2013-0504471I7 RDSPs and bankruptcy

Principal Issues: 1. Do the registration conditions in paragraphs 146.4(4)(a) and (i) prevent a bankruptcy trustee from collapsing a bankrupt’s RDSP and receiving the proceeds? 2. Are there any other restrictions that may limit a bankruptcy trustee’s ability to realize RDSP funds?

Position: 1. No 2. Yes

Reasons: 1. Because of the agency relationship deemed to exist by paragraph 128(2)(a), there would be no assignment or surrender of the beneficiary’s rights under the RDSP and any payments made from the plan to the trustee in bankruptcy would be considered to have been made to the beneficiary. 2. Under the BIA and related jurisprudence, a trustee in bankruptcy generally has no greater rights than the bankrupt and can only deal with property available to the bankrupt. To the extent that the beneficiary is restricted in making withdrawals from the RDSP, the bankruptcy trustee would also be restricted. In addition, RDSPs are exempt in certain circumstances.

Author: Wurtele, Dave
Section: 128(2)(a), 146.4(4)(a), (i), (j), (n) and (n.1), 67 of BIA

                                                                                         August 14, 2015

    Registered Plans Directorate                                       Income Tax Rulings Directorate
    Specialty Products Policy Section                               D. Wurtele

    Attention: Christy O’Quinn                                           2013-050447

    RDSPs and bankruptcy

We are responding to your email of September 30, 2013 concerning registered disability savings plans (RDSPs) and bankruptcy. 

The issuer of an RDSP of a bankrupt individual has received a request from the trustee in bankruptcy asking them to collapse the RDSP and to forward the proceeds (net of any income tax withholdings and repayments under the Canada Disability Savings Act) to the bankruptcy trustee for the benefit of the bankrupt’s creditors. You ask whether this would contravene the registration conditions in paragraphs 146.4(4)(a) and (i) of the Income Tax Act (the “Act”). You also ask whether there are any other restrictions that may limit a bankruptcy trustee’s ability to realize RDSP funds.  The bankrupt individual is both the beneficiary and holder of the plan.

Comments

Paragraph 146.4(4)(a) of the Act requires, in part, an RDSP to be operated exclusively for the benefit of the beneficiary and to prohibit the assignment or surrender of the beneficiary’s right to receive payments from the plan. Paragraph 146.4(4)(i) of the Act limits the types of payments permitted to be made from an RDSP to a payment to the beneficiary (or the beneficiary’s estate) and to two other types of payments neither of which are relevant to the question at hand. Paragraph 128(2)(a) of the Act deems the trustee in bankruptcy to be the agent of the bankrupt for all purposes of the Act, notwithstanding that the bankrupt's property vests with the trustee by operation of the Bankruptcy and Insolvency Act (the “BIA”). In an agency relationship, the agent acts on behalf of the principal and there is no change in ownership of any property held by the agent. 

For income tax purposes, because of the agency relationship deemed to exist by paragraph 128(2)(a) of the Act, we would consider there to have been no assignment or surrender of the beneficiary’s rights under the RDSP and any payments made from the plan to the bankruptcy trustee (in its capacity as such) to have been made to the beneficiary. Therefore, none of the registration conditions cited in the previous paragraph would be offended by operation of the BIA and actions of the bankruptcy trustee.

There are however several factors that may limit the ability of a bankruptcy trustee to realize RDSP funds. Although the non-tax aspects of these factors fall outside the purview of the Canada Revenue Agency (the “CRA”), we are able to provide you with a brief overview of our understanding of them for information purposes only. Any questions you may receive regarding the authority and powers of a bankruptcy trustee, the applicability of property exemptions or other bankruptcy matters should be directed to the appropriate authority outside the CRA. 

Under the BIA and related jurisprudence, the trustee in bankruptcy generally has no greater rights than the bankrupt and can only deal with property available to the bankrupt. Therefore, a bankruptcy trustee can only exercise such powers in respect of a bankrupt’s RDSP as might have been exercised by the bankrupt for his or her own benefit. This means that the bankruptcy trustee is subject to and bound by the terms of an RDSP in the same way as the bankrupt beneficiary.

Any withdrawals a bankruptcy trustee seeks to make from an RDSP would be subject to the assistance holdback rule in paragraph 146.4(4)(j) of the Act. This limitation prohibits a payment from being made to a beneficiary if, after the payment, the fair market value of the RDSP property would be less than the assistance holdback amount for the RDSP (generally the total grants and bonds paid into the beneficiary’s RDSP within the last 10-year period, less any such grants and bonds previously repaid to the government).

In the case of an RDSP that is a primarily government-assisted plan (that is, where the total government grants and bonds exceeds the total private contributions), subparagraph 146.4(4)(n)(i) of the Act imposes a maximum annual limit on payments that may be made to the beneficiary. Any withdrawals the trustee seeks to make from a primarily government-assisted plan would be subject to this limit.

The right to direct that payments be made from an RDSP generally lies with the holder of the RDSP. Absent the holder’s consent, the beneficiary generally has no right to demand the issuer make a payment except to the extent provided for by subparagraph 146.4(4)(n)(ii) and paragraph 146.4(4)(n.1) of the Act. Consequently, where the bankrupt individual is not the holder of the RDSP but only the beneficiary, the bankruptcy trustee’s ability to access the RDSP funds would be limited to the amount, if any, determined pursuant to the provisions referred to in the preceding sentence.

Paragraph 67(1)(b) of the BIA provides that property of a bankrupt divisible among creditors does not include property that is exempt from execution or seizure under the laws applicable in the province where the property is situated and the bankrupt resides. Consequently, if an RDSP is exempt by provincial law, it cannot be seized by the bankruptcy trustee. 

Paragraph 67(1)(a) of the BIA similarly exempts property held in trust by a bankrupt for any other person. Consequently, in the event of bankruptcy of the holder of an RDSP who is not the beneficiary, the RDSP funds would be exempt in those proceedings as they represent property held in trust for another person.

We trust these comments will be of assistance.

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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