Royal Bank of Canada v. North American Life Assurance Co.

Royal Bank of Canada v. North American Life Assurance Co.
Collection
Supreme Court Judgments
Date
1996-02-22
Report
[1996] 1 SCR 325
Case number
24316
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Saskatchewan
Subjects
Bankruptcy and insolvency
Notes
SCC Case Information: 24316
Decision Content
Royal Bank of Canada v. North American Life Assurance Co., [1996] 1 S.C.R. 325
Royal Bank of Canada Appellant
v.
North American Life Assurance Company and
Balvir Singh Ramgotra Respondents
Indexed as: Royal Bank of Canada v. North American Life Assurance Co.
File No.: 24316.
1995: November 8; 1996: February 22.
Present: La Forest, L'Heureux‑Dubé, Sopinka, Gonthier, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for saskatchewan
Bankruptcy ‑‑ Settlement of funds ‑‑ RRSP transferred in good faith to RRIF (insurance annuity) for benefit of third party ‑‑ Settlements made up to five years prior to bankruptcy void against trustee in bankruptcy if interest of settlor in property did not pass on settlement -- RRIFs normally exempt from claims of bankrupt's creditors ‑‑ Bankruptcy declared within five years of transfer ‑‑ Whether transfer to RRIF a settlement -- If so, whether or not settlement void against trustee in bankruptcy -- If so, whether or not funds in RRIF available to satisfy claims of creditors notwithstanding exempt status of RRIF ‑‑ Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3, ss. 67 , 91 ‑‑ The Saskatchewan Insurance Act, R.S.S. 1978, c. S‑26, ss. 2(kk), 158.
In June 1990, respondent Ramgotra transferred the funds from his RRSPs into a RRIF managed by respondent insurance company. His wife was designated beneficiary under the RRIF and payments began that August. Circumstances related to relocation of respondent's medical practice led him to make an assignment into bankruptcy in February 1992. On his absolute discharge from bankruptcy in January 1993, his only assets were his clothing and household contents, and the RRIF. While the RRSPs would have been subject to his creditors' claims, the RRIF constituted a life insurance annuity and was therefore exempt from their claims on the basis of s. 67(1)(b) (property divisible among creditors on bankruptcy does not include property exempt from seizure under provincial law) of the Bankruptcy and Insolvency Act (BIA ), when read in conjunction with ss. 2(kk)(vii) (life insurance includes annuities) and 158(2) (life insurance money and contract is exempt from seisure where a spouse is designated beneficiary) of The Saskatchewan Insurance Act. The trustee in bankruptcy applied for a declaration that the transfer of the RRSP funds into the RRIF was void, pursuant to s. 91(2) of the BIA , which declares, in part, that "settlements" made one to five years prior to bankruptcy are void against the trustee if "the interest of the settlor in the property did not pass" upon settlement. The trustee's application was dismissed at trial because the transfer of the RRSP funds into the RRIF had been made in good faith and not for the purpose of defeating the claims of his creditors. Appellant's appeal to the Saskatchewan Court of Appeal was dismissed. The issues here were: (1) whether the transaction was a settlement within the meaning of s. 91 BIA ; (2) if so, whether the settlement was void against the trustee in bankruptcy under the second branch of s. 91(2) ; and, (3) if so, whether the funds in the RRIF were available to satisfy the claims of the creditors despite the RRIF's exempt status under s. 67(1) (b).
Held: The appeal should be dismissed.
When respondent Ramgotra transferred the funds from his two RRSPs into an RRIF designating his wife as beneficiary, the funds became exempt from execution or seizure by reason of s. 67(1) (b) BIA , when read in conjunction with ss. 2(kk)(vii) and 158(2) of The Saskatchewan Insurance Act. Even if the beneficiary designation was a settlement within s. 91 BIA , and was void against the trustee in bankruptcy pursuant to the second branch of s. 91(2) , the RRIF remained exempt from the claims of respondent Ramgotra's creditors and, in particular, the appellant.
Jurisprudential consensus has emerged that the designation of a beneficiary under a life insurance policy constitutes a s. 91 settlement. Respondent Ramgotra effected a settlement triggering s. 91 .
Sections 67(1) (b) and 91 BIA are not in conflict. The two provisions can be reconciled by giving effect to their distinct terms, and by recognizing their distinct roles in bankruptcy. Section 91 dictates that certain settled property will fall back into the estate of the bankrupt in the possession of the trustee, while s. 67 is directed at the exercise of administrative powers over the estate by the trustee. Where a settlement is void against the trustee under s. 91 , then in normal circumstances, the trustee is empowered to administer the settled asset and use it to satisfy the claims of creditors. However, in the special case where the asset is exempt under s. 67(1) (b), then the trustee is prohibited from exercising his or her distribution powers because the asset is not subject to division among creditors.
