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

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?

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.

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.

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.

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.

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; ...

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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")

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 .

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.

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.

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.

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".

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.]

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.

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.

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.

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")

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 legal approach taken in cases like Wilson. While I appreciate his solution to the problem, I note that he was bound to follow the Wilson view that self-settlements are subject to s. 91, since the Saskatchewan Court of Appeal had accepted this proposition in Camgoz, supra. As I explain below, I do not think that good faith is relevant to the question of whether a settlement has been made within the meaning of s. 91. I prefer the approach to self-settlement taken by the Saskatchewan Court of Appeal in the instant case.

(iii)The designation of a beneficiary under a life insurance plan 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 "Geraci (Court of Appeal) approach")

Although the Court of Appeal in the instant case found that Dr. Ramgotra's exchange of a non-exempt asset for an exempt asset was not, by the fact of the exchange alone, a settlement under s. 91, Jackson J.A. proceeded to hold that when Dr. Ramgotra designated his wife as beneficiary of the RRIF, he effected a s. 91 settlement. This approach, which is particular to life insurance plans, was based on the decision of the Ontario Court of Appeal in Re Geraci (1970), 14 C.B.R. (N.S.) 253. There, at a time when the bankrupt was clearly insolvent, he designated his wife as beneficiary of a life insurance policy with a cash surrender value of $9,000. The effect of the designation was to render the insurance exempt from execution or seizure. The trustee in bankruptcy applied for a declaration that the beneficiary designation was void under the first branch (i.e., the "insolvency branch") of what is now s. 91(2) BIA . For the court, Jessup J.A. reasoned at pp. 255-56:

I think there emerges from the authorities a definition of the ordinary meaning of "settlement" that it is a disposition of property to be held, either in original form or in such form that it can be traced, for the enjoyment of some other person; and that the designation of a beneficiary of an insurance policy is such a disposition.... Having regard to the wide ranging affairs to which the Bankruptcy Act applies, I do not think that the word "settlement" in s. 60(1) [now s. 91] of that statute should be given a restricted meaning. The respondent argues that the designation of the wife as beneficiary of the policy was not a disposition of property because she would acquire no property rights in or benefit from the policy, unless and until the prior death of the bankrupt. I think it would be more accurate to say the wife's rights are contingent on the death of her husband. But the definition of property in s. 2(o) of the Bankruptcy Act, which is in the widest terms, includes "every description of estate, interest and profit, present or future, vested or contingent, in, arising out of, or incident to property".... Moreover, the circumstance that the wife's contingent interest in the policy may be divested by the designation of a different beneficiary does not derogate from the fact that she has an interest until there is divestiture. [Italics added by Jessup J.A.]

He thus concluded that the beneficiary designation in question, having been made when the bankrupt was insolvent, was void against the trustee in bankruptcy.

This reasoning appealed to Jackson J.A., and has been followed by several courts: Re Douyon (1982), 134 D.L.R. (3d) 324 (Que. Sup. Ct.); Re MacDonald (1991), 21 C.B.R. (3d) 211 (Alta. Q.B.); Re Yewdale (1995), 30 C.B.R. (3d) 194 (B.C.S.C.). I too find it persuasive. It is also significant that the BIA was amended in 1992 to include a definition of "settlement" as follows:

2. ...

"settlement" includes a contract, covenant, transfer, gift and designation of beneficiary in an insurance contract, to the extent that the contract, covenant, transfer, gift or designation is gratuitous or made for merely nominal consideration; [Emphasis added.]

(Act to Amend the Bankruptcy Act, S.C. 1992, c. 27, s. 3(2))

This definition was not in force when the circumstances of the instant appeal arose (in fact, between 1949 and 1992, there was no statutory definition of settlement in BIA). However, in light of Geraci and the cases following it, I think that a jurisprudential consensus has emerged that the designation of a beneficiary under a life insurance policy constitutes a s. 91 settlement. The new statutory definition reflects this consensus. On this basis, I agree with Jackson J.A. that Dr. Ramgotra effected a settlement triggering s. 91.

After concluding that the designation of Mrs. Ramgotra as beneficiary of Dr. Ramgotra's RRIF was a s. 91 settlement, Jackson J.A. turned to the second branch of s. 91(2), and inquired as to whether Dr. Ramgotra's interest in the settled property passed at the time of settlement. The settlement would only be void against the trustee in bankruptcy if Dr. Ramgotra's interest had not passed. This raised the perplexing issue of which "interest" should be considered in relation to the property passing requirement: Dr. Ramgotra's present interest in the RRIF itself, which certainly did not pass at the time of settlement, or the future contingent interest which he had obviously passed to Mrs. Ramgotra when she became his beneficiary? (For a general discussion of this controversial issue, see David J. McKee, "Debtor-Creditor Issues Affecting Annuity Contracts" (1993), 12 Est. & Tr. J. 247, at pp. 272-78, and Norwood and Weir, Norwood on Life Insurance Law in Canada (2nd ed. 1993), at pp. 253-56.)

Before this Court, the parties focused their submissions on the property passing issue. This was not surprising, as Jackson J.A. wrote substantial reasons justifying her conclusion that the relevant property interest was the future contingent interest which had passed to Mrs. Ramgotra. Jackson J.A.'s position was in direct conflict with the decision in Re MacDonald, supra. The difficulty with Jackson J.A.'s position is that it does violence to the distinction which s. 91(2) requires to be made between in futuro and immediate transfers of property. The settlement of a contingent and revocable future interest in RRIF funds is an in futuro settlement, i.e., the settlor's interest in the property does not pass at the moment of the settlement. If the settlement of a contingent and revocable future interest were considered an immediate transfer of property, as Jackson J.A. proposes, it is difficult to imagine what sort of settlement of future property could not be so described.

Since the designation of a beneficiary was an in futuro settlement made within the five years prior to Dr. Ramgotra's bankruptcy, it is void against the trustee, pursuant to s. 91(2). However, this does not mean that the RRIF funds may be distributed to the creditors of the estate. For the reasons given below, the exempt status of the life-assured RRIF remains in effect under provincial law so as to block the creditors' claims. Before explaining why this is so, I will examine the fourth approach to the problem raised in the instant case.

(iv)Where property is exempt from execution or seizure by creditors, pursuant to s. 67(1) (b) BIA , then its exempt status prevails over the fact that it became exempt as a result of a voidable settlement (the "Geraci (trial) approach")

Dr. Ramgotra argued forcefully in his submissions that since his RRIF was an exempt property under The Saskatchewan Insurance Act, and since this exemption is incorporated into the BIA by s. 67(1)(b), then it should be irrelevant that the funds in the RRIF were settled when his wife was designated as the beneficiary. In essence, Dr. Ramgotra urged this Court to hold that the exemption provision of the Act should be given effect regardless of s. 91.

Support for Dr. Ramgotra's submission can be found in the judgment of Houlden J. in the trial decision in Re Geraci (1969), 13 C.B.R. (N.S.) 86 (Ont. S.C.) (a judgment later overturned by the Ontario Court of Appeal, as discussed above). