News
New protection for Registered Retirement Savings Plans (RRSP)
There are changes about to come into effect regarding RRSPs.
Currently, certain types of RRSPs are protected in a bankruptcy (meaning they will not be available to creditors). Some life insured RRSPs are exempt from bankruptcy where there is a beneficiary that meets specific criteria. Locked-in plans from former employers and company pension plans are also exempt.
However, the traditional RRSPs through banks, investment companies and certain types of Deferred Profit Sharing Plans are not exempt. If you file a bankruptcy, these plans will be redeemed by the Trustee to be distributed to the creditors.
The new rules expected to come into effect in the next few months will exempt all types of RRSPs from bankruptcies. The only exception will be contributions made within the 12 months prior to the bankruptcy.
This will benefit those who do not have the advantage of employer sponsored pensions and must rely on their RRSP as main source of income when they retire.
Further information on these changes can be found at http://strategis.ic.gc.ca/epic/site/bsf-osb.nsf/en/h_br01368e.html
Protecting your wages when your employer is bankrupt
Many times, when a company closes due to bankruptcy, the employees are left with unpaid wages or vacation pay and must get in line behind the other creditors to get paid. In most cases there are no funds available for the employees.
There are changes coming to help protect employees when this occurs. The Wage Earner Protection Program Act is about to come into force in the next few months. The Act gives employees a priority ahead of other creditors to a maximum of $3,000 per employee.
Further information on this new act can be found at http://strategis.ic.gc.ca/epic/site/bsf-osb.nsf/en/br01782e.html#commercial
Behind on your income tax?
There are occasions where people are behind on either filing their income tax or paying the outstanding balances. What can happen?
Penalties and Interest
Canada Revenue Agency (CRA) will charge a penalty when tax returns are not filed on time. The amount of the penalty will increase depending on whether it is the first time (5%) or if it is not the first time (10%+). The amount owed will continue to increase just like interest on a loan until the balance is paid.
Interest will be charged on the tax arrears just like interest on a loan. Interest can be charged even when the return is filed on time but the balance is not paid. The amount of interest charged is based upon a prescribed interest rate set quarterly by the government and is similar to rates being charged on bank loans.
Penalties and interest will also be charged where you are required to make quarterly instalments and they are not made as required. Instalment payments normally apply to self employed individuals and those receiving pensions.
Collection action
If CRA is unable to make a suitable payment arrangement with you to bring your tax balance current, they have several options to recover the money.
Phone calls
CRA has its own collection group that will call in an attempt to make payment arrangements.
Requirement to Pay (Garnishee)
This is the same as a wage garnishee. If CRA issues the Requirement to Pay to your employer, your employer is required to hold back a portion of your wages and remit it to CRA. The amount held will depend on whether you are paid a wage or commission. Filing a bankruptcy or consumer proposal will stop the garnishee.
Liens
If you own property, CRA can take steps to register a lien against your home. Once registered, the lien has the same status as a mortgage. Filing a bankruptcy or consumer proposal will not affect the lien. CRA normally uses the lien as a last resort after all efforts to collect the tax debt have failed. If you own property and are unable to pay the tax debt, it is important to speak to an insolvency professional before it is too late.
What are your rights?
It may not seem like you have many rights, but you do. If you have the ability to pay but need time, you should refer to the CRA document on taxpayers’ rights, which can be found at http://www.cra-arc.gc.ca/agency/fairness/rights-e.html
If you are unable to pay the debt, you should discuss your situation with an insolvency professional to see if a consumer proposal or bankruptcy may assist you in getting a fresh start.
News Alert: The Effects of Bankruptcy After Separation
When you are bankrupt and separated there are several issues that are unique to your situation.
Support Payments
If you are required to pay either spousal or child support, this will not change because you are bankrupt. While a bankruptcy can stop most court ordered garnishees, support obligations are one that cannot be stopped.
If you are in arrears of support, this debt will survive after the bankruptcy is over. If the arrears started within 12 months prior to the bankruptcy, your former spouse will be entitled to special status in the bankruptcy and will have priority over other creditors to be paid first.
Equalization of Assets
In many separation agreements, there are sections that deal with either an equalization payment or division of property. An equalization payment is treated the same as any other debt. It would be added to the creditors included in the bankruptcy. A division of property is different and how it is handled will depend upon the wording of the agreement.
Separation of Debt
In some separation agreements, it is agreed that each person will pay certain debt. However, it is possible the creditor shows both people as the borrower. The creditor will not be required to follow the separation agreement and could possibly pursue the other spouse if one has become bankrupt.
News Alert: Making Ends Meet After Separation
This is a common statement heard after a separation or divorce. While married or living together, you have two incomes that are running the household. After separating, you have the same amount of income but now need to pay the expenses of running two households. In a very short period of time, debt will pile up as you try to keep up with daily living.
The first step is to plan out when your pay is received and match it to the expenses that come up during the month. For example, if you are paid bi-weekly, budget the expenses that will need to be paid from that cheque such as rent, mortgage, utilities or car payments. Then budget the expenses that will come up after the next pay is received. Once you have done that, you will now need to budget out your debt payments for loans, credit cards etc.
If you find there is not enough money left, the time to act is now. One option is to apply to the bank to consolidate the debt into one monthly payment. If the payment is still too high, then you should consider whether a consumer proposal or bankruptcy is needed. A consumer proposal is a way of telling the creditors you canít afford to pay them the full amount owed, but are willing to pay a reduced amount you can afford. A bankruptcy is the last resort when there is no money left to make any payments.
A financial counselor can meet with you at no cost and review your situation in detail. This will help you identify which option is best for you.
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News Alert: Implementing a Budget
Implementing a budget can seem overwhelming, but it need not be complicated. Start by creating a list of your housing expenses, then work related and transportation costs, essential living costs, and finally personal expenses. You will find that some of these costs will be “fixed” in that they are the same every month, i.e. rent or mortgage, car payment, insurances. Then there are the expenses which we pay for with “cash”, which has now become synonymous with our use of debit cards. These would include food, fuel, entertainment, etc. Finally list the “occasional” costs, i.e. those that typically do not necessarily occur every month, but should ideally be planned for and require anticipated savings. These would include clothing, gifts, car repairs etc. Typically these expenses are paid for with the use of credit, simply because we failed to plan ahead for them. This in turn, increases the true cost of these items.
Getting started. Fixed expenses are just that, fixed, they are also the easiest to identify.
Cash expenses tend to be somewhat consistent from month to month. There are different methods to track and control cash costs. One may be to total the monthly amount of such costs and divide the amount into a weekly cash withdrawal. Purchase the priority expenses such as fuel and food and leaving the remaining monies available for entertainment, dining, etc. Once the weekly cash is utilized you must forego the expense until the following week.
Another method would be the use of a debit card. While this is very convenient it can be difficult to monitor and should be discouraged if one is trying to gain control of spending. The majority of people likely use a combination of both cash and debit.
Now, let’s focus on saving ahead for the occasional expenses. A list might include an annual estimate for car or house repairs, gifts, sports, vet fees, vacations, or investments. By projecting an annual amount and then setting those funds aside monthly, there will less of a need to rely on credit. An easy way to allocate money for irregular costs is to instruct the bank to transfer a specific amount to a designated account monthly or per pay period. This ideally ensures that funds are available when required. The use of credit cards is not elaborated on, if expenses are being paid by credit it is strongly recommended that the balance be paid monthly
You will find that planning for and tracking your expenses will allow you to attain your financial goals.