RESPs and Bankruptcy, exempt or not.

by Brian McIlmoyle on February 19, 2014

I’m seeing more and more people investing in Registered Education Savings Plans for their children’s education. Such plans make sense if you have the money available to set aside to make the investment. The government supports these plans by tax sheltering the growth and also by offering grants to top up the investments over time. These plans are long term investments, often with some pretty heavy front loaded fees that eventually are refunded if the plans go to full term.

What happens if you have RESPs and you file a bankruptcy? ¬†Currently the funds in the plan invested by you are considered as assets in the the bankruptcy, and the trustee would request the collapse of the plan and the funds be delivered to them to be distributed to your creditors. You could avoid the collapse of the plan ( and save the grant portions ) by agreeing to “buy back” the asset from your trustee. When you buy back assets , you pay their value to your estate and retain the ownership of the asset. ¬†If the plan is relatively new this may be a good idea to preserve the time value of that money.

In Alberta, the provincial government recently changed their regulations to make RESP funds exempt from seizure by creditors, and by Trustees in the case of Bankruptcy. This has sparked a debate that this policy should be adopted Canada wide. The debate is gathering steam, and I would not be surprised if other provinces change their provincial regulations to be in line with Alberta. Neither would I be surprised to see an amendment in the Bankruptcy and Insolvency Act to roll our this change nationally. So far this has not happened and in Ontario for now at least RESPs remain unprotected assets. Watch this space for developments on this issue, I’ll post any changes that may happen.

 

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