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One of the most common insurance questions received by the Advanced Sales Department is regarding creditor protection and its applicability to Life Insurance products in general, and more specifically, to registered funds, including RRSPs and RRIFs in all the various forms from Daily Interest Accounts through to Segregated funds. This Sales Bulletin provides basic information on how creditor protection arises in life insurance products and the steps which are required to avail one-self of this protection through insurance products. At a later date we will discuss some of the other possible means of creditor proofing investments assets.

Creditor Protection of Insurance Products

The first issue to understand is that, in order to qualify for creditor protection offered under provincial insurance legislation, the product must be an insurance policy. Insurance companies take the position that all products sold by an Insurance Company are insurance policies. (There have been court cases which have disagreed and limited the protection associated with fixed rate deposits and segregated funds issued by life insurance companies.) This includes life insurance policies as well as annuities which may be registered or non-registered. These annuities may be immediate annuities (meaning they are making payments) or deferred annuities (either registered or non-registered, which are accumulating funds to be paid out at a later time). RRSPs fall under the category of deferred annuities and may include various investment options such as daily interest accounts, guaranteed investment certificates or term deposits and segregated funds (the life insurance industry's version of mutual funds). It is also important to differentiate products sold by Insurance Company Subsidiaries. Although these products may be distributed through the same channels, they do not qualify as insurance products and thus will not be afforded the same creditor protection. The most common examples of this are mutual funds and GICs which are issued and sold by Insurance Company Subsidiaries.

The next issue to understand is how this creditor protection arises. The creditor protection comes from provincial legislation which states that an insurance policy with the proper beneficiary designated may be creditor-proof. The beneficiary, in the common law provinces, must be either a spouse (this does not include a common-law spouse), child, grand-child or parent of the person who is the life insured. In Quebec the class of beneficiaries is wider, including any ascendant (i.e. parent, grandparent, great-grandparent, etc.) or any descendent (i.e. child, grandchild, great-grandchild, etc.) as well as the spouse. In addition to these named beneficiaries, creditor protection may arise if a beneficiary (either within or outside these foregoing groups) is named irrevocably.

Once you have met these tests within the provincial law you must then examine other legislation including the Federal Bankruptcy and Insolvency Act as well as legislation dealing with fraudulent settlements and conveyances. Either of these two pieces of legislation may eliminate the availability of creditor protection. This time frame with regard to the legislation is extremely important. As a rule of thumb, any transfers to an insurance policy within one year prior to the bankruptcy will be overturned. In addition, any transfer to a policy within five years prior to bankruptcy will be subject to scrutiny.

While these are general rules regarding creditor protection, the problem arises in the interpretation of these rules. It is impossible for anyone to say definitively whether creditor protection will be available under the particular circumstances faced by a policyholder. This uncertainty arises due to the interaction of the various pieces of legislation and the judicial interpretations of that legislation. At most, a comment along the lines of the following is the only assurance that someone should give regarding creditor protection:

"Life Insurance can provide a method of creditor proofing, but it will be a finding of fact in each situation to determine whether or not creditor proofing applies."

Any stronger statement may open the company and the Representative to liability for providing misleading information in the event of a successful challenge to the creditor protection in a specific client situation.

This whole area of creditor protection on life insurance products is currently subject to a great deal of litigation, both from the point of view of the existence of creditor proofing and what products are actually life insurance policies. There have been decisions that have come down on both sides of this issue and many of the decisions are being appealed. The decisions also vary by jurisdiction, illustrated by two totally opposite results in recent cases in Newfoundland and British Columbia. This lack of consistency in the decisions and the ongoing litigation should make anyone commenting on this area extremely cautious.

Other Forms of Creditor Protection

While life Insurance policies are the most common form of creditor protection, there are some other possibilities.

In Prince Edward Island, all RRSPs are creditor-proof regardless of the issuer or the beneficiary.

At death, British Columbia provides creditor proofing for any RRSP with an irrevocable beneficiary.

Quebec provides creditor protection, similar to insurance policies, to fixed term annuities which have been issued by provincially chartered Trust Companies. There are still legal issues regarding the scope of this creditor protection. It is also important to note that Investors Group Trust Co. Ltd. is not a Quebec chartered company and cannot offer this product.

As well, funds in pension plans have some creditor protection due to pension legislation. This includes Individual Pension Plans, as well as amounts that have been transferred from pension plans to Locked-In RRSPs and Locked-In retirement Accounts (LIRAs). While in the past creditor protection on pension plans has been viewed as an absolute, recent cases have begun to weaken this protection, with plaintiffs getting access to pension amounts in certain cases. Revenue Canada has also argued that it is not subject to the provincial legislation which protects pension monies. Another area where the pension legislation may not protect the funds will be in a marital breakdown. Also, additional voluntary contributions to pension plans are not necessarily afforded creditor protection.

There may also be creditor protection available to funds held within a corporation or a trust. As both of these entities are separate from the individual, the creditor may be prevented from reaching the funds in either of these entities. The use of trusts and corporations for creditor protection is a complex issue that the client will have to discuss with their own lawyer.

Another way that people attempt to avail themselves of creditor protection is by placing assets in the name of the spouse. There are various consequences to this action including loss of control and possible attribution of income. In addition, gifts or transfers of property to a spouse or other related party for inadequate consideration will be overturned if made within one year of bankruptcy and can also be overturned if the transfer was made within five years prior to bankruptcy, if they are made with the intent to defeat creditors. As a result, such a strategy should only be undertaken with the advice of the client's own legal and accounting specialists.

The purpose of this bulletin is to inform you of current developments, not to provide legal advice. Clients should consult their professional advisers for advice based on their specific circumstances. If you have questions, contact the Advanced Financial Planning Support Department #108 at 1-800-737-0447, menu selection 2-1-2.