consumer proposal your assets are protected, you don’t lose them. Now obviously you’re making payments in the proposal sufficient that the creditor’s agree to it. So, with this new rule does that change the world of proposals at all?

Ted Michalos: I don’t think it’s changed much of anything. For the folks that had less than $10,000 worth of equity in their home probably wouldn’t be using their house as the only reason they’re filing a proposal. So, just briefly folks the concept behind a proposal is you offer to repay a portion of your debt. There are two caveats: it has to be more than your creditors would be entitled to in a bankruptcy and it’s got to be enough that the creditors will agree to the offer. Well, so in a bankruptcy if you had less than $10,000 of equity in the house it’s questionable whether or not the trustee would force the sale of the house. They might have you simply pay that equity over three or four years. Well, so, that hasn’t changed the calculation that we’re going through now to determine how much a proposal would be worth.

Doug Hoyes: Yeah and you’re right. A proposal as an alternative to bankruptcy. In a bankruptcy I am going to lose a portion of my income if it’s over the limit. I’m going to lose assets that aren’t on this list of being exempt. So, most people who would have a house with 20 or $30,000 in equity probably earn more than the minimum threshold set by the government. So, they are going the proposal route because of both their assets and their surplus income. So, do you find it changes the math a tiny little bit, a huge amount, not really much?

Ted Michalos: There’s a very small segment of the people that we see that this has had an impact on. The folks – so the equity in their house is $9,500. So, now in the bankruptcy that’s not something we can go after, so conceivably it reduces the amount they’d have to offer in a proposal. There aren’t that many people that fall into that category. You either have equity in your house or you don’t. Unless you’ve only just bought it so again now we’re back to the example of somebody’s only had it for a year or two.

Doug Hoyes: Well, in a lot of cases it’s the creditors, the people you owe money to, who are driving what you’ve got to pay in a proposal. So, I might have $5,000 in equity in my house and I might have 5 or $10,000 worth of potential surplus income, but I may not be able to offer a $15,000 proposal that particular bank who we’re dealing with who shall remain nameless, ’cause we don’t want to pick on any particular banks, they might say no, no our minimum in your case would be $20,000 or $25,000.

Doug Hoyes: So, again, as we wrap up this segment, the message is there’s a whole bunch of new rules, it’s a bit of a moving target, come in and see us, we’ll walk you through in your specific situation. Don’t try to read this on the internet and figure out how it will apply to you. I don’t believe in doing heart surgery over the internet either. Come in and see us, it won’t cost you anything. We’ll walk you through it. Great, thanks for being with me Ted, we’re going to take a quick break and be back with the next segment, you’re listening to Debt Free in 30.

Let’s Get Started Segment

It’s time for the Let’s Get Started segment here on Debt Free in 30. I’m Doug Hoyes and I’m joined by Ted Michalos and we are talking about new Ontario legislation.

What we’re going to talk about now isn’t specifically legislation but it is a Supreme Court of Canada ruling that was released on November the 13th of 2015, so a few months ago. And we are now finally understanding the implications of it. It is the case of 407 ETR highway, which I’m sure everyone is familiar with in our listening area. It is the toll road in the Toronto area. It’s a privately owned company. It was built by the government, but was sold to private interest. And you have to have a transponder, you have to pay a certain amount per kilometer that you drive on it. If you do not pay your toll fee, the ETR has the ability to go to the Ministry of Transportation and say hey, don’t renew the guy’s license, his license for his car vehicle, his vehicle license. So, it doesn’t affect your driver’s license, but you can’t renew the plates on a car if that car, via you, owes a bunch of money in tolls. And obviously that was a rule that was put in there to protect the owners of the highway ’cause otherwise, hey if there’s no consequences for me never paying, I’m never going to pay. So, we understand why it was there. So, Ted, tell me over the last few years what you’ve seen happening with people who end up coming to see you and they need to go bankrupt or do a proposal and they’ve got 407 debt.

Ted Michalos: Now this is a good example of some of the things that are wrong with our legal system. It’s generally been held for a number of years that a 407 debt, the toll for using the road, is a debt that’s dischargeable in bankruptcy. It means it’s no different from a credit card, a payday loan debt, an income tax debt. You owe money and you’re getting relief from the Bankruptcy Act so you don’t have to pay it. The 407 has always taken the opinion that, well sure, the debt may be dischargeable, but using our road is a privilege and we’ve got the right to deny that privilege to you if don’t pay it. And that fundamentally thwarts the protections of the Bankruptcy Act. The Bankruptcy Act says look if you’re dealing with your debts through the bankruptcy act you’re using the legal rights that you have as a Canadian to deal with this debt then people can’t do something else to force you pay theirs. And the 407 was saying no, you want to renew your plates, you’ve got to pay this debt, even though it’s going to be dealt with in the bankruptcy.

Doug Hoyes: And the whole point of bankruptcy, obviously, is to eliminate your debts. That’s the whole reason you’re doing it. And the government has thought of specific exceptions to that. If you owe child support you still have to pay it. Bankruptcy is not going to get you out of that. And there are some other exceptions to that as well. But there is no exception that says the 407 is special. And so it is always been our opinion that, no, that’s a debt that goes away. And going away means you can’t also be denying their plates at the same time.

Ted Michalos: Well and they lost the challenges in the lower courts. But again, what I was alluding to earlier, one of the flaws of our legal system, they simply appealed it to the higher court and as long as the matter was before the courts, the continued to follow their flawed policy. I believe they knew they were wrong all along. But because the court hadn’t issued a final verdict on it they just kept doing the wrong thing and getting away with it.

Doug Hoyes: Yeah, I agree. I think this was a slam dunk right from the beginning. But you keep appealing, you keep appealing. And so what has happened is over the last, I don’t know, four or five years that this has been before the lower courts, there have been lots of people who have gone bankrupt who have owed 407 money, you’ve dealt with lots of them.