Respondent Ramgotra's property interest in the RRIF passed to and vested in the trustee in bankruptcy by operation of s. 71(2) BIA . The future contingent interest of the designated beneficiary under the RRIF was not captured by s. 71(2) , since it had been settled on the designated beneficiary prior to bankruptcy. The trustee in bankruptcy could apply to have this settlement set aside under s. 91(2) BIA .
The effect of s. 91 is to render certain settlements void against the trustee in bankruptcy. A life insurance policy, however, is rendered exempt under s. 67(1) (b) by the designation of a beneficiary and this status continues so long as the designation is "in effect" according to s. 158(2) of The Saskatchewan Insurance Act. The fact that a beneficiary designation is void against the trustee under federal legislation does not necessarily result in its no longer having effect vis‑à‑vis the claims of creditors under the provincial legislation which s. 67(1) (b) incorporates.
It was not necessary to decide whether respondent Ramgotra effected a void settlement under the second branch of s. 91(2) when he designated his wife as beneficiary of his RRIF. Even if the settlement were void against the trustee in bankruptcy, that would not allow the trustee to use the funds in the RRIF to satisfy the claims of creditors such as the appellant bank. The RRIF is an exempt asset pursuant to the provincial legislation incorporated into s. 67(1) (b): it is not property which is divisible among creditors. Given this, even if Mrs. Ramgotra's future contingent interest in the RRIF had passed into the possession of the trustee through the application of s. 91(2) , the RRIF was property "incapable of realization" by the trustee pursuant to s. 40(1) BIA . Therefore, the trustee was obliged to return it to respondent Ramgotra prior to applying for his discharge. Regardless of whether or not respondent Ramgotra's settlement was void against the trustee, the exempt status of the RRIF is an absolute bar to the appellant's claim.
Whether a settlor has acted in good faith or for the purpose of defeating creditors is not relevant to the question of whether a settlement has been made within s. 91 . In contrast, however, a settlor's intention is highly relevant where a settlement is being challenged under provincial fraud legislation. It was not necessary to determine if a life insurance beneficiary designation can be set aside as a fraudulent conveyance of property. The provincial fraud provisions are clearly remedial in nature and should be given the fair, large and liberal construction and interpretation that best ensures the attainment of their objects. There is a strong case for concluding that a life insurance beneficiary designation is both a "juridical act" and a "disposition" or "conveyance" of "property".
The Statute of Elizabeth, assuming without deciding that it remains in force, would allow creditors to challenge fraudulent conveyances, including life insurance beneficiary designations, without having to prove that, at the time of the conveyance, the debtor was insolvent, was unable to pay his or her debts in full, or knew that he or she was on the eve of insolvency.
Cases Cited
Applied: Re Bozanich, [1942] S.C.R. 130; considered: Re Wozniuk (1987), 76 A.R. 42; Re Geraci (1970), 14 C.B.R. (N.S.) 253, rev'g (1969), 13 C.B.R. (N.S.) 86; Re Sykes (1993), 18 C.B.R. (3d) 148; Re Pearson (1977), 23 C.B.R. (N.S.) 44; Nicholson v. Milne (1989), 74 C.B.R. (N.S.) 263; disapproved: Wilson v. Doane Raymond Ltd. (1988), 69 C.B.R. (N.S.) 156; Re Yewdale (1995), 30 C.B.R. (3d) 194; referred to: Royal Bank v. Oliver (1992), 11 C.B.R. (3d) 82; In re Lowndes; Ex parte Trustee (1887), 18 Q.B.D. 677; Shrager v. March, [1908] A.C. 402; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; M.N.R. v. Anthony (1995), 124 D.L.R. (4th) 575; Re Malloy (1983), 48 C.B.R. (N.S.) 308; Alberta Treasury Branches v. Guimond (1987), 70 C.B.R. (N.S.) 125; Camgoz (Trustee of) v. Sun Life Assurance Co. of Canada (1988), 70 C.B.R. (N.S.) 131, aff'd (1988), 72 C.B.R. (N.S.) 319; Klassen (Trustee of) v. Great West Life Assurance Co. (1990), 1 C.B.R. (3d) 263; Re Douyon (1982), 134 D.L.R. (3d) 324; Re MacDonald (1991), 21 C.B.R. (3d) 211; Canadian Imperial Bank of Commerce v. Meltzer (1991), 6 C.B.R. (3d) 1; Marzetti v. Marzetti, [1994] 2 S.C.R. 765; Thompson v. Coulombe (1984), 54 C.B.R. (N.S.) 254; Zemlak (Trustee of) v. Zemlak (1987), 66 C.B.R. (N.S.) 1; Sovereign General Insurance Co. v. Dale (1988), 32 B.C.L.R. (2d) 226; Technurbe Building Construction Ltd. v. McKinley (1989), 76 C.B.R. (N.S.) 106.
