The Supreme Court of British Columbia made an order that the funds in a Registered Disability Savings Plan (RDSP) could not be seized by the Trustee-in-Bankruptcy of the bankrupt beneficiary to satisfy the claims of creditors.
The case of Re Alary is the first judicial consideration of this issue. RDSPs were introduced in 2008 by the Canada Disability Savings Act and amendments to the Income Tax Act. They allow for persons with disabilities to save for their future old age needs similar to a Registered Retirement Savings Plan ("RRSP"). The Government of Canada matches contributions to an RDSP, but also restricts how redemptions can be made. Unlike RRSPs, there is no explicit protection in federal or provincial legislation for RDSPs in claims by creditors or in bankuptcy proceedings.
In Re Alary, the trust instrument governing the RDSP complied with s. 146.4(4) of the Income Tax Act and included a term that the plan must be "operated exclusively for the benefit of the beneficiary under the plan". The trust instrument further provided that payment "made to or on behalf of a creditor" of the beneficiary is deemed not to be for the benefit of the beneficiary, and a court order would be needed before any such payment was made. When the Trustee-in-Bankruptcy sought to seize a portion of the RDSP funds, the Royal Bank of Canada (RBC) sought the advice and directions of the Court.
Madam Justice Bruce held that resolution of this matter involved a balancing between the Bankruptcy and Insolvency Act, the provisions of the Income Tax Act, and the terms of the trust instrument for the RDSP. The trust instrument prohibits the payment of funds to creditors, but permits the Court to exercise a discretion to release funds to satisfy creditors. In the circumstances of this case, Madam Justice Bruce held that she would not exercise such discretion, and ordered RBC not to release funds from the RDSP to the Trustee-in-Bankruptcy.
A court should be guided by what is "just and equitable" in the particular circumstances. In this case, it would not be fair and equitable to permit funds from the RDSP to be paid to creditors. The RDSP had a value of $32,200. The maximum payment that could be made under the trust instrument and a legislative formula was $3,229. Such payment would trigger a requirement in the Canada Disability Savings Regulations for repayment of nearly $10,000 in government-funded benefits, leading to a substantial depletion in the value of the RDSP. In contrast, payment of $3,229 would represent a "minimal benefit" to the bankrupt's creditors.
Bruce J. referred to the strong policy reasons for protecting RDSP funds.The underlying purpose of RDSPs is to ensure that severely disabled persons are able to save for their retirement, so as to be able to live with dignity or satisfy their basic needs. There is an even greater societal interest in preserving the integrity of RDSPs (as opposed to RRSPs) since a severely disabled person has less ability to work and save for their old age. RDSPs are strictly regulated and there are few opportunities for abuse by the beneficiary.
The Alary decision indicates that each case involving a creditor's claim to an RDSP would be fact-specific and dependent upon the Court's exercise of discretion. This decision also exposes the legislative gap in exempting RRSPs and RRIFs from seizure, but leaving RDSPs held by severely disabled persons exposed to such claims. The policy reasons underlying RDSPs, as identified by Madam Justice Bruce, provide an impetus for legislation, either federal or provincial, to correct this oversight.