Ted Michalos: Yep.

Doug Hoyes: They come into see you and they go okay I owe $400 for the 407 and you say fine we’re going to list it in the bankruptcy. Well, but my plates are going to come up for renewal in six months, what do I do? Well…

Ted Michalos: Then if you wanted to renew the plates, you pretty much had to pay the bill.

Doug Hoyes: Yep, it was if you owed a lot of money and the car wasn’t worth much, fine I’ll just get another car, I guess. But for most people that’s not an option. So, there were a lot of people who got caught in this and ended up paying the money even though –

Ted Michalos: Legally they shouldn’t have.

Doug Hoyes: In hindsight yes, but practically they had no choice. So, on Friday November 13th, because Friday the 13th is always a good day. The Supreme Court finally issued their ruling on this and they said no 407, that duck ain’t going to fly, it’s a debt, it goes away in the bankruptcy just like every other debt. So, what does that mean for people that went bankrupt last year and ended up paying the 407?

Ted Michalos: At this point, I don’t think they’ve actually set out a regiment for how to deal with that yet. We’re talking about millions of dollars, thousands of people.

Doug Hoyes: Yeah, it would appear that they’re basically out luck, sorry guys. The money has been paid and we know it took five years through the court system just to get this particular piece of the law changed, how are you going to get that money back? Well, my advice would be don’t be holding your breath on it. Now, if you are currently bankrupt then what’s the 407 doing now?

Ted Michalos: So, the 407 has said that they will take your name off the denying license renewal list when you’re discharged from the bankruptcy, is that right?

Doug Hoyes: That’s correct. So, that’s very interesting.

Ted Michalos: That’s still wrong.

Doug Hoyes: That’s still wrong. So, if you owe money to a credit card and you go bankrupt, the credit card company immediately is required to stop phoning you, stop any legal action. It’s stopped.

Ted Michalos: Stop charging interest.

Doug Hoyes: Stop charging interest.

Ted Michalos: The debt is frozen, it’s done.

Doug Hoyes: It’s done, the 407 obviously not so much. So, again our advice with the 407 is come in and talk to us we’ll explain how it works, but as of this point in time, if you file a bankruptcy or a consumer proposal, the debt will be dealt with in that procedure. That was the Let’s Get Started segment right here on Debt Free in 30.

Doug Hoyes: Welcome back, it’s time for the 30 second recap of what we discussed today. On today’s show Ted Michalos and I discussed the changes to the Ontario Execution Act that prevents creditors or a bankruptcy trustee from seizing certain assets. That’s the 30 second recap of what we discussed today. As I said on the show the rules we discussed are new so no one knows for sure exactly how they’ll be viewed by the courts, so it’s likely some of these rules will evolve over time. If you’re listening to this show on the radio, or on our podcast when it was released in February 2016, the information is current. But if you’re listening to this podcast many months after February 2016 you should definitely consult a licensed insolvency trustee or a lawyer before making any decisions if you think any of these rules may impact your situation.

The post Ontario Bankruptcy Legislation Updates: The Execution Act & 407 ETR appeared first on Hoyes, Michalos & Associates Inc..

For example, under the old rules a motor vehicle was exempt from seizure up to a value of $5,650, while the new limit is $6,600. That means you can now go bankrupt in Ontario and keep a car with no loans up to a value of $6,600. That’s good news for debtors because they are now less likely to lose their car in a bankruptcy.

So, what’s the problem?

The problem is that the new rules change the wording of some sections of the Execution Act, and as a result, some assets are less protected than they were under the old exemption rules.

Necessary and Ordinary Apparel now Necessary Clothing

For example, under the old rules “necessary and ordinary apparel” were exempt from seizure.  The new regulations narrow this definition to “necessary clothing”.  Why does this matter?  Under the old rules, if you owned jewelry, like a wedding ring, your trustee would consider your wedding ring to be part of your “ordinary apparel” because you wear it every day. So, provided that it was a standard wedding ring, we would consider it to be exempt property, meaning you could keep it if you went bankrupt.

However, under the new rules, only clothing is exempt, not apparel. Since a wedding ring (or necklace, or earrings) are not clothing, they are not considered to be exempt from seizure by the trustee.

Household Furniture, Utensils, Equipment, Food and Fuel now Household Furnishings and Appliances

Here’s another example:  under the old rules, “household furniture, utensils, equipment, food and fuel” were exempt. The new rules narrow this definition to “household furnishings and appliances”.  “Equipment” and “food” are no longer on the exempt list.

Does this mean that your trustee must seize your children’s toys or your sports equipment because it is no longer protected in a bankruptcy?  What about your food?  That seems crazy, but that’s what the rules say.

My point is that the new rules, perhaps unintentionally, have removed previously available protection from bankrupts.

So who is going to fight for the rights of bankrupts?

Me.

Asking for Clearer Exemption Rules

On November 19, 2015 I sent a letter to The Honourable Madeleine Meilleur, the Attorney General for Ontario, who is responsible for all legislation in Ontario, including the Execution Act.  I asked her to consider amending the legislation to restore the protection previously available to debtors. Specifically we asked that an exemption specifically covering small personal belongings be added to the legislation:

“we request that the Execution Act, Ontario Regulation 675/05, Exemptions be amended to include an exemption for personal property… We further submit that a prescribed amount of $6,600, comparable to the prescribed amount for a motor vehicle, would be sufficient to protect personal property of the vast majority of debtors.”

You can read my full letter to her here.

I am pleased to report that I did receive a response from Ms. Meilleur.

Unfortunately, her response is that the government is not considering any changes at this time.  She advises that she cannot provide any specific advice, but does advise that “the amendments provide a mechanism by which a debtor can claim an exemption under the act and, in the event of a dispute, the matter can be referred to the courts for a determination”.

So where does that leave us?

I agree with Minister Meilleur’s comment that ultimately it will be up to the courts to interpret these new regulations. Personally, I would prefer that the government be more specific in drafting their regulations to minimize the need to ask the court for directions.

I will continue to personally monitor this situation and lobby the government as appropriate, and perhaps even make an application to court to obtain the necessary protection for debtors.

Will every bankrupt person now lose their wedding ring?

No.  At Hoyes Michalos we have two strategies for dealing with these new rules.

First, where possible, we suggest filing a consumer proposal rather than bankruptcy, since a proposal protects your assets. However, we will only recommend this approach where is makes sense for the debtor as a whole.

Second, it is our standard practice to have all debtors provide us with a list of their household items, including jewelry, so that we can determine a strategy to allow you to keep your wedding ring.  In most cases, rings do not have significant value. They have great sentimental value, but if you try to re-sell a wedding ring, you will discover that it’s generally not worth more than the melted-down value of the gold, which is not a significant amount.  Since in most cases a bankrupt is required to make a contribution towards the cost of their bankruptcy, it is usually possible to include the value of the jewelry in this base contribution. So, for most bankrupts, the cost of bankruptcy will not increase under these new regulations.

Confused?  Don’t be.  We offer no-charge initial consultations so we can review your situation and give you specific advice before you decide to file a consumer proposal or bankruptcy.  Contact us and we will walk you through the process.

And as mentioned, I will continue to monitor this situation, so stay tuned for further developments.

The post Lobbying to Clarify and Retain Exemption Protection for Debtors appeared first on Hoyes, Michalos & Associates Inc..

Ontario is bringing into effect increased thresholds for items that are protected from seizure by a person’s creditors, even when they file for bankruptcy. The law that is being updated is called the Execution Act and it sets out the value of exemptions for things like clothing, furniture, tools of the trade and your car. In other words, it defines what assets you can keep when you declare bankruptcy in Ontario.

Ontario Protects A Portion of Home Equity

As of December 1, 2015, section 2(2) of the Execution Act states that states that the debtor’s principal residence is exempt from seizure if the debtor’s equity does not exceed $10,783.  However, Section 2(3) states that if the equity exceeds $10,783 the principal residence is subject to seizure.

What This Means For People Filing Insolvency

Under the pre-December 1, 2015 rules, if you had equity in your house, your bankruptcy trustee was required to “realize” on that equity.  (In simple terms, “equity” are the funds generated after a house is sold and the mortgage and all other selling expenses are paid).  So if you had $5,000 in equity, you could perhaps arrange for a friend or family member to “purchase” the equity in your house from the trustee, so you could keep your house.

In most cases, if you have equity in your house, a consumer proposal is a better option, since you can make a plan with your creditors to make payments over a period of time as long as 60 months so that you can keep your house.

After December 1, 2015, a trustee will not be able to seize your principal residence if the equity is $10,783 or less.  So, if you have $8,000 in equity, the trustee cannot seize it, so you could go bankrupt and not pay your bankruptcy estate anything for that equity.

However, if the equity is greater than $10,783, the trustee must realize on the equity, so again a consumer proposal is often the preferred option if you want to keep your house.

Consumer Proposals and House Equity

When a person files a consumer proposal, the amount they are required to offer their creditors is based in part on how much equity they have in their home. This new $10,783 protection will reduce the amount of equity available to the creditors by up to $10,783, so it may result in lower proposal payments.

It should also be noted that this exemption is for a principal residence, not investment property or a second property such as a cottage or vacation home.

Existing Exemption Limits Increased

In addition to adding a home equity limit, existing bankruptcy exemption limits in Ontario are being increased. The new limits under the Execution Act will be as follows:

It is important to remember that in addition to these exemptions, most life insurance products are protected under the law, as are funds held in an RRSP for more than 12 months.

Exemption Regarding Jewelry and Non-clothing Possessions May Be Removed

In addition to changing the prescribed limits, it is important to note that the language of most exemptions is also changing. Some changes will have little affect and serve to clarify exemptions already in place. For example the new act specifically states ‘one’ motor vehicle rather than a motor vehicle.

The Execution Act now states that there will be no exemption limit for necessary clothing. However the wording has been changed to exempt ‘necessary clothing’ rather than ‘necessary and ordinary apparel’. It has been general practice in a bankruptcy that, under the previous legislation, reasonable jewelry such as a wedding ring and small personal accessories would be included as ordinary apparel and as such most trustees considered these assets to be exempt from seizure. The narrowing of the wording in the new provision may serve to limit a bankrupt’s ability to exempt personal items from seizure. Despite the addition of wording around ‘personal property’ the new changes provide no prescribed list or limit amounts for this category and this may mean that, at present, no such exemption exists.

It is our position that bankruptcy is meant to be a fresh start and should not be punitive. It does not seem reasonable to require a bankrupt to surrender small personal items of jewelry, such as a wedding ring or family heirloom. In addition, in most cases, the recovery value of these assets would be minimal, significantly below the original ‘retail’ value.

Our approach, pending clarification of the legislation or the inclusion of additional prescribed items, will be to include the value of assets such as jewelry, toys and other small personal items as part of the monthly base cost payments made by bankrupts into their bankruptcy which means that for those with basic jewelry, with little realizable value, the cost of bankruptcy remains unchanged with us.  In the meantime, we have contacted the Attorney General to request that basic personal property, like a wedding ring, be exempt from seizure in a bankruptcy.

If You Have Home Equity Does A Consumer Proposal Still Make Sense?

Prior to the new legislation, consumers with significant unsecured debt could safeguard their home equity by filing a consumer proposal and offering the equivalent ‘value’ to their creditors as part of their settlement terms. Does the new home equity exemption mean that consumer proposals no longer make sense if the equity in your home is less than $10,783?

