Case Law Re: Alary

BC Supreme Court holds that Registered Disability Savings Plan Funds are not property that can be seized by a Licensed Insolvency Trustee for creditors

In a recent decision, the Supreme Court of British Columbia ordered that the funds in a Registered Disability Savings Plan (RDSP) could not be seized by the Licensed Insolvency Trustee of the bankrupt to satisfy the claims of creditors.  To our knowledge, this is the first case that deals with the issues of RDSPs.

Unlike RRSPs, there is no explicit protection in federal or provincial legislation for RDSPs for the asset to claimed as exempt property by the debtor or be protected from creditors.

In Re; Alary the Court 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, the Court held that it would not exercise such discretion, and ordered the Bank not to release funds from the RDSP to the Licensed Insolvency Trustee.

The Alary decision indicated that each case involving a creditor’s claim to an RDSP would be fact-specific and dependent upon the Court’s exercise of discretion.  It also exposes the legislative gap in exempting RRSPs and RRIFs from seizure, but leaving RDSPs exposed to such claims. In our view, this puts the Licensed Insolvency Trustee in an untenable position as the legislation provides that RDSPs are not exempt property.

The Canadian Association of Insolvency and Restructuring Professionals recommended in its submission on legislative changes that the BIA be amended to exempt from seizure property held in a RDSP.  It also recommended that any contributions to such a plan in the 12 months prior to the date of the initial bankruptcy event be clawed-back and form part of the property divisible among creditors.

When legislation changes might occur is a different matter.