Storey (Re), 2012 ABQB 746

Court of Queen ’ s Bench of Alberta Citation: Storey (Re), 2012 ABQB 746 Date: 20121203 Docket: BE03 1182822; BE03 1182829 Registry: Edmonton Action No. BE03 1182822 In the Matter of the Bankruptcy of Roy Michael Storey Action No. BE03 1182829 and In the Matter of the Bankruptcy of Laura Lucina Storey _______________________________________________________ Memorandum of Decision of L.A. Smart, Registrar in Bankruptcy _______________________________________________________ Background [ 1 ] Roy and Laura Storey made assignments into bankruptcy on March 26, 2009.

Laura purchased a Primerica RRSP (RRSP) in the amount of $32,500 on March 9, 2006. The purchase was funded by a $30,000 loan from AGF with $2500 contributed by Laura. AGF filed a proof of claim in the bankruptcy of Laura indicating that there remains $24,925.29 outstanding on the loan. The RRSP is a “ spousal registered retirement savings plan ” which was placed by Laura for the benefit of Roy. In the Statement of Affairs of Laura she disclosed the RRSP as her asset and Roy did not disclose it in his Statement of Affairs. [ 2 ] The Trustee seeks advice and direction pursuant to

Section 34 of the Bankruptcy and Insolvency Act , RSC 1985,c. B-3 as amended (BIA). Firstly, he seeks advice as to whether or not the RRSP is properly the property of the estate of Laura or Roy. Secondly, in light of amendments to the BIA on exemptions for RRSPs, direction as to the obligation of the Trustee to pursue or realize a RRSP or otherwise pursue an equivalent amount of a RRSP, or take other positions in the bankruptcy proceedings of either Roy or Laura, where the RRSP constitutes a windfall.

Discussion RRSP - Property of Laura ’ s or Roy ’ s Estate [ 3 ] RRSPs are a creature of the Income Tax Act , R.S.C. 1985, c.1 (5 th Supp.)(ITA). There is no issue that this RRSP meets the requirements of the ITA and it is a Spousal Plan. The ITA stipulates that a spousal plan established by an individual is for the benefit of the spouse and not the individual. A RRSP is a trust arrangement, not a debtor and creditor relationship. In the case of a spousal plan the spouse is the beneficiary of the plan.

So as to avoid Spousal Plans being used as simple income splitting arrangements, the ITA provides that any amounts contributed by an individual to a spousal plan will be taxed back to the individual to the extent that any amount is withdrawn by the spouse in the year of contribution or the next two taxation years. Most notable for purposes of this application is that the spouse has the ability to withdraw the spousal RRSP with no apparent direct consequence to him.

The contributing individual has the amount withdrawn attributed back as income and is subject to taxation on the amount even though that contributing individual is given no ability to prevent the withdrawal. [ 4 ] One final aspect of RRSPs that factor in to this matter is that the ITA provides that a depositary of RRSP property has no right of offset for any debt or obligation owing to the depositary and that RRSP property cannot be pledged, assigned or in anyway given as security for a loan or for any other purpose. [ 5 ] Pursuant to s.67(1) (

c) of the Bankruptcy and Insolvency Act , R.S.C. 1985, c.B-3 (as amended) ( BIA) the property of the bankrupt shall comprise all of his property wherever situated at the date of the bankruptcy. The interest of Roy as the beneficiary of the trust, being property of the Bankrupt pursuant to s.2(1) of the BIA , vests in the Trustee for the benefit of his creditors subject however to any statutory exemption. Exemption [ 6 ] Under the Insurance Act , R.S.A. 2000 c.I-3, a RRSP is exempt where it constitutes an undertaking to provide an annuity and the bankrupt ’ s spouse is named as the beneficiary.

The RRSP in this case does not fit that criteria. Amendments to the BIA effective July 7, 2008 provided that property held by a bankrupt in a RRSP, as defined by the ITA is exempt, subject to a claw back of any contributions made in the 12 months preceding the date of bankruptcy. These bankruptcies post date the amendment and the exemption is available. As no contributions were made during the 12 months preceding Roy ’ s bankruptcy, the clawback aspect of the provisions does not apply in this case.

Parenthetically, although not directly applicable to these bankruptcies, Alberta now has a general exemption for all RRSP contributions with no provision for claw backs. One final possible factor to note is that prior to enactment of broader exemptions for RRSPs, the conversion of a non-exempt form of RRSP to an exempt form was susceptible to being set aside by a trustee as a settlement. Windfall [ 7 ] The retention by Roy of this exempt asset may well be perceived as a windfall. The majority of the contribution was derived from a loan from AGF to Laura with a marginal repayment being made.

Courts have taken the view that the amount of exempt RRSPs may be taken in to account when determining an appropriate payment as a condition of discharge. The continuation of this approach is discussed in an

article by (as he then was) Deputy Registrar Andrew Diamond, “ Does No Mean No? The Treatment of Exempt Assets on Discharge from Bankruptcy: Are the Amendments to the BIA Pro-Debtor? ” Annual Review of Insolvency Law 2008.