Statutes and Regulations Cited
Acte agaynst fraudulent Deedes Gyftes Alienations, &c. (Statute of Elizabeth), 1571 (Eng.), 13 Eliz. 1, c. 5.
Assignments and Preferences Act, R.S.N.B. 1973, c. A‑16, s. 2.
Assignments and Preferences Act, R.S.N.S. 1989, c. 25, s. 4.
Assignments and Preferences Act, R.S.O. 1990, c. A.33, s. 4(1).
Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3, ss. 2 "settlement" [am. S.C. 1992, c. 27, s. 3(2)], 16(3), 17, 18, 19, 24, 30(1)(a), (b), (c), (j), 40(1), 43(1), 49(1), 67(1) [rep. & sub. idem s. 33 ] (a), (b), (c), (d), 68 [idem s. 34 ], 71(2), 72(1), 91(1), (2), 3(b), 94, 98(1), 99, 158(a).
Bankruptcy Rules, C.R.C. 1978, c. 368, r. 89.
Civil Code of Québec, art. 1631 ("Paulian Action").
Exemptions Act, R.S.S. 1978, c. E‑14, s. 2.
Frauds on Creditors Act, R.S.P.E.I. 1988, c. F‑15, s. 2.
Fraudulent Conveyance Act, R.S.B.C. 1979, c. 142, s. 1.
Fraudulent Conveyances Act, R.S.M. 1987, c. F160, s. 2.
Fraudulent Conveyances Act, R.S.N. 1990, c. F‑24, s. 3.
Fraudulent Conveyances Act, R.S.O. 1990, c. F.29, s. 2.
Fraudulent Preference Act, R.S.B.C. 1979, c. 143, s. 3.
Fraudulent Preferences Act, R.S.A. 1980, c. F‑18, s. 2.
Fraudulent Preferences Act, R.S.S. 1978, c. F‑21, s. 3.
Fraudulent Preferences and Conveyances Act, R.S.Y. 1986, c. 72, s. 2.
Insurance Act, R.S.A. 1980, c. I-5, s. 265.
Insurance Act, R.S.B.C. 1979, c. 200, s. 147.
Insurance Act, R.S.O. 1960, c. 190, s. 162(2) (now R.S.O. 1990, c. I.8, s. 196(2)).
Interpretation Act, 1993, S.S. 1993, c. I‑11.1, s. 10.
Saskatchewan Farm Security Act, S.S. 1988‑89, c. S‑17.1, s. 65
Saskatchewan Insurance Act, R.S.S. 1978, c. S‑26, ss. 2(kk)(i), (ii), (iii), (iv), (vii), 158(1), (2).
Authors Cited
Caplan, Lisa H. Kerbel. Case Comment (1994), 26 C.B.R. (3d) 252.
Cuming, R. C. C. "Section 91 (Settlements) of the Bankruptcy and Insolvency Act : A Mutated Monster" (1995), 25 Can. Bus. L.J. 235.
Dunlop, Charles Richard Bentley. Creditor‑Debtor Law in Canada, 2nd ed. Scarborough, Ont.: Carswell, 1995.
Houlden, Lloyd W. "Life Insurance Contracts in Ontario" (1963), 4 C.B.R. (N.S.) 113.
McCabe, Michael J. "Execution Against an R.R.S.P." (1990), 76 C.B.R. (N.S.) 218.
McKee, David J. "Debtor‑Creditor Issues Affecting Annuity Contracts" (1993), 12 Est. & Tr. J. 247.
Norwood, David, and John P. Weir. Norwood on Life Insurance Law in Canada, 2nd ed. Scarborough, Ont.: Carswell, 1993.
APPEAL from a judgment of the Saskatchewan Court of Appeal (1994), 26 C.B.R. (3d) 1, 120 Sask. R. 277, 68 W.A.C. 277, 115 D.L.R. (4th) 536, [1994] 8 W.W.R. 26, [1994] I.L.R. ¶ 1-3089, dismissing an appeal from a judgment of Baynton J. (1993), 18 C.B.R. (3d) 1, 108 Sask. R. 257. Appeal dismissed.
Robert G. Kennedy and Ian A. Sutherland, for the appellant.
Gary A. Meschishnick and Eric M. Singer, for the respondent North American Life Assurance Co.
Robert D. Jackson, for the respondent Balvir Singh Ramgotra.