Consumer proposals will still be a better solution for many individuals, especially those with surplus income payments in a bankruptcy. In fact, prior to these changes, 42% of all homeowners who filed a consumer proposal had no equity in their home. In addition, similar legislation protecting homeowners equity has existed for many years in other provinces across Canada and proposals have continued to increase in popularity in those provinces due to other inherent benefits of a consumer proposal over other debt relief options.

To get a complete assessment of your situation, and what may be protected under the law, please arrange for a no charge initial consultation with a local, licensed Hoyes Michalos trustee.

The post Ontario Bankruptcy Exemption Law Changes Protect Home Equity appeared first on Hoyes, Michalos & Associates Inc..

• what they are and why you should invest in an RESP to save for your child’s education;
• what happens to your RESPs if you file insolvency;
• why the rules around RESPs and bankruptcy are different in Alberta than Ontario; and
• what is happening with regards to recent legislation proposals surrounding RESPs and bankruptcy in Canada.

Today’s first guest was Mike Davies, a financial planner with IPC Investment Corporation in Brantford, Ontario.

Why are RESPs a Good Investment?

Registered Education Savings Plans allow a parent or grandparent to save money, tax free, for a child’s education, up to a maximum investment of $2,500 per year.  The federal government will make an additional contribution of 20% of your contribution, so by investing in an RESP you have a guaranteed rate of return of 20% in the year of contribution.  Extra government help is also available.

Can I withdraw RESP money to pay off debt?

As Mike Davies explains on the show, when money is taken out of an RESP and is not being used for the educational benefit of a child, the grant will have to be repaid to the government. Additionally, any growth in the plan will be subject to tax at your marginal tax rate plus an extra 20 percent. Think of it as getting your capital back, less any changes in the value of your investments. You should consult with your advisor to see if there any other costs involved.  So, if you are in debt and take money out of your RESP, you may end up with a big tax obligation.

Our second guest, Barton Goth, a bankruptcy trustee from Edmonton, Alberta, explains that the rules surrounding RESPs and bankruptcy are different in Alberta and most other provinces.

Due to a change in provincial legislation on April 1, 2014, RESPs are exempt from seizure in a bankruptcy in Alberta.  In Ontario, RESPs are not exempt in a bankruptcy.  In simple terms, if you go bankrupt in Ontario you lose your RESP.  In Alberta, you don’t.

If you have RESP assets you would like to keep, one option is to file a consumer proposal, where you make a deal with your creditors. One of the biggest benefits of a consumer proposal is that you keep all assets, including your RESPs and still eliminate your debt. 

Should the RESP and Bankruptcy Laws Change?

It is not fair that the laws are different depending on whether you live in Alberta, Ontario, or another province.  In the final two segments of the show, Doug Hoyes and Ted Michalos both agree that the RESP laws should be changed to be similar to the RRSP laws.

Under current bankruptcy legislation, that applies in every province in Canada, Registered Retirement Savings Plans (RRSPs), are exempt from seizure in bankruptcy, except for your contributions in the previous year.  If you file for bankruptcy in Canada you can keep your RRSP, except for the contributions you made in the last 12 months.

Ted Michalos and Doug Hoyes both agree that the federal government should change the rules for RESPs to make them similar to the RRSP rules, so that most Canadians could keep most of the money they have saved for their children’s education, even if they file bankruptcy.  As Ted says in the show:

The young family that’s saving for one, two, three kids education in the future, it can make a critical difference, and if they haven’t got the money in the future, then it’s more likely than as a culture we’ll either be giving them grants or loans or some other way of funding that education.

If you have an RESP, and have debt, there are options. Before cashing in your RESP, reach out to one of our experienced professionals for a free initial consultation to discuss your specific situation.

Resources Mentioned in the Show

• Investment Planning Counsel, the Davies Moffat Team Website
• Goth & Company, Bankruptcy Trustees, Edmonton, Alberta
• Hoyes Michalos submission to Industry Canada advocating for fair RESP rules for Canadians

FULL TRANSCRIPT show #6 with Mike Davies

Doug Hoyes:  Welcome to Debt Free in 30 where every week we take 30 minutes and talk to industry experts about debt, money and personal finance. I’m Doug Hoyes. Today we are going to discuss RESPs, Registered Education Savings Plans.

Why in the world are we discussing investments on a show about debt? Two reasons; first, this is also a show about personal finance and if you have children or grandchildren, RESPs are an important topic. So to start the show, I’ve asked a financial advisor to explain all of the basics about RESPs. Then in the second segment, I’ll bring on a debt expert to explain what happens to an RESP if you get into debt trouble. So to start, I’m joined by a financial planner, let’s welcome him in, who, where do you work and what do you do?

Mike Davies:  I’m Mike Davies and with my business partner, Don Moffat, we are financial planners with IPC Investment Corporation here in Brantford.

Doug Hoyes:  So who exactly is Investment Planning Council, who is IPC?

Mike Davies:  IPC is a Canadian wealth management company with over $22 billion of assets under administration and over 900 advisors across the country.

Doug Hoyes:  Thanks, Mike, and welcome to Debt Free in 30. We are recording this today on location at 218 Brant Avenue in Brantford, Ontario so why am I telling you the address? Because Mike and Don’s firm, IPC Investment Corporation and my firm, Hoyes Michalos, both have the same landlord and we both have an office here at 218 Brant Ave. Our companies are not related but since I’ve bumped into Mike and Don in the office for the last 10 years, I thought they’d be good guys to have on to explain the investment implications of an RESP so that’s why Mike’s here today.

I’ll give my standard disclaimer here that what you are about to hear on this show are the opinions of my guest and you should not take any action based on what you hear today until you’ve researched this topic for yourself and if necessary, consulted with a professional advisor. So with that background, let’s get started. Mike, give me the basics. What is an RESP?

