If I Go Bankrupt Will I Lose My Pension in Canada?

Losing your pension can be a scary thought. We spend a lifetime building our pension, and we don’t want to see it taken away in a flash in a bankruptcy.

The good news is that there are Canadian laws that protect individuals’ pensions in the case of bankruptcy.

The Licenced Insolvency Trustees at David Sklar & Associates have ample experience with bankruptcies in Canada. They will help walk you through the process and explain all the nuances of your savings-related assets, including both your RRSP and pension.

Pension & Bankruptcy in Canada

The only income source for many seniors in Canada is the government funds provided through Canada’s Old Age Security (OAS) and Canada Pension Plan (CPP).

Old Age Security (OAS)

The Old Age Security (OAS) pension program provides monthly payments to those aged 65 and older. Service Canada is sometimes able to automatically enrol individuals in this program and notify you if they can do so. 

You can receive your first OAS payment a month after you turn 65. For every month you delay your first payment, you can receive a higher pension amount. 

As of December 2020, you can receive up to $614.14 per month, but the amount you will receive is dependent on the length of time you have lived in Canada after turning 18. It is important to note that you are obligated to pay tax on this payment. 

Typically, you will only have to apply for OAS if Service Canada does not have sufficient information to enrol you automatically. In the rare case that you are not automatically enrolled, you will be able to apply yourself.  

Guaranteed Income Supplement

Depending on your income, you may also be eligible for the Guaranteed Income Supplement (GIS). The Guaranteed Income Supplement is available for those who meet the following criteria:

  • Are age 65+
  • Live in Canada
  • Have OAS
  • Your income is below $18,624 (if you are single, widowed or divorced)

You are also eligible if your income plus the income of your spouse/common-law partner is less than the following:

  • If your spouse/common-law partner receives the full OAS pension: $24,576
  • If your spouse/common-law partner does not receive an OAS pension: $44,640
  • If your spouse/common-law partner receives the Allowance: $44,640

Canada Pension Plan (CPP)

This retirement pension plan is a monthly tax benefit provided by the government that individuals contribute throughout their careers. This income is meant to replace part of your earnings upon retirement. Those who qualify for the CPP retirement pension will receive it for the rest of their life. 

To be eligible, an individual must:

  • Be at least 60 years old
  • Have personally made a minimum of one contribution to the CPP or have credits from a spouse or common-law partner.  

Eligible individuals must apply for this program, as it is not automatic like OAS. In this program, monthly earnings are based on your income throughout your working career. As of 2019, the average monthly payment is $679.16, and individuals can earn a maximum monthly amount of $1,154.58.

Canada Pension Plan (CPP)

This retirement pension plan is a monthly tax benefit provided by the government that individuals contribute throughout their careers. This income is meant to replace part of your earnings upon retirement. Those who qualify for the CPP retirement pension will receive it for the rest of their life. 

To be eligible, an individual must:

  • Be at least 60 years old
  • Have personally made a minimum of one contribution to the CPP or have credits from a spouse or common-law partner.  

Eligible individuals must apply for this program, as it is not automatic like OAS. In this program, monthly earnings are based on your income throughout your working career. As of 2019, the average monthly payment is $679.16, and individuals can earn a maximum monthly amount of $1,154.58.

Debts After Retirement

When entering into retirement, you will see a cut in your income. With a reduced income comes the need to cut expenses to help keep the budget balanced. As a result, if you are already in debt before entering into retirement, then any added debts can be an issue. 

The good news is that both Federal and Provincial laws do a great job of protecting one’s pension, as in addition to your OAS, GIS and CPP, private pensions are protected when you file for bankruptcy. 

For Pensioners in Ontario, The Pensions Act of Ontario mentions that pensions are not subject to seizure/execution. This legality helps to protect our seniors from losing all sources of their income. Consequently, the trustee cannot seize your pension and distribute this amongst your creditors.

Why Are Pension Funds Part of Bankruptcy?

In certain circumstances, you can obtain a portion of a pension in a lump sum payment.  Some Pensions will only allow you to receive a fixed annual or monthly distribution. 

Outside of bankruptcy, this would allow for creditors to seek permission from the courts to seize some or all of your pension payouts. The bankruptcy prevents or stops creditors from being able to take these funds.

Pensions are considered a source of income; therefore, they are used in the calculation of potential surplus income.

What Happens to My Pension in Bankruptcy?

Statistics Canada reports that a total of 4.2 million workers in Canada have defined benefit pension plans. 2.9 million of these workers have government-funded pension plans, while 1.3 million have privately funded programs. 

Can Creditors Garnish a Pension in Canada?

In Canada, only the CRA is allowed to garnish your CPP if you have any outstanding income tax or other debts collectable by CRA. If you owe the CRA and are eligible for CPP and file for bankruptcy, however, they will have to cease any garnishment, and you will be able to continue collecting the CPP owed to you. 

While pensions are generally safe from seizure, the income paid out of the pension can be garnished by a creditor with a court order. Bankruptcy will stop any garnishment of your pension income.

Can CPP be Garnished?

Because the CRA is more powerful than other creditors like credit card companies, it can garnish both CPP and OAS and all types of pensions. In short, the CRA does not have to abide by standard garnishment rules and can seize some or even all of your monthly CPP earnings.  Other creditors cannot seize your CPP earnings directly, but they could potentially access these funds through a garnishment of your bank account where the funds are deposited.  

The Bankruptcy and Insolvency Act (BIA)

Section 67 (1) (b.3) of the Bankruptcy and Insolvency Act exempts any RRSPs or RRIFs from seizure in a bankruptcy, except for contributions made within the last 12 months. For clarity, only contributions made over the previous 12 months can be seized in the case of bankruptcy. 

Exempt Pension in Bankruptcy

The following pensions are exempt from seizure in a bankruptcy:

Registered Retirement Savings Plans (RRSP): RRSPs are an exempt asset in bankruptcy, except for any savings contributed 12 months before declaring bankruptcy. 

Registered Pension Plans (RPPs): The Ontario Pension Benefits Act governs registered pension plans (RPPs), which are deemed exempt in a bankruptcy. Under this plan, all pension assets are protected, including company and government-sponsored registered pension plans. All savings are exempt regardless of the date of the most recent contribution.

If You Have A Pension Plan with Life Insurance: The Insurance Act of Ontario deems that any pension plans that include a life insurance clause with a spouse, parent, child, or grandchild named a beneficiary are exempt from bankruptcy.

Locked-In Retirement Accounts (LIRA) / Lock-In Retirement Savings Plans: Any pensions in a locked-in registered plan are deemed exempt from seizure in a bankruptcy.

Savings Not Exempt in a Bankruptcy

There are various savings or investment products that will not be exempt in the case of bankruptcy. Assets that can be seized are:

  • Mutual funds
  • Marketable securities
  • Rental income properties
  • Tax-free saving accounts (TFSA)

Personal Bankruptcies with David Sklar & Associates

If you are considering filing for bankruptcy, get in touch with the Licensed Trustees at David Sklar & Associates. Our trustees will help you weigh all of your options, explain your rights to you, and help you assess your assets to identify what you are entitled to in a bankruptcy.

If you are in financial trouble, overwhelmed by debt and considering bankruptcy or a consumer proposal in Ontario, we are happy to lend a helping hand and a compassionate ear. Book your free consultation with David Sklar & Associates today.

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