//Gonthier J.//
The judgment of the Court was delivered by
Gonthier J. --
I. Issue
1 This case raises an important and controversial issue concerning the interpretation of ss. 67(1) (b) and 91 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3 , as amended (hereinafter "BIA "): Where a bankrupt has transferred registered retirement savings plan (RRSP) funds into a registered retirement income fund (RRIF) within the five years preceding bankruptcy, and where the RRIF is exempt from the claims of creditors under provincial legislation incorporated into the BIA by s. 67(1) (b), may a creditor set aside the transfer as a s. 91 "settlement", and thereby get at the RRIF despite its exempt status?
II. Factual Background
2 The respondent Ramgotra is a medical doctor who practised from 1971 to 1991 in Saskatoon, Saskatchewan. During this period, as a self-employed doctor responsible for his own retirement planning, he built up savings and investments, including two RRSPs. In May 1989, he became an associate at a Saskatoon medical clinic, but his share of the clinic expenses proved higher than expected. As a result, in February 1990, he opened his own practice. Unfortunately, the practice was not as successful as Dr. Ramgotra had hoped, partly because of a slow patient load, but also because Dr. Ramgotra suffers from insulin dependent diabetes and was required to reduce his work hours in response to his medical condition.
3 In June 1990, at the suggestion of a financial adviser, Dr. Ramgotra transferred the funds from his two RRSPs into an RRIF under which his wife was designated as beneficiary. The RRIF was to provide Dr. Ramgotra with a gross monthly income of $1,066.20, and these payments commenced in August 1990. The respondent North American Life Assurance Company is the financial institution responsible for the management of the RRIF.
4 Ten months later, in May 1991, Dr. Ramgotra applied for and obtained a position as permanent physician with the Town of Dinsmore, Saskatchewan. He then attempted to negotiate with his landlord in Saskatoon in order to terminate the commercial lease for his practice there. These negotiations were unsuccessful, and the landlord obtained a judgment against Dr. Ramgotra for approximately $30,000. This event led Dr. Ramgotra to make an assignment into bankruptcy in February 1992. When he received an absolute discharge from bankruptcy in January 1993, the only assets which he retained were his clothing and household contents, and the RRIF.
5 While Dr. Ramgotra's RRSPs would have been subject to the claims of his creditors, the RRIF constituted a life insurance annuity, and was therefore exempt from their claims on the basis of s. 67(1) (b) BIA , when read in conjunction with ss. 2(kk)(vii) and 158(2) of The Saskatchewan Insurance Act, R.S.S. 1978, c. S‑26. However, the trustee in bankruptcy applied under r. 89 of the Bankruptcy Rules, C.R.C. 1978, c. 368, for a declaration that the transfer of the RRSP funds into the RRIF was void, pursuant to s. 91(2) BIA . That provision declares, in part, that "settlements" made one to five years prior to bankruptcy are void against the trustee if "the interest of the settlor in the property did not pass" upon settlement.
6 At trial, the trustee's application was dismissed because Dr. Ramgotra's transfer of the RRSP funds into the RRIF had been made in good faith, and not for the purpose of defeating the claims of his creditors. An appeal to the Saskatchewan Court of Appeal by the appellant Royal Bank, Dr. Ramgotra's major creditor, was also dismissed.
III. Relevant Statutory Provisions
Saskatchewan Insurance Act, R.S.S. 1978, c. S-26:
2. __ ...
(kk) "life insurance" means insurance whereby an insurer undertakes to pay insurance money:
(i) on death;
(ii) on the happening of an event or contingency dependent on human life;
(iii) at a fixed or determinable future time; or
(iv) for a term dependent on human life;
and, without limiting the generality of the foregoing, includes:
...
(vii) an undertaking given by an insurer, whether before or after this section comes into force, to provide an annuity or what would be an annuity except that the periodic payments may be unequal in amount;
158. __ (1) Where a beneficiary is designated, the insurance money, from the time of the happening of the event upon which the insurance money becomes payable, is not part of the estate of the insured and is not subject to the claims of the creditors of the insured.
(2) While a designation in favour of a spouse, child, grandchild or parent of a person whose life is insured, or any of them, is in effect, the rights and interests of the insured in the insurance money and in the contract are exempt from execution or seizure.
Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 , as amended:
67. (1) The property of a bankrupt divisible among his creditors shall not comprise
...
(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province within which the property is situated and within which the bankrupt resides,
91. (1) Any settlement of property, if the settlor becomes bankrupt within one year after the date of the settlement, is void against the trustee.
(2) Any settlement of property, if the settlor becomes bankrupt within five years after the date of the settlement, is void against the trustee if the trustee can prove that the settlor was, at the time of making the settlement, unable to pay all his debts without the aid of the property comprised in the settlement or that the interest of the settlor in the property did not pass on the execution thereof.