Mike Davies:  Well, simply put an RESP is a savings plan that can be used by parents or other family members to help pay for the educational expenses of their children after high school.

Doug Hoyes:  Okay. So what’s the point of an RESP? If I’m a parent or a grandparent or another family member, maybe an uncle for example, and I want to save for a child’s post secondary education, college, university or whatever, what makes an RESP so attractive?

Mike Davies:  Well, what is particularly attractive about this program is the federal government will make additional contributions or grant payments as they are known of 20 percent of your contribution but only up to a limit of $2,500 annually.

Doug Hoyes:  Okay. So give me an example here. So if I put a $1,000 into a qualifying RESP, what happens?

Mike Davies:  So in that example, the government is going to contribute an extra $200 for you by way of the grant.

Doug Hoyes:  Okay. So what about people who can’t afford to make a full contribution?

Mike Davies:  Well, recognizing that not everyone can easily afford to make contributions to an RESP, the government further assists people who have low to moderate incomes by awarding an extra 10 or 20 percent of grant money on the first $500 contribution. And further additional help may be available through the Canada Learning Bond which provides an additional grant of $500 in year one and $100 annually thereafter for as long as they qualify and are making contributions.

Doug Hoyes:  Okay. So that sounds good. Obviously the government is kicking in money into this program so let’s get into the nitty gritty of it here. What specifically are the rules? What do I need to get one of these RESP plans open?

Mike Davies:  Well, to open a plan, you’ll need a social insurance number for your child. All Canadian children are eligible to participate and receive the grant. And grant money can be received as soon as the children are born and the plan has been opened for them and can continue to be received until the age of 15 or age 17 if certain conditions are met. Any unused grant will accumulate annually so if you missed one  year of contributions but we’re able to double up in the next, you’d receive twice the amount of grant money.

Doug Hoyes:  So is there an annual limit on what can be contributed?

Mike Davies:  There is no annual maximum that can be deposited but you can only receive grant money on the first $2,500 of your contribution or the first $5,000 contribution if sufficient carry forward room exists. And there is a lifetime maximum contribution to the plan of $50,000 per child with maximum grant paid out of $7,200 per child.

Doug Hoyes:  Okay. So if I’m 40 years old, I mean, I wish I was still 40 years old, but if I was 40 years old and I get laid off and I want to go back to school, can I use an RESP to fund that?

Mike Davies:  RESP are opened with a child’s name attached to them so not directly,  but if this was the only way for you to get money to pay for your own schooling, you could collapse the plan, repay the grant money and get back the capital that you had originally invested. But another option, which may be better, is to withdraw money tax free from your RRSP under the governments life-long learning program and then repay the money borrowed from your RRSP at a later date.

Doug Hoyes:  Okay. So RESPs are really designed for younger people, not older people. There’s other things older people can do if education is what they’re looking for. So I guess education is getting pretty expensive now.

Mike Davies:  The cost of obtaining post secondary education is increasing all the time. Even today, it’s not unusual to hear that with tuition fees, books and the cost of accommodation, it can cost $10,000 each year for a four-year program. In fact, a report by TD issued in 2011, suggested at that time, a student living at home would have costs roughly $55,000 and if living away from home, $84,000. Even more worrying perhaps is that for children born at the time the report was written, by the time they attend university, the stay at home would’ve risen to $102,000 and if living away from home, they would’ve increased to a $139,000.

Doug Hoyes:  Wow, so it’s very expensive. So I guess anybody who is looking to be going to school should be certainly investigating those costs. So let’s go back to one of the first questions I asked. What then is the real point of an RESP?

Mike Davies:  So the point of an RESP is to encourage parents to start saving for their child’s education from a very early age. The combination of regular savings over an extended period of time plus the government grant money will help reduce the need for a more substantial payment when the child goes to school.

Doug Hoyes:  So if I’ve got a child or a grandchild and I want to save for their education, why don’t I just put the money in a savings account? This RESP thing seems like a lot of work, I got social insurance number, a whole bunch of stuff I’ve got to do. Wouldn’t it just be better to just stick it in some other savings vehicle like a savings account?

Mike Davies:  Well, that is one option. The disadvantage of that choice would be the loss of the 20 percent government grant on those contributions. It’s a far more attractive proposition to contribute say $1,000 and have the government kick in an extra $200 rather than leaving that on the table. Furthermore, investments inside an RESP grow tax free, whereas the interest earned in a simple savings account would be subject to tax of the parents marginal rate.

Doug Hoyes:  Okay. So this show is called Debt Free in 30, we talk about debt and issues relating to that so what happens if I get into financial trouble and I want to cash in the RESP before my child goes to school? What happens then, do I have to pay tax, what costs are there?

Mike Davies:  As discussed previously, when money is taken out of an RESP and is not being used for the educational benefit of a child, then the grant will have to be repaid to the government. Additionally, any growth in the plan will be subject to tax at your marginal rate plus an extra 20 percent. Think of it as getting your capital back, less any changes in the value of your investments. You should consult with your advisor to see if there any other costs involved.

Doug Hoyes:  Great. Thanks very much, Mike. I really appreciate you joining us here today. The point then is an RESP is a way for the government to help you save for a child’s education. They’re actually kicking money in to do it. It’s something that certainly should be considered, but as I said off the top, you’ve got to really crunch the numbers, talk to a financial advisor to make sure it makes sense for you. Mike, thanks for being here today.

Mike Davies:  You’re welcome.

Doug Hoyes:  Thanks.

RESPs and Bankruptcy

Doug Hoyes:  Welcome back to Debt Free in 30. Today we are talking about RESPs. In our first segment, we found out what they were, how they work, what the rules are. Now we’re going to talk about what happens to an RESP when you’re in debt. And so I’ve got an expert in the field here to talk about it. Can you please tell me who you are, where you work and what you do?