He also observes there is a view that parliament by enacting the amendment has clearly stated an intention that “ retirement ” funds as a matter of policy and law should be given the fullest protection of exemption. [ 8 ] Clearly parliament ’ s action is based on a desirable and laudable policy objective heightened by recent discussion surrounding pension/retirement reform and the aging of the Canadian population.

But should that overrule the more general consideration that in arriving at appropriate financial conditions in a discharge order, the court should have regard to the bankrupt ’ s financial situation as a whole?

[9] The Deputy Registrar reviewed briefly the decision of Re: Poettcker, 2007 ABQB 718 where the court concluded thatwhen dealing with the discharge of bankrupts with significant exempt assets (in that case the exempt homestead valued at $380,208 asagainst total liabilities of $242,146) the deciding factor is whether the result would “ ...cause the bankruptcy system to fall into disreputein the eyes of a reasonable observer who was fully informed of all of the circumstances?” On the facts of that case the exemption wasupheld without the requirement of additional funds being paid in lieu of the exempt asset.

The Deputy Registrar baldly states that thedecision was a “significant move from the traditional position in Alberta where the value of the exempt real property has been treated assacrosanct and not taken into consideration on the bankrupt’s discharge.” From my humble perspective as an Alberta Registrar inBankruptcy, I must say I found this to be a most startling revelation. Regardless, it seems that the

article caused at least this Trustee totake some pause and now seeks advice as to how to treat analagous situations, hence this application for advice and directions. [10] The issue of exempt assets and how to treat them is not new.

Below is an extract of the 1995 decision in Re Nelson (SK KB), 33 C.B.R. (3rd) 292 where it was discussed: The Discharge 14 Revenue Canada, which is owed $41,256, has filed an objection to an absolute discharge, and supports the trustee’srecommendation that Elvin Nelson be discharged on the condition that he pay $33,000, the value of the non-exempt real property andalso $67,000 to be realized out of Elvin’s R.R.S.P.’s.

It is conceded that R.R.S.P.’s are exempt under the present state of the law. 15 The trustee claims that Elvin failed to perform his duty, under s. 158(k), to “aid to the utmost of his power in the realization ofhis property and distribution of the proceeds among his creditors.” Page 2 of the trustee’s application for discharge states the reason forthe recommendation: The purpose of the Bankruptcy and Insolvency Act, as stated in Houlden & Morawetz, is to permit an honest but unfortunate debtor toobtain a discharge from his debts subject to reasonable conditions.

We feel that to exit bankruptcy with a net worth of $250,000.00 iscontrary to the integrity of the bankruptcy process and places the public’s perception of the bankruptcy system in doubt. 16 The trustee had requested a key to the home, in keeping with its position as a co-owner and its right to unity of possession. Thiswas refused by Elvin, on the advice of his counsel.

I do not think that the refusal to give up possession and agree to sale of the homeconstitutes a bankruptcy offence in view of the law as enunciated in Neuls. 17 Section 172(1) gives this court the discretion to grant or refuse an absolute discharge although no bankruptcy offence has beencommitted.

It is well established that in exercising its discretion a court must balance three things: The interest of the creditors in beingpaid, the interest of the rehabilitation of the bankrupt and the integrity of the bankruptcy process and the public’s perception of it (see forexample Re Shakell (1988), 70 C.B.R. (N.S.) 270 (Ont. S.C.)). In an oft-quoted passage, the court in Re Crowell (1989), 74 C.B.R.(N.S.) 121 (N.S.T.D.), said that the whole matter must be looked at in “the light of reason, common sense and humanity”, having regardto the fundamental policy of the Act. 18 Closer to home, Mr.

Justice Kyle held in Re Satish (1990), (SK KB), 1 C.B.R. (3d) 220 at 221 (Sask. Q.B.): It is said that the prime purpose of the Bankruptcy Act is to allow a citizen, burdened by debt, to become a useful citizen free from thecrushing burden of his debts. I am charged with achieving a balance between the creditors’ rights to payment and the debtor’s right to theopportunity of rehabilitation. In that case, a debt to Revenue Canada was the principal cause of the bankruptcy and, according to Mr.

Justice Kyle: In the eyes of the community should he be now discharged upon these terms, he would be seen to have “put one over on thegovernment”.

19 Does a person exiting a bankruptcy with assets of $250,000 have a “ crushing burden of debt ” ? Would “ reasonable people, using common sense ” feel that he is putting something over on his creditors? 20 The factors to which I may look include the non-exempt value of the Nelson ’ s home ($98,000), the value of Elvin ’ s R.R.S.P. ’ s ($185,000), the amount of money he put into his wife ’ s R.R.S.P ’ s ($24,000 since 1990), the fact that Elvin is only 54 years old and is acting as a consultant for the new Centennial Plumbing and Heating.

Taking into account his experience and expertise in that type of business, his prospects of advancement would seem to be good. He is living, granted not extravagantly, on his salary of $2,000 per month now and his lifestyle and future financial security would not change drastically were he to obtain a small mortgage on his house and/or cash in some of his R.R.S.P ’ s. I agree with the trustee that leaving a bankrupt with $250,000 in assets brings into question the integrity of the bankruptcy system.

Therefore the discharge of the bankrupt will be conditional upon payment to the trustee of $75,000 over a period of three years from this date. (How he raises this amount is entirely up to him.) When $33,000 has been paid, Pinder must transfer his interest in the home back to Elvin. [ 11 ] Re Nelson sets out an example where a financial obligation was imposed upon the bankrupt but more importantly provides a review of the broad fundamental principles for the court to consider when addressing discharge applications.

Although Poettker focuses on the integrity of the BIA , the court must always do so in the context of the rights of creditors and the rehabilitation of the bankrupt. In this case we have an unusual result arising in that it is a spousal RRSP. The benefit resides with Roy but the debt remains with Laura. To require Roy to pay into his estate would benefit his creditors but would be of no consequence to Laura ’ s creditors most notably AGF which lent the funds to purchase the RRSP. AGF has no claim against Roy.

One might assume that post bankruptcy Roy will share the “ windfall ” with Laura as justification for her paying something into her estate. Without more that is not an assumption I am prepared to make. Regardless, in light of my conclusions below it is of no moment in this case. Conclusion [ 12 ] Rob and Laura Storey assigned in to bankruptcy concurrently. The reasons given for their bankruptcy as set out in the Assignment, and Trustee ’ s Report are considerably more fulsome than most which is of assistance.

Far too often the only description is generic and so vague as to be meaningless such as: “ over use of credit ” or “ unable to pay debts as they become due. ” The latter example is used by them but is prefaced with “ The high cost of home repair of roof and sewer. Child diagnosed with Tourette ’ s and Epilspy (sic): resulting in high travel and medical costs.

These were unexpected and we were unprepared for the extensive expense. ” The Storey ’ s are around 50 years of age, reside in the rural community of Sexsmith, Alberta, have two children, have two motor vehicles worth about $2,800 and own their home with net equity of $9,000. Laura is a school teacher and Roy is a Front Load Overhead operator with a collective net income of about $6,500 after non-discretionary expenses. In addition to the subject RRSP Roy has a further RRSP of about $3,000. The only other asset of any real significance is Laura ’ s pension valued at $61,100.

Exempt assets have a total value approaching $100,000. Their unsecured debts collectively totaled $136,295.05. [ 13 ] As noted above Roy ’ s RRSPs are exempt and not susceptible to clawback. There is no statutory mechanism to directly attach or otherwise deal with those RRSPs to make them available for the general benefit of creditors.

A more specific question is posed by the Trustee in the body of his brief as to whether or not there ought to be a starting principle that a payment should be made as a condition of discharge, where a loan has been made to fund the purchase of a RRSP, as opposed to a bankrupt saving and making contributions to a RRSP. Although the idea of doing so is somewhat attractive, I am disinclined to adopt such a principle. Indeed, if such a principle were adopted surely it would apply to any unsecured credit used to acquire any exempt asset.

In my view requiring additional contributions in these types of circumstances should be governed in the context of the balancing required under the broad fundamental principles particularly where abuse of credit is apparent. [ 14 ] The reality is that each case must be considered individually having regard to the interests of the creditors, the rehabilitation of the bankrupt and the integrity of the system. It is incumbent upon Trustee ’ s to bring circumstances such as this to the attention of the court so that it can be considered in the proper context.

Only then can the whole matter be looked at in “ the light of reason, common sense and humanity ” having regard to the fundamental policy of the BIA . [ 15 ] There is no suggestion or evidence presented that indicate that Roy and Laura Storey are anything other than honest but unfortunate debtors. They are precisely the types of individuals the BIA was designed to assist. Based on the material before me, I can see no reason to conclude that their bankruptcies arise from living extravagantly but rather from significant unexpected expenses for

home repairs and health care for a child. Laura has a small pension. To purchase RRSPs to bolster retirement monies is considered desirable by parliament such that an exemption from creditors over RRSPs has been enacted. With regard to this purchase/loan transaction, there is also nothing to suggest that the Storey ’ s embarked on a strategy to defeat creditors or had reason to believe that they would not repay the loan in the ordinary course.

Indeed the specific lender in this case would have been well aware of its inability to recover payment from the RRSPs purchased. [ 16 ] Having regard to the foregoing factual circumstances and applying fundamental principles on a discharge, it is my view that the Trustee is under no obligation to pursue an additional payment from Laura or Roy as a condition of there discharges.

If the Storey ’ s have otherwise performed their duties in their respective bankruptcies (subject to any other issues by the Trustee may raise) on an application for discharge, I would decline to impose a financial contribution as a condition and grant the Storey ’ s absolute discharges. Dated at the City of Edmonton, Alberta this 3 rd day of December, 2012. L.A. Smart Registrar in Bankruptcy Appearances: Bryan Maruyama Parlee McLaws LLP for the Trustee, Exelby & Partners Ltd.