Alary (Re)

2016 BCSC 2108 Alary (Re) IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Alary (Re), 2016 BCSC 2108 Date: 20161116 Docket: R142523 VA92 Registry: Vancouver In Bankruptcy and Insolvency In the Matter of the Bankruptcy of Brigitta Dora Alary (Summary Administration) Before: The Honourable Madam Justice Bruce Reasons for Judgment Counsel for the Trustee in Bankruptcy, Smythe Ratcliffe Insolvency Inc.: Murray K. Morrison Counsel for the Royal Bank of Canada and the Royal Trust Company: M. Scott Kerwin Place and Date of Hearing: Vancouver, B.C. September 22, 2016 Place and Date of Judgment: Vancouver, B.C. November 16, 2016 INTRODUCTION [1] This is an application by Smythe Ratcliffe Insolvency Inc., the Trustee in Bankruptcy for an undischarged bankrupt, Ms. Dora Alary (the "Trustee"), for a declaration as to whether funds held in trust for the benefit of Ms. Alary in a Registered Disability Savings Plan ("RDSP") are exempt from seizure under s. 67(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. The respondent in this application is the Royal Bank of Canada as agent for the Royal Trust Company (collectively "the Royal Bank"), which is the trustee of the RDSP in question. [2] The parties agree that there is no specific provision of the Bankruptcy and Insolvency Act or the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), that governs the issue. Instead, the parties agree that I have a discretion to permit the Royal Bank, as trustee, to pay out monies from Ms. Alary's RDSP in satisfaction of her debts to identified creditors. SUMMARY OF THE FACTS [3] The facts are not in dispute. Ms. Alary was born in 1963 and is currently 53 years old. She has one or more severe and prolonged impairments in physical or mental function and was declared by the Government of Canada to be entitled to the disability tax credit under s. 118.3 of the Income Tax Act and eligible for an RDSP. [4] An RDSP is a long-term savings plan designed to assist people with disabilities to save for their future old age needs similar to a Registered Retirement Savings Plan ("RRSP"). Unlike an RRSP, however, the Government of Canada matches contributions to an RDSP and restricts who may contribute to such a plan and how the funds may be disbursed. In particular, only a parent, legal guardian or trust institution may open and contribute to an RDSP and only the beneficiary can access the funds. [5] Section 146.4 of the Income Tax Act governs RDSPs and establishes the conditions that must be satisfied before a plan may be registered. This section of the Act effectively dictates the terms of the trust instrument for the RDSPs. In addition, RDSPs are governed by the Canada Disability Savings Act, S.C. 2007, c. 35, and the Canada Disability Savings Regulations, SOR/2008-186, which also mandates the preconditions for registration. [6] In or about February 2010, Ms. Alary applied to the Royal Bank for an RDSP and asked the bank to submit a plan to the Government of Canada for its registration under the Income Tax Act. Ms. Alary's RDSP was approved with the Royal Trust Company designated as the trustee and issuer of the plan. The Royal Bank administers Ms. Alary's plan as agent for the Royal Trust Company. Ms. Alary is the sole beneficiary of the plan and the "holder" within the meaning of s. 146.4 of the Income Tax Act. [7] The only privately contributed funds currently held in Ms. Alary's RDSP are in total $6,800. This money apparently came from Ms. Alary's parents and was deposited in 2012. The balance of her RDSP is made up of grants from the Government of Canada under the Canada Disability Savings Act and some market growth. In total the fund holds in trust $32,250. [8] On December 18, 2015, Ms. Alary filed an assignment into bankruptcy owing about $24,000 in unsecured debt. On December 22, 2015, the Trustee in Bankruptcy wrote to the Royal Bank advising it of the bankruptcy and asserting its interest in the monies held in Ms. Alary's RDSP. On January 5, 2016, the Royal Bank responded that the monies held in the plan were exempt from seizure and did not form part of the property available for distribution to creditors. [9] The relevant terms of the trust instrument governing Ms. Alary's RDSP are as folllows: 1. DEFINED TERMS "Disability Assistance Payment" means any payment from the Plan to the Beneficiary or to the Beneficiary's estate. 