Barton Goth:     I’m Barton Goth. I’m from Edmonton, Alberta. I work at a firm, Goth and Company, Limited. This is a trustee and bankruptcy firm so we deal with people that have financial troubles on a daily basis.

Doug Hoyes:  Now, you’re from Alberta and that’s the reason that I wanted to have you here on the show because Alberta has, I believe, a different rule than anywhere else in Canada. Certainly different than the rules in Ontario. In Ontario, the rule is, if you have an RESP, and you go bankrupt, you lose that RESP. It becomes an asset of your estate so as the trustee, my job is to send a letter to the RESP company and say hey, send me the money. They’re not going to send me all the money. There’s going to be some government grants they have to give back and so on but you as the person in debt lose all that money. What are the rules in Alberta?

Barton Goth:     We used to have the exact same rule in Alberta up until April 1^st of this year. Then things changed. They amended the Civil Enforcements Act of Alberta to make all RESPs exempt assets meaning if you file a bankruptcy in Edmonton or anywhere else in Alberta, this is not an asset that you are going to lose. It’s a protected asset. It’s something that you can retain and you don’t have to worry about dispersing amongst your creditors.

Doug Hoyes:  What’s your opinion on that? Is that a good thing, is that a bad thing? What are your thoughts on it?

Barton Goth:     Overall, I don’t disagree with the notion of exempting an asset that’s for the betterment of a child. It’s very difficult to sit there and know that you’re trying to set something aside and have done on a regular basis that’s going to hopefully improve the future economic status of someone that doesn’t really have much a choice.

In the same breath, there’s also the other side of the coin which I understand these monies are monies that are contributed by the debtor. These are monies that weren’t used to go to the creditors to pay down debts that obviously exist. So as much as there’s two sides of that equation, I tend to feel for the child who doesn’t have control. He didn’t make the decision. They didn’t choose to charge up the debts. They’re largely just a victim, if you will, of not having some of those opportunities that may have existed otherwise.

Doug Hoyes:  So we’re recording this in late 2014 so you’re saying that in early 2014 the law changed in Alberta. They are currently looking at potential changes to federal bankruptcy law which may or may not happen in 2015. It all depends on what the government does. What do you think the federal government should do? Should they make a law that applies in all of Canada similar to what is in Alberta now which is that RESPs are exempt, you don’t lose them if you go bankrupt. What do you think the federal government should do? If you have the opportunity to tell the federal government what to do, what’s your advice to them on this one?

Barton Goth:     Well, what I would suggest is I would suggest the amendments in Alberta are good amendments largely, although there are a few things that they haven’t thought of so I would encourage and I would support the notion of exempting those assets, exempting those RESPs, but I’d want them to be a little bit cautious because when you have an exemption that exists and you don’t have any controls associated with that exemption, there’s opportunities for potential abuse.

Right now for instance, if somebody came in January 1^st to my office and asked me about bankruptcy and learned that there’s this exemption rule, there’s nothing preventing them from saying okay, let’s hold off and not file with Goth and Company. Let’s put some of my money that I would’ve lost otherwise into an RESP and maybe four months later I’m going to try another trustee and hopefully I’ll be able to keep those funds. Now, in practice, this doesn’t always protect those funds. If this gets found out, that very quickly is something that can be overturned but the opportunity is there. I would suggest to the federal government that they make a 12-month period prior to filing of a bankruptcy where any contributions to those RESPs would be something that can be clawed back, it would become beneficial to the estate or to the creditors of the bankrupt.

They do the exact same thing for an RRSP. There’s a federal exemption that exists for all RRSPs with the exceptions of that 12 month period immediately preceding the bankruptcy filing. And I would support something like that.

Doug Hoyes:  So when you go bankrupt now, if you put money into your RRSP, your registered retirement savings plan anywhere in Canada, any money you put in the last year, you can lose. The trustee can take that which prevents someone from going out and borrowing $15,000 on their credit cards, dumping it into the RRSP and then going bankrupt the next day. Anything that’s been in your RRSP for a year, is okay, you’re not going to lose it in a bankruptcy. You’re saying we should essentially have the same rule for an RESP, a registered education savings plan. Any money that’s been there for more than a year, if you go bankrupt, that money stays there, that becomes money for your child and that’s the way it should be.

Barton Goth:     I think that would be a good system to balance the rights of the creditors versus the rights of the child who largely hasn’t charged up these debts, yes.

Doug Hoyes:  Excellent. Great. Thanks very much for that, Bart. We appreciate it. This is Debt Free in 30. We’re going to take a quick break and then wrap up our show on RESPs. Stay tuned.

 30 Second Recap

Doug Hoyes:  Welcome back. It’s time for the 30-second recap of what we discussed today.

My first guest was Mike Davies, a financial planner who explained what RESPs are and how they work. He explained that they’re a great way for parents or grandparents to save for their child seduction because the federal government contributes 20 percent of your contributions so your education savings grow faster.

My second guest was Barton Goth, a bankruptcy trustee from Alberta who told us that unlike in Ontario, RESPs are exempt from seizure in a bankruptcy in Alberta. That means if you go bankrupt in Alberta, you get to keep your RESP. That’s the 30-second recap of what we discussed today.

So what’s my take on RESPs? There a number of issues here so let’s take them one at a time.

First, are RESPs a good investment? Well, yes, if you qualify, you should consider RESPs. As Mike Davies explained, the common scenario is a parent or grandparent who wants to save for their child or grandchild seduction. If you start when the child is young, the earnings can compound quite nicely.

As we discussed, there are two benefits to an RESP as compared to just putting money in a savings account. The government is giving you free money and the earnings accumulate essentially tax free. That’s a good deal. But this show is called Debt Free in 30 and we talk about debt, so let’s not forget the obvious point. Savings make sense if you don’t have debt. If you have debt, becoming debt free is almost always more important.