(3) This section does not extend to any settlement made
...
(b) in favour of a purchaser or incumbrancer in good faith and for valuable consideration; ...
IV. Decisions Below
1. Saskatchewan Court of Queen's Bench (1993), 18 C.B.R. (3d) 1
7 In his reasons, Baynton J. made two factual findings: (1) Dr. Ramgotra was solvent at the time he transferred the RRSP funds into the RRIF, and (2) the transfer was made in good faith, and not for the purpose of defeating creditors. Because of the former factual finding, the first branch of s. 91(2) BIA could not be used by the trustee to void the transfer. However, the second branch of s. 91(2) was still available, and the issue was whether the transfer was a "settlement" in which the interest of the settlor in the property did not pass at the time of settlement.
8 Relying on recent case law establishing that the exchange of non-exempt property for exempt property (i.e., "self-settlement") could constitute a settlement under s. 91 BIA , Baynton J. reached the tentative conclusion that the transfer in the case at bar fell within the second branch of s. 91(2) because it was a settlement in which, by definition, the property interest of the settlor did not pass. He refused, however, to declare the settlement void against the trustee in bankruptcy. He referred to his previous decision in Royal Bank v. Oliver (1992), 11 C.B.R. (3d) 82 (Sask. Q.B.), where a similar settlement was at issue. In Oliver, he decided that a bona fide exchange of property should not be a voidable settlement under s. 91(2) . He effectively "borrowed" the concept of good faith which appears in s. 91(3) (b) BIA (but is not applicable in the case of self-settlement), and used it to limit the common law definition of settlement.
9 Since Dr. Ramgotra had acted in good faith, and not for the purpose of defeating creditors, when he transferred his non-exempt RRSP funds into an exempt RRIF, Baynton J. concluded that the transfer was not a settlement which could be set aside under s. 91(2) .
2. Saskatchewan Court of Appeal (1994), 26 C.B.R. (3d) 1
10 The Saskatchewan Court of Appeal unanimously dismissed the appellant's appeal. For the court, Jackson J.A. rejected the submission (which had been accepted by Baynton J.) that a settlement had been effected by the transfer of the non-exempt RRSP funds into the exempt RRIF. In her view, settlement within the meaning of the BIA involved settlement on a third party; the mere conversion of non-exempt property into exempt property was insufficient.
11 However, after a review of the jurisprudence on the meaning of settlement, Jackson J.A. concluded that the designation of a beneficiary under an insurance policy could constitute a settlement. Thus, when Dr. Ramgotra designated his wife as beneficiary under the RRIF, he settled a property interest on her. Jackson J.A. characterized this interest as a future contingent property interest.
12 Jackson J.A. then considered whether such a settlement could be declared void under the second branch of s. 91(2) concerning the passing of property. In her view, the essential issue was whether or not it was necessary to convey, or give up control over, all the interests in a particular piece of property in order for the property passing exception to be met. Jackson J.A. reviewed the case law on this issue, most of which concluded that a settlement in the form of an insurance beneficiary designation does not involve the passing of property because the settlor always maintains property interests in, and control over, the insurance after the designation. However, she preferred to rely on two early English cases, In re Lowndes; Ex parte Trustee (1887), 18 Q.B.D. 677, and Shrager v. March, [1908] A.C. 402 (P.C.), for the proposition that property passes if a settlor divests him- or herself of all interest in the property acquired by a third party beneficiary. Thus, the beneficiary designation in the case at bar passed a contingent property interest to Mrs. Ramgotra, and fully divested Dr. Ramgotra of that same property interest. Jackson J.A. held that this was sufficient to meet the property passing requirement of the second branch of s. 91(2) , with the result that Dr. Ramgotra's designation of his wife as beneficiary under the RRIF was not void against his trustee in bankruptcy.
13 Jackson J.A.'s conclusion that the property passing requirement had been met was further reinforced by her view that any other conclusion would be contrary to bankruptcy policy and the purpose of RRIFs. She noted that if the designation of a beneficiary under an insurance policy were not found to pass property to the beneficiary, then all insurance beneficiary designations made within five years of bankruptcy would be void against the trustee in bankruptcy by operation of the second branch of s. 91(2) , including those made in good faith when the bankrupt was solvent. Jackson J.A. was of the view that s. 91 BIA should be interpreted to avoid such an absurd result.
