Are your investments protected from creditors? (Quebec edition)

After many years of uncertainty and a Supreme Court decision (Bank of Nova Scotia v Thibault), the Quebec government introduced Bill 136 amending the Quebec Insurance Act and other laws dealing with annuity contracts sold in the province. This bill is significant for those who invest either directly in annuity contracts or insurance-based investments that contain an annuity component.

Bill 136 was adopted on December 14, 2005 and took effect on March 1, 2006. Most importantly, contract changes made as a result of Bill 136 now provide investors with confidence that the benefits of creditor protection may be available to them when purchasing annuity contracts in Quebec. The following points provide clarification on Bill 136.

An annuity contract is generally any investment contract, such as registered and non-registered segregated fund contracts, guaranteed interest accounts (GIAs), or payout annuities, that provides for the eventual regular payment of benefits to an investor and is offered by an insurance company.

To qualify as an annuity and the potential creditor protection offered by Bill 136, the contract must contain these provisions:

• There must be alienation of capital to the issuer of the contract.
• The contract must be for a defined period of time.
• The annuity payment must be made in cash or in cash installments.
• The amount of the annuity to be paid periodically must be defined or determinable in the contract.

The Quebec Civil Code stipulates that annuity contracts are generally exempt from seizure during the owner’s lifetime if the named beneficiary falls under one of three categories:

• married or civil union spouse (not common-law spouse) of the owner
• ascendants or descendants of the owner
• irrevocable beneficiaries.

Bill 136 stipulates that Quebec annuity contracts purchased in the past, either directly or in investment products that contain an annuity component, will benefit from creditor protection until the end of the contract. Furthermore, any contract that was offered for sale as an annuity contract as of December 6, 2005 and purchased before March 1, 2006 will benefit from the same protection of the accumulated capital provided the named beneficiary is under one of the three categories stated above and that a fraudulent conveyance hasn’t occurred. This means that the provisions in contracts issued prior to March 1, 2006 don’t have to be revised to obtain creditor protection benefits. All annuity contracts must now comply with the provisions outlined in the revised Quebec Insurance Act and will, therefore, contain the necessary provisions to make potential creditor protection available to investors.

Finally, in 2018, the Quebec Insurance Act has been replaced by the Quebec Insurers Act.

In an amendment to the Bankruptcy and Insolvency Act, the federal government provides protection for RRSPs, RRIFs, and deferred profit sharing plans (DPSPs), in the event of bankruptcy only.

Limitations of bankruptcy legislation

• Contributions made within 12 months of declaring bankruptcy aren’t protected.
• You must be insolvent to go bankrupt. In most situations, if you owe less than what you own, you aren’t insolvent; therefore, you can’t go bankrupt and, therefore, you could have your RRSPs/RRIFs seized unless your investment is held in an insurance company with a valid beneficiary designation, as stated above.

Consequently, protection with insurance products is provided both in bankruptcy and non-bankruptcy situations (some exceptions may apply). Another requirement is that there can’t be a fraudulent conveyance. In other words, the investments couldn’t have been deposited into an insurance investment merely to avoid creditors while already being insolvent (or knowing it will happen).

1 DPSP plans may contain withdrawal restriction provisions that may protect contributions made within 12 months of declaring bankruptcy from creditors.