So let’s take an obvious example. Let’s say you’ve got a $1,000 in cash so should you put it in your child’s RESP or should you use it to pay down debt? Well, the $1,000 instantly becomes $1,200 inside your RESP because the government gives you a grant of 20 percent so on the surface, it would appear that investing in the RESP is the obvious answer. But if you have a credit card with a 20 percent interest rate, using the $1,000 to pay down your credit card by a $1,000 saves you 20 percent over the next years which is the same return as the RESP. So to answer the question about what’s better, contributing to an RESP or paying down debt, you have to crunch the numbers.

If you don’t pay down debt, how long will it take you to get out of debt? If you’re going to pay 20 percent on your $1,000 credit card for the next five years because you never pay down the principal, you’re just paying interest, then you’ll be paying a $1,000 in interest over the next five years. You only get the 20 percent grant in an RESP in the year you contribute so paying down the debt saves you interest forever.

To be clear, I’m not saying you should always pay down debt. I’m saying what I say on every show. You’re the boss. You need to decide what makes sense for you and your family. If you really want to contribute to your child’s RESP, great. Cut your expenses so you can do both, pay down your debt and invest in an RESP.

Remember, as I said in the show, as I record this in the fall of 2014, the law in Ontario is that you lose your RESP if you go bankrupt. So if you have debt and risk losing an RESP, you may be better off to either file a consumer proposal so you can keep your RESP or pay down debt and then worry about a registered education savings plan.

Of course there are lots of other factors to consider. If your child was just born, you have a lot of time to save for their education so perhaps you make small contributions now and use most of your resources to pay down debt. If your child is only a few years away from college, perhaps an RESP is important. Again, every situation is different. So you need to do your own research and decide what’s best for you.

That’s my take on whether or not RESPs are a good investment. So what’s my take on what the law should be for RESPs in a bankruptcy? On the podcast only segment of this show, I interview my business partner and Hoyes Michalos co-founder Ted Michalos who back in July 2014, submitted a report to the federal government advocating for changes to RESP rules. His comments are similar to what we heard from Barton Goth and they’re similar to my views.

I believe that RESPs should be treated the same way that we treat registered retirement savings plans in a bankruptcy. Under current Canadian law, if you go bankrupt, you keep your RRSP except for what you contributed in the last year. So if I have been contributing $1000 to my RRSP for the last 10 years and I now have $10,000 in my RRSP, I only lose the last $1,000 if I go bankrupt. I lose the last years contributions, I get to keep the rest. Why, because the federal government decided that it’s important for people to save for their retirement  but it’s also important that people don’t use the RRSP as a way to play games with the people they owe money to. You’re not allowed to put a pile of money in your RRSP today and go bankrupt tomorrow, that’s not fair. But you are allowed to keep the money you have saved in past years.

I believe that RESPs should be treated the same way. You shouldn’t be allowed to dump a pile of money into an RESP to keep it away from your creditors the day before you go bankrupt, but I believe that if you have diligently saved money over many years in an RESP, you should be able to keep it. After all, that money is there for the benefit of your children. They didn’t cause your debt problems so they shouldn’t suffer unduly when it comes to their education.

In my experience most people who go bankrupt don’t have a huge amount of money in RESPs so the big banks won’t lose much money if this rule is changed. We’ll see what happens when the government reviews our insolvency laws probably in 2015.

My hope is that the government acknowledges that saving is a good idea and saving for the benefit of your children or grandchildren is an even better idea. I think the one year rule is a good compromise. If you go bankrupt, you get to keep most of your RESP for the benefit of your children but the one-year rule prevents abuse of the system.

Will the rules change? Who knows, but just like we did back in 2008 when Ted Michalos and I traveled to Ottawa to testify before the government to argue for fair laws, we will continue to fight for what’s fair. Keep watching our website, we’ll post updates if there are any changes. For up to the minute updates, you can follow me on Twitter @doughoyes.

That’s our show for today. This show is on the radio every week and also available on our website and on iTunes so please go to Hoyes.com for a full list of radio stations that carry the show. We also have links and details so you can listen to the show on our website or download the show to listen on your iPod or Smartphone. Full show notes are available on our website and I’d love to hear your comments which you can leave right on our website at Hoyes.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

Thanks for listening to the radio broadcast segment of Debt Free in 30 where every week your host, Doug Hoyes, talks to experts about debt, money and personal finance. Please stay tuned for the podcast only bonus content starting now on Debt Free in 30.

Bonus Segment – Ted Michalos Tells the Federal Government to Change the RESP Rules

This is the bonus segment of Debt Free in 30. I’m Doug Hoyes and I’m joined by Ted Michalos. My business partner and Hoyes Michalos co-founder. We’re going to talk about the current state of the law when it comes to RESPs and bankruptcy. So on the second segment of the show, we had Barton Goth from Edmonton talking about the rules in Alberta which are, as of early 2014, that if you file bankruptcy, you don’t lose your RESP.

Now, Ted, in Ontario right now and I’ll tell everyone we’re recording this in the fall of 2014, it’s possible that the law will change which is what we’re going to talk about, but as of right now, if you go bankrupt in Ontario and you have an RESP, what happens?

Ted Michalos:  Well, unfortunately, the funds in that RESP will be collapsed and seized in other words to be given to your creditors.

Doug Hoyes:  So you go bankrupt, you lose your RESP. Now, back in July of 2014, the Office of the Superintendent of Bankruptcy asked for submissions from people as to what laws you think should be changed because every five years the government has to look at insolvency laws. So you wrote a detailed brief to them. One of the items you covered was RESPs, Registered Educational Savings Plans, and you recommended that the law change. You don’t believe they should be completely lost in the bankruptcy. So what first of all did you recommend?

