Death Can Cheat a Creditor

A creditor may enforce a judgment for the payment or recovery of money by garnishment. Garnishment is a procedure whereby moneys owing to the debtor (garnishee) by a third person attach directly to the creditor (garnishor). Garnishment attaches to moneys held in a RRSP.¹ In life, there is little question that RRSP’s vest in the owner of the RRSP.² At death, section 2(1) of the Estates Administration Act states that any real and personal property of a person that vests in that person during life, is transferred to the personal representative of that person at death, regardless of whether the property is disposed of by will or any other testamentary disposition. ³

In Amherst Crane Rentals Ltd. v. Perring, 2002 CarswellOnt 2362, the Deceased died in April 1998, leaving his wife as estate trustee and sole beneficiary of his estate. His wife was also designated the beneficiary of two RRSPs held by deceased, totaling about $115,700. The wife received the RRSPs in May, 1998. The estate made a voluntary assignment into bankruptcy in April, 1999. In October, 1999 the trustee in bankruptcy demanded payment of proceeds of RRSPs from wife. The wife refused and in November and December of 1999 the wife collapsed the RRSPs and paid the net proceeds into her bank account. The trustee in bankruptcy assigned its claim to a creditor.

The creditor then brought an application for a declaration that proceeds of RRSPs were held in trust for it.

The lower court dismissed the application and held that upon the death of an owner of RRSPs the proceeds of these RRSPs transfer to the designated beneficiary and not the estate. The Honourable Justice Cameron stated that the death of the owner of the RRSPs terminated a creditor’s right to claim interest from the RRSPs. Simply because the legislation does not specifically exempt RRSPs from creditor’s hand does not result in the conclusion that creditors have a claim to RRSP proceeds where there is a designated beneficiary.

The lower court referred to section 72 of the Succession Law Reform Act which deals with dependant’s relief. This section allows a court to include assets not normally considered estate property for the purposes of valuing the estate and to satisfy valid dependant support claims. The provision confirms the social policy that a deceased’s dependants deserve support and implies that an RRSP with a designated beneficiary would, absent the section, not be part of the estate of the deceased. If an RRSP is immediately considered part of the estate, section 72(1)(g) of the Succession Law Reform Act would be “meaningless.”⁴ The Court of Appeal agreed with the lower court and dismissed the appeal.⁵

So what does all of this legal jargon mean for beneficiaries of a deceased’s estate?

In effect, the court has sidestepped the issue of priorities in the Bankruptcy and Insolvency Act in favour of beneficiaries. The court held that RRSPs do not form part of the estate of the deceased but flow directly to the designated beneficiary. Moreover, a creditor cannot seek payment of its debt directly from the beneficiary of the RRSPs as a creditor cannot claim any interest in proceeds that do not form part of the estate of a debtor.

The lower court and the court of appeal recognized that often times people designate their spouses as beneficiaries of their RRSPs as these are vehicles for tax-deferred savings over the years. This designation is frequently for the recognition of the unpaid work the surviving spouse has done to contribute to the deceased’s life. The court of appeal went further and stated that a spouse is not a volunteer beneficiary but rather “a spouse has given consideration or a quid pro quo during the lifetime of the other spouse, and in return, receives the RRSP proceeds for support after the death of the other spouse.”⁶ Moreover, in many situations RRSPs are the only assets that a beneficiary may receive upon the death of a spouse or family member.⁷ Life partners of the deceased have “provided support to their spouses with the expectation that they will be supported after the death of their spouses.”⁸

Stated in the words of the Honourable Justice Cameron: “Death terminates the creditor’s rights to claim the property. He is then too late.”⁹