2. PURPOSE OF THE PLAN The Trustee agrees to act as trustee of the Plan, and to administer the Assets in accordance with the terms of this Trust Agreement. The Plan will be operated exclusively for the benefit of the Beneficiary. The Beneficiary's designation is irrevocable and no right of the Beneficiary to receive payments from the Plan is capable of surrender or assignment. For further clarity, an execution, seizure or other payment made to or on behalf of a creditor of the Beneficiary is deemed not for the benefit of the Beneficiary and the Trustee and Agent will not make any such payment without an order issued by a court in Canada requiring the same. 7. PAYMENTS FROM THE PLAN No payments will be made from the Plan other than: i) Disability Assistance Payments to or for a Beneficiary; ARGUMENT [10] The Trustee agrees that all of the grant money contributed to the RDSP by the Government of Canada is exempt from seizure and limits its claim to the monies contributed to the RDSP privately. Further, the Trustee maintains that while there is no specific provision in the relevant legislation that governs the seizure of monies held in RDSPs, from a public policy perspective, and based on a proper interpretation of the Bankruptcy and Insolvency Act, the Court should exercise its discretion in favour of an order permitting the Royal Bank to release the funds. [11] In particular, the Trustee points to s. 67(1) of the Bankruptcy and Insolvency Act that exempts other types of registered plans, including RRSPs, but does not expressly exempt RDSPs from seizure. The fact that RDSP funds are not included in this provision implies that they are not exempt property: Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 at para. 108. [12] Further, the Trustee refers to s. 67(1)(c) of the Bankruptcy and Insolvency Act, which vests in the trustee in bankruptcy all property of the bankrupt and s. 67(1)(d) of the Act, which grants the trustee the same powers as the bankrupt has over all their property wherever situated. [13] In terms of public policy, the Trustee argues that while the RDSP is a benefit conferred on the bankrupt by the Government of Canada and federal legislation, the ability to assign oneself into bankruptcy is also a benefit. As such, the bankrupt should not be entitled to rely on both benefits to the unfair advantage of creditors. [14] In addition, the Trustee says that notwithstanding s. 146.4 of the Income Tax Act, s. 128(2)(a) of the Act deems the trustee in bankruptcy to be the agent of the bankrupt for all purposes of the Act. Because the trustee is the agent of the bankrupt, a seizure of the RDSP monies does not amount to a transfer or assignment in contravention of s. 146.4. [15] Lastly, the Trustee argues that the case law about the exempt status of RRSP monies prior to the amendment of the Bankruptcy and Insolvency Act (s. 67(1)), supports the proposition that RDSP monies should be able to be seized in bankruptcy: Vancouver A & W Drive-Ins Ltd. v. United Food Services Ltd., [1981] 38 B.C.L.R. 30 (S.C.). [16] The Royal Bank argues that the specific terms of the trust instrument are consistent with s. 146.4 of the Income Tax Act and were expressly approved by the Government of Canada when it approved the registration of the RDSP. The terms of the trust instrument do not permit any payment that is not for the exclusive benefit of Ms. Alary and payments to creditors are deemed not to be for her benefit. In addition, the trust instrument stipulates that the funds cannot be surrendered or assigned or otherwise dealt with except as disability assistance payments to the beneficiary. These terms, argues the Royal Bank, ensure that no funds can be paid out to a creditor or to a trustee in bankruptcy for the purpose of paying creditors, without a court order to that effect. The Royal Bank also maintains that the principles of trust law support its position because the law mandates the trustee to comply with the terms of the trust instrument: Swintuch Estate v. Erickson, 2016 BCSC 1623 at para. 47. [17] While the Royal Bank agrees that the monies contributed privately to the RDSP would constitute "property" within the meaning of the Bankruptcy and Insolvency Act, it argues that the language of the trust instrument and