Ted Michalos:  All right. So a little bit of background. Last time the government made changes to the act, they made RRSP contributions, so registered retirement savings plan contributions, that had been on deposit for more than 12 months exempt under the law. That means someone saving for their retirement, if they hadn’t put money in in the last 12 months, that money was safe. It would still be there for their retirement. And that makes a certain amount of sense from a policy perspective. You want people to save money for their retirement.  Well RESPs were created so that young families, people with limited means, could save money for their children’s or their own education in the future.

So it seemed inconsistent to me that we would be exempting money saved for retirement for the older members of our society and seizing funds for the younger members of our society. So the recommendation that our firm made was simply that RESPs be treated the same way as RRSPs. Money that has been on deposit for more than 12 months would be exempt from seizure and therefore available for these families when they need them in the future.

Doug Hoyes:  So what you’re recommending, someone goes bankrupt, they get to keep their RESP except for what they put in in the last 12 months. So why that last 12 month thing? Why is that in there?

Ted Michalos:  The only reason I put that in there is to be consistent with the existing law, and the reason they put it in the existing law for registered retirement funds is so that people don’t get cute. I mean, it’s possible that you could take large cash advances on your credit cards or lines of credits or loans, dump the money in an RRSP and if that 12 month rule wasn’t there, they might be exempt under the law. So this simply makes sure that people have had the money on deposit for a significant period of time. It wasn’t a planned event.

Doug Hoyes:  And so what you’re trying to do is balance two different factions here in effect?

Ted Michalos:  That’s exactly right. The Bankruptcy and Insolvency Act is always about balance. You’re trying to give the honest but unfortunate debtor a fresh start while maintaining the rights of the creditors. Somebody has to pay for this money that’s been borrowed and it’s a balancing act about where does the money come from.

Doug Hoyes:  So you think the 12 months is a suitable requirement. So let me take the side of the creditors then, the people who are owed money. They’re all saying well wait a minute, on your current law, someone has money in an RESP, it gets collapsed, we get that money. If these new rules that you’re proposing come into place, we won’t get that money. Is this going to be a huge thing that they’re going to all complain about? Do you see a lot of people who go bankrupt, who have a lot of money in RESPs?

Ted Michalos:  I don’t see there being any significant blow back for this. The amount of money that’s traditionally cashed out of an RESP might be a couple of thousand dollars at most. It doesn’t represent significant dollars to the financial community; the major banks in Canada, the credit card companies, the lenders aren’t going to miss that money. Certainly, they’d like it but they’re not going to miss it. Whereas the young family that’s saving for one, two, three kids education in the future, it can make a critical difference, and if they haven’t got the money in the future, then it’s more likely than as a culture we’ll either be giving them grants or loans or some other way of funding that education.

An interesting side note of course is the RESP funds on deposit are almost always held with financial institutions so to some extent, there’s a benefit to them in allowing the money to stay on deposit. It’s the same argument they made with registered retirement savings plans. They wanted the money to be exempt so that it would be there and available and still in their portfolios. The same logic applies to RESPs.

Doug Hoyes:  I put my money with a bank into an RESP or an RRSP, they’re paying me interest at one or two percent but that’s money they can then turn around and loan to somebody at a higher rate for a mortgage or a loan. So even though they’re going to lose a bit if these funds aren’t given to them in a bankruptcy, there’s still a pool of money there that they’re probably still making money on. So we don’t have to worry about the banks is what you’re saying.

Ted Michalos:  That’s exactly right. And to kind of give you some prospective, the average person who files owes somewhere in the $60,000 – $70,000 in unsecured debt and my guess is the average RESP that we cashed out because they don’t appear in every bankruptcy, might only amount to $500 or $600 on average.

Doug Hoyes:  Yeah, and that makes sense because I had $50,000 in my RESP, then probably I’d say okay, I better pay my debts off with it. It’s not something I’m going to — you’ve got a lot of money if you’ve got that much money in an RESP, you’re probably not in serious financial trouble either.

Ted Michalos:  Well, and by extension, people know that the current rules are that as a trustee, I will seize it if you file bankruptcy so if they are going to collapse some sort of investment before they file, likely it would be the RESP anyway.

Doug Hoyes:  Yeah, it’s money you’re going to lose anyways, so okay if in the two or three months before my bankruptcy, I’m getting behind on my rent payment or something, oh well, might as well cash the RESP in because I’m going to lose it anyways. Obviously, we’re not recommending people do that because when you go bankrupt, if you did cash an RESP in or any other investment right before bankruptcy, what happens? What are the implications?

Ted Michalos:  Well, the risk is that we’ll look at what you did with the money and say perhaps it wasn’t appropriate. So in the example that you just gave, I cashed out my RESP and I paid the rent. As a trustee, that wouldn’t bother me too much. But let’s say you cashed it out and you put $1,500 on the debt that you owed your Uncle Bob. That would probably be something that we would look at carefully and likely I’d contact Uncle Bob and say well, you need to pay that money back because you were treated better than all the other creditors.

Doug Hoyes:  An obviously if it was $15,000 or $20,000 in the RESP and you paid one creditor but not the other than it becomes even more of a serious issue.  So I guess the bottom line is it’s not a big asset from the point of view of the banks right now so they shouldn’t really care about it. It’s really not a huge asset when it comes to bankruptcies in general because most people who are in dire financial needs have probably cashed it in already. What we’re trying to do is encourage savings. We both believe that’s a good thing. And looking forward to the future is a good thing so by changing the rules, that gives a good balancing act. That’s really what we’re talking about.

Ted Michalos:  That’s exactly right.

Doug Hoyes:  Excellent. Well, thank you very much, Ted. That’s the bonus segment here on Debt Free in 30 with RESPs. I think we’ve covered all the basics. But if you want more information, you can always go to our website at Hoyes.com. This was Debt Free in 30.

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