QUEBEC PLAN MEMBERS WITH ANNUITIES AND RRSPS have not had the same creditor protection afforded to registered pension plan members. But recent legislative developments have clarified the rules concerning annuities and may put all plan members on a level playing field.

The Quebec National Assembly recently enacted amendments to its insurance and financial institutions legislation to make sense of the rules regarding annuity contracts and their vulnerability to seizure by creditors.

In Bank of Nova Scotia v. Thibault, the arrangement in question was a self-directed RRSP trusteed by a trust company. Under the terms of the plan, the plaintiff retained control and ownership of the assets, subject to the trust company’s right of refusal of any investments which did not meet its administrative requirements. At maturity, the trust company was to liquidate the assets and purchase an annuity. The plaintiff ’s wife was the beneficiary.

One of the plaintiff ’s creditors claimed the assets in the plan, which the plaintiff contested, arguing the RRSP was exempt from seizure under the Quebec Civil Code. In order to be protected, the RRSP had to qualify as an annuity or trust.

The Supreme Court of Canada considered the broad question of whether “…funds invested in a self-directed retirement savings plans [are] exempt from seizure in Quebec?” Generally, the Court held that as the investor retained a substantial degree of control over the assets, they were not protected as either an annuity or as a trust. The Court held that such a plan did not qualify as an annuity, as the plaintiff had not sufficiently divested himself of control over the capital. He directed the investments, and could require a distribution of all or part of the assets. An amendment at that time allowing the investor to make full or partial withdrawals from annuity contracts without changing the character of the contract did not change the Court’s decision.

Similarly, the plan could not be considered a trust, as the plaintiff did not transfer control over the capital to the trustee, but instead retained control over these assets until maturity. The trustee was a trustee in name only, as the plaintiff could freely dispose of the assets.

Bill 136 itself is quite straightforward, although its implications are still unclear. It amends legislation governing financial institutions and permits plans to offer a choice of investments without precluding them from having control of the accumulated capital. It also allows withdrawal of all or part of the accumulated capital, although this will reduce the trust’s obligations. The Bill also mandates that the amount any periodic annuity must be determined, or determinable, according to formula defined in the contract; and there must be an irrevocable beneficiary. The amendments do not address trusts.

All contacts improperly sold as annuities with beneficiaries before March 1 will be deemed to be annuity contracts not subject to seizure. Individuals whose annuities were seized in the past may have their assets restored by the trust or insurance company, as well as any court costs incurred by the investor if proceedings had been instituted by a creditor. The companies are prohibited from seeking restitution from the creditors.

At the federal level, Bill C-55 states that assets in registered RRSPs will be exempt from seizure, subject to limits to be determined by regulation and except for contributions made in the 12 months leading up to bankruptcy. Bill C-55, which is federal bankruptcy legislation and therefore paramount in bankruptcy situations, will, if proclaimed with appropriate regulations, protect annuity and nonannuity RRSP arrangements.

These amendments will hopefully put all RRSP holders on an equal footing with pension plan members, overcoming technical distinctions between RRSPs with and without annuity elements.

Amanda Darrach is an associate with Koskie Minsky in Toronto.