s. 146.4 of the Income Tax Act take priority and exempt the funds from seizure in bankruptcy. [18] The Royal Bank argues it is an open question whether the monies in the RDSP vest in a trustee in bankruptcy. It argues that A & W Drive-Ins Ltd. is not conclusive because the RRSP funds in that case were fully vested in the holder of the fund and thus in the trustee in bankruptcy based on the right of the fund holder to withdraw all of the funds. The restrictions on access to the monies held in an RDSP and the presence of government grant monies, distinguish this type of fund. See, Yorkshire Trust Company v. 239745 BC Ltd. (1983), 45 B.C.L.R. 361 (S.C.), where the absence of a right to withdraw the monies in an RRSP precluded creditors from seizing the funds. [19] Further, the Royal Bank maintains there is authority for the proposition that payments to creditors are not for the "benefit" of the beneficiary of a trust fund: Lowther v. Bentinck (1874), L.R. 19 Eq. 166, 44 L.J. Ch. 197; Re Carley Estate (1994), 2 E.T.R. (2d) 142 (Ont. Ct. J.); In re Price (1887), 34 Ch. D 603; Re Allen-Meyrick's Will Trusts [1966] 1 All E.R. 740, and In re Esteem Settlement, 2001 JLR 7, aff'd 2001 JLR 540. [20] In the alternative, the Royal Bank argues that if Ms. Alary's rights to receive the funds in the RDSP vest in the Trustee in Bankruptcy, the Trustee can have no greater rights than Ms. Alary. In this regard, prior to her 59th birthday, Ms. Alary is only entitled to withdraw 10% of the market value of the RDSP each year: Trust Instrument clause 8. In this case, the total permissible withdrawal would be approximately $3,229. Further, because the withdrawal occurred prior to Ms. Alary's 59th birthday, the terms of the trust instrument and the Canada Disability Savings Regulations require that $3 of grant money be returned to the Government of Canada for every $1 of private contribution withdrawn. In effect, such a withdrawal would lead to the repayment of most of the grant monies. The Royal Bank argues that this is a huge penalty to the disabled beneficiary and one not contemplated by the Government of Canada when it enacted the Canada Disability Savings Act. DECISION [21] The question in this case involves a balancing between s. 67(1)(c) of the Bankruptcy and Insolvency Act, which defines the property of the bankrupt available for distribution to creditors, and the provisions of the Income Tax Act that define RDSPs and the terms of the trust instrument governing distribution of trust funds. [22] "Property" is defined in s. 67(1)(c) as including, "all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge, including any refund owing to the bankrupt under the Income Tax Act." Whereas specific types of retirement savings plans are expressly excluded from the definition of "property" in s. 67(1)(c), the RDSP is not one of the enumerated plans. [23] In contrast, s. 146.4 of the Income Tax Act stipulates that an RDSP must be operated exclusively for the benefit of the plan's beneficiary and none of the benefits can be surrendered or assigned. Further, in this case the approved language of the trust instrument precludes any payment out to creditors as such payments are expressly defined as not for the benefit of the beneficiary under the plan. [24] In my view, these seemingly conflicting statutory provisions can be reconciled. Although s. 67(1)(c) of the Bankruptcy and Insolvency Act vests in the trustee in bankruptcy any property interest held by the bankrupt, the trustee can take no greater interest than the bankrupt in such property. In Re: Lifshen (1977), 78 D.L.R. (3d) 444 (Sask. Q.B.), MacLeod J. held that the funds held in RRSPs vested in a trustee in bankruptcy (prior to their exemption from the Act). However, the plan in question accorded the beneficiary the right to redeem funds upon request. In contrast, Ms. Alary's right to receive funds from her RDSP is strictly limited by the trust instrument. In particular, no funds can be paid out to creditors or to her for the purpose of satisfying creditors. Because Ms. Alary's interest in the funds is limited in this manner, the Trustee's interest in and ability to deal with the funds is similarly restricted. [25] Neither Ms. Alary, nor the Trustee, may demand the release of funds in the RDSP for the purpose of satisfying creditors. [26] Despite the limitations on the rights of the Trustee, based on the limited interest possessed by Ms. Alary in the funds within the RDSP, the trust instrument permits the Court to exercise a discretion to release funds to satisfy creditors. There are no enumerated factors governing the exercise of discretion by the Court. However, there is guidance in s. 183(1) of the Bankruptcy and Insolvency Act, which grants the Court jurisdiction in bankruptcy to apply both law and equity in the resolution of proceedings before it. [27] A review of the authorities reveals the following factors relevant to the exercise of discretion in bankruptcy and insolvency proceedings. Generally, the Court should be guided by what is just and equitable in the particular circumstances from the perspective of the creditors and the bankrupt. The exercise of discretion should properly balance the interests of the parties and any prejudice. The Court's exercise of discretion must be reasonable. It must not erode confidence in, or frustrate the purposes of, the insolvency legislation. Lastly, the Court should endeavour to provide certainty to other commercial parties when addressing a similar situation. See, Bennett on Bankruptcy, 13th edition (Toronto, CCH Canadian Limited, 2011) at p. 564; Cole (Re), [1995] B.C.J. No. 1280 at para. 94 (S.C.); and Madam Justice Jackson & Dr. Jannis Sarra, "Selecting the Judicial Tool to get the Job Done: An Examination of Statutory Interpretation, Discretionary Power and Inherent Jurisdiction in Insolvency Matters", in Jannis Sarra ed., Annual Review of Insolvency Law: 2007 (Toronto: Thomson Carswell, 2008) at 41. [28] Applying these factors to Ms. Alary's circumstances, I find that it is not fair and equitable to permit moneys from the RDSP to be paid for the benefit of creditors. Permitting funds to be paid out from the plan at this time (prior to Ms. Alary's 59th birthday), would result in a substantial depletion of the trust fund far beyond the monies available to creditors. A release of funds at this time would cause three dollars for each one dollar paid out to be refunded to the Government. In this case, Ms. Alary would be required to forgo approximately $13,000, which represents a substantial percentage of the total funds in the trust, in order to reduce her indebtedness by $3,229. This result causes significant prejudice to Ms. Alary while according minimal benefit to her creditors. [29] There is no evidence that Ms. Alary contributed monies to the RDSP in order to defeat her creditors. Nor is there evidence that the funds were pledged as security for credit. Moreover, there are no general concerns about fraud or deceit on the part of Ms. Alary that would dictate the exercise of the court's discretion in favour of the Trustee. [30] The underlying purpose of the RDSP is to ensure that severely disabled persons are able to save for their retirement. In the case of disabled persons, there is an even greater societal interest in preserving the integrity of such trust funds than in the case of an RRSP. Clearly, a severely disabled person has less ability to work and save for their old age. In my view, an RDSP is designed to protect this small and significantly disadvantaged and vulnerable group in our society. Without access to such funds, the older disabled person may no longer be able to live with dignity or even satisfy their basic needs. [31] In light of the purpose underlying the creation of an RDSP, I find that refusing to exercise my discretion to permit trust monies to be paid out for the benefit of creditors on the facts of this case would not erode public confidence in the bankruptcy scheme. These plans can only be created with the approval of the Canada Revenue Agency and there are strict guidelines for the identification of eligible beneficiaries, who can make contributions to the plans, and how the funds may be distributed. In these circumstances, there are few opportunities for abuse by the beneficiary. [32] Balancing the relevant factors, I find it is not appropriate to exercise my discretion to permit trust funds to be paid out for the benefit of Ms. Alary's creditors. Accordingly, the Royal Bank is not permitted to release funds from Ms. Alary's RDSP to the Trustee. [33] Neither party has sought costs. Thus no costs order is granted. "Bruce J."