14 Finally, with respect to the bona fide test applied by the trial judge, Baynton J., Jackson J.A. stated that it was not necessary for her to adopt his position, but she nevertheless endorsed his analysis of the difficulties associated with any interpretation of s. 91 BIA which would automatically void legitimate transactions made by solvent debtors. Jackson J.A. agreed with Baynton J. that to attack a beneficiary designation made by a solvent debtor, a trustee in bankruptcy should have to prove some lack of good faith on the part of the debtor. However, she disagreed that the creation of a good faith requirement for self-settlement under s. 91 would be appropriate. Instead, she opined that trustees may rely on other legislation, such as provincial fraud legislation, to attack bad faith self-settlements.
V. Analysis
1. Introduction
15 In my recent decision in Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453, I had the opportunity to review the two fundamental purposes underlying the BIA . As I stated there, the first such purpose is to ensure the equitable distribution of a bankrupt debtor's assets among the estate's creditors, while the second is to provide for the financial rehabilitation of insolvent persons (at para. 7). The case at bar demonstrates that these two purposes may come into conflict. The appellant bank, Dr. Ramgotra's principal creditor, wishes to attach his RRIF in order to satisfy its outstanding financial claims against him. Not surprisingly, in light of Dr. Ramgotra's post-bankruptcy financial position, he resists the bank's attempts to seize one of his few remaining assets. He argues that the RRIF, being life insurance under s. 2(kk)(vii) of The Saskatchewan Insurance Act, is exempt from execution or seizure by creditors (s. 158(2) of The Saskatchewan Insurance Act and s. 67(1) (b) BIA ). In short, the bank seeks an "equitable distribution" of Dr. Ramgotra's assets, while Dr. Ramgotra's "financial rehabilitation" is furthered if he maintains his interest in the RRIF.
16 Since Dr. Ramgotra transferred the funds from his two RRSPs into his exempt RRIF when he was solvent, and not for the purpose of defeating his creditors, one might well wonder how the bank could get around the exempt status of the RRIF __ a status which, on its face, constitutes an absolute bar to the bank's claim. In the general context of debtor-creditor relations, the bank would have no expectation at all of attaching Dr. Ramgotra's exempt RRIF. On the facts of this case, Dr. Ramgotra's creditors are not being denied something which they would otherwise have, since the general rule is that they would not be entitled to attach the RRIF unless it had been removed from Dr. Ramgotra's estate through a fraudulent conveyance. Why should Dr. Ramgotra's bankruptcy place creditors like the bank in a better position than they would be in absent the bankruptcy? The bank's position before this Court appears to conflict with the principle that creditors should not gain on bankruptcy any greater access to their debtors' assets than they possessed prior to bankruptcy: M.N.R. v. Anthony (1995), 124 D.L.R. (4th) 575 (Nfld. C.A.), at p. 580.
17 Moreover, the policy of exempting life insurance investments and policies from execution or seizure under the BIA , where family members are designated as beneficiaries, is sound. Given the importance of insurance in providing for the welfare of dependents upon the death of the insured, an insurance policy may be characterized as a necessity. In Saskatchewan, as in the other provinces, many other necessities are excluded from the property of a bankrupt which is subject to execution or seizure by creditors. Examples include food, fuel, clothing, household items, tools of a trade (The Exemptions Act, R.S.S. 1978, c. E-14, s. 2), farm buildings, farming equipment, and livestock (The Saskatchewan Farm Security Act, S.S. 1988-89, c. S-17.1, s. 65). One might well characterize exempt property collectively as the "bare minimum" which a bankrupt is entitled to maintain in order to facilitate his or her rehabilitation following bankruptcy.
18 Thus, the bank's claim before this Court is at odds with the exempt status of the property in question, the policy justification underlying that exempt status, and its own expectations prior to Dr. Ramgotra's bankruptcy as to what it would be able to attach. However, the bank is challenging the transaction which transferred the RRSP funds into the RRIF. The bank claims that this transaction was a settlement within the meaning of s. 91 BIA , that Dr. Ramgotra's property interest did not pass at the time of the settlement, and that the settlement is void pursuant to the second branch of s. 91(2) (i.e., the "property passing branch"). According to the bank, the funds at issue are not exempt from execution or seizure because the transaction which rendered them exempt is void.
19 The issues raised by the bank are three-fold: (1) is the transaction in the case at bar a settlement within the meaning of s. 91 BIA ; (2) if so, is the settlement void against the trustee in bankruptcy under the second branch of s. 91(2) ; and (3) if so, are the funds in the RRIF available to satisfy the claims of Dr. Ramgotra's creditors despite the RRIF's exempt status under s. 67(1) (b). These issues are not new. They have been the source of considerable controversy in the lower courts, where four competing approaches have been adopted. I will deal with each of these in turn. However, I should state at the outset that I find none of them to be a satisfactory resolution of the problem presented by the case at bar and similar cases. I prefer an approach which recognizes the distinct roles of ss. 67(1) (b) and 91 in bankruptcy, as outlined below.
2. The Competing Approaches in the Lower Courts
(i)The exchange of a non-exempt asset for an exempt asset is a settlement under the BIA , and is voidable against the trustee in bankruptcy pursuant to s. 91 where made in the five years preceding bankruptcy (the "Wilson approach")
20 The first approach to the problem raised by the case at bar involves the more general issue of whether a self-settlement is caught by s. 91 BIA . Such an approach is typified by the decision of the Alberta Court of Appeal in Wilson v. Doane Raymond Ltd. (1988), 69 C.B.R. (N.S.) 156. There, the appellant dairy farmers sold their milk quota, a non-exempt asset, and used the proceeds to purchase a condominium, an exempt asset. A month later, they made assignments into bankruptcy. The trustee in bankruptcy sought an order declaring the condominium purchase to be a void settlement of property under s. 69(1) of the Bankruptcy Act, R.S.C. 1970, c. B-3, (now s. 91(1)) BIA .
21 For the Court of Appeal, Haddad J.A. relied upon the decision of the Alberta Queen's Bench in Re Wozniuk (1987), 76 A.R. 42, a case the facts of which are strikingly similar to those of the case at bar. In Re Wozniuk, it was held that a self-settlement in which a non-exempt RRSP was exchanged for an exempt life insurance annuity was a settlement within the meaning of the BIA . Haddad J.A. agreed with this proposition, adding at p. 159 that "[a] settlement within the scheme of the statute occurs when a disposition of property reduces the bankrupt estate available to the trustee for distribution to creditors". He thus concluded that the appellants' conversion of non-exempt property into exempt property was a void settlement under the BIA , since it had the effect of reducing the estate which was available to creditors. It made no difference that the appellants had effected the conversion for the purpose of obtaining a home for themselves, and not for the purpose of defeating creditors.
22 The principle flowing from Wilson and Wozniuk, namely that the exchange of a non-exempt asset for an exempt asset is a settlement under the BIA , and is voidable under s. 91 , has been adopted in numerous cases: Re Malloy (1983), 48 C.B.R. (N.S.) 308 (Ont. S.C.); Alberta Treasury Branches v. Guimond (1987), 70 C.B.R. (N.S.) 125 (Alta. Q.B.); Camgoz (Trustee of) v. Sun Life Assurance Co. of Canada (1988), 70 C.B.R. (N.S.) 131 (Sask. Q.B.), aff'd (1988), 72 C.B.R. (N.S.) 319 (Sask. C.A.); Klassen (Trustee of) v. Great West Life Assurance Co. (1990), 1 C.B.R. (3d) 263 (Sask. Q.B.). Moreover, this principle was adopted by the trial judge, Baynton J., in the case at bar, and in his earlier decision in Oliver, supra.
23 The approach which found favour with the Alberta Court of Appeal in Wilson was rejected, I think properly, by the Saskatchewan Court of Appeal in the case at bar. In my view, it is incorrect to conclude that a person may settle property on him- or herself. This is confirmed by the traditional judicial understanding of "settlement", as stated by this Court in In re Bozanich, [1942] S.C.R. 130. Rinfret J. described "settlement" as follows at pp. 138-39:
Without attempting to give a definition of the word __ and more particularly of that word as used in section 60 __ it seems to me sufficient for the purpose of interpreting the section to adopt a passage of Cave J., in the case of In re Player; Ex parte Harvey (1885), 15 Q.B.D. 682, at 686-687:
One must look at the whole of the language of the section in applying that definition, and consider what is meant by "settlement". Although "settlement", by the 3rd subsection, "shall for the purposes of this section include any conveyance or transfer of property", yet I think the view of my brother Mathew is well founded, and that a settlement in the ordinary sense of the word is intended. The transaction must be in the nature of a settlement, though it may be effected by a conveyance or transfer. The end and purpose of the thing must be a settlement, that is, a disposition of property to be held for the enjoyment of some other person. [Emphasis added.]
Rinfret J. then added, at p. 141:
The Act, as broad as it is, allows of a clear distinction between settlements though effected by a conveyance or transfer of property and conveyances or transfers of property not in the nature of a settlement.
24 There is no room in the definition of settlement adopted by this Court in Re Bozanich for a "settlement onto oneself", since the settlement must involve the transfer of property to be held for the enjoyment of another person. It would seem that the lower courts have departed from this aspect of Re Bozanich, and have held that a self-settlement is a settlement under the BIA , because the exchange of non-exempt property for exempt property is one convenient means of defeating creditors. As the court reasoned in Re Wozniuk at p. 62, a bankrupt should not be able to "bootstrap himself" out of s. 91 "by taking non-exempt property and converting it into property which would be exempt".
25 Although the court in Wilson thought that excluding self-settlements from s. 91 BIA would allow for considerable abuse, it seems to me that the contrary conclusion is more problematic. If creditors may attach self-settled property by attacking the self-settlement under s. 91 BIA , notwithstanding the exempt status of the property, then the result follows that such property is attachable in all cases where the self-settlement occurred in the five years preceding bankruptcy, including those cases where the bankrupt was solvent and acting in good faith at the time of the impugned transaction. In his article, "Section 91 (Settlements) of the Bankruptcy and Insolvency Act : A Mutated Monster" (1995), 25 Can. Bus. L.J. 235, Professor Cuming strongly criticized the judicial extension of the concept of settlement to include self-settlement as "patently unreasonable", at p. 235, and "a dramatic mutation", at p. 238. He added, at p. 242:
The problem of injustice arises when this expanded interpretation of the concept of settlement is combined with another Canadian-made adjunct to s. 91 : that, in both such situations, the interest of the settlor does not pass on execution of the transfers, thereby bringing them within the third arm of s. 91 . The logic of this reasoning appears to be as follows: the transfer of the property to the debtor is a settlement and the interest of the settlor did not pass on execution since, by definition, he retained or ended up with the interest or its equivalent.
This approach alone, while unable to withstand close technical scrutiny, would not be a source of injustice if the property has not been converted into exempt property as a result of the unexecuted transaction. The "settled" property is divisible among the bankrupt settlor's creditors. The potential for injustice arises in situations where the "settlement" involves conversion of property from non-exempt to exempt property. [Emphasis added.]
26 I agree that there is considerable potential for injustice if the Wilson approach to self-settlement is adopted. The situation is quite different in the case of settlements on third parties, not only because in such cases the property of the settlor may well have passed, but also because of s. 91(3) (b). That provision states that a "settlement made ... in favour of a purchaser or incumbrancer in good faith and for valuable consideration" is not void against the trustee in bankruptcy, thus providing a bona fide exception to s. 91(1) and (2) . However, the provision is not available in the case of self-settlement because, (1) there is no "purchaser or incumbrancer", and (2) there is no exchange of "valuable consideration". The Act therefore affords no protection to self-settlors like Dr. Ramgotra, who have acted in good faith. This anomaly is a persuasive indication that Parliament did not intend s. 91 to apply to self-settlement.
27 Further to this, I think that the inclusion of self-settlements within s. 91 is contrary to the purpose of that provision. As I will explain in greater detail below, s. 91 empowers the trustee in bankruptcy to return property to the bankrupt's estate, where it has been removed from the estate through a settlement by the bankrupt on a third party. Since a self-settlement does not transfer property to a third party, the property remains in the bankrupt's estate and vests in the trustee at the time of the bankruptcy (s. 71(2) BIA ). What possible role could s. 91 have in that situation? Moreover, the property passing branch of s. 91(2) has traditionally been viewed as providing a means by which the trustee in bankruptcy may challenge in futuro settlements by the bankrupt on third party beneficiaries, and thereby avoid future claims by those beneficiaries against the bankrupt's estate. In other words, as Jackson J.A. reasoned in the court below at para. 50, the property passing test catches those transactions by solvent debtors that do not confer an immediate interest. The purpose of the second branch of s. 91(2) would be distorted if creditors could employ it to attach self-settled property, since a self-settlement is qualitatively different from the kinds of dealings at which the property passing test is aimed.
28 Ultimately, I think that the Wilson approach to s. 91 fails to strike an appropriate balance between the Act's dual, and sometimes conflicting, purposes of protecting creditors and rehabilitating bankrupts. Even though a self-settlement which creates an exempt asset has the effect of reducing the property available to creditors, one must not lose sight of the fact that the result of the transaction is the acquisition of an asset which is so essential to the bankrupt and his or her dependents that it has been rendered exempt from execution or seizure by provincial legislation incorporated into the Act by s. 67(1) (b). To interpret s. 91 BIA in a manner which automatically allows creditors to attach exempt property of such an essential character is, in my view, going too far.
29 Thus, I see no reason in this case to depart from the definition of settlement adopted by this Court in Re Bozanich, which requires a disposition by the settlor to a third party. To borrow the words of Rinfret J., self-settlement is a transfer of property not in the nature of a settlement.
(ii)Bona fide self-settlements are not settlements under s. 91 BIA (the "Oliver approach")
30 In light of my rejection of the Wilson approach, it is not necessary to deal with the bona fide exception developed by Baynton J. in Oliver, supra, and applied in the case at bar. Suffice it to say that I share Baynton J.'s concerns about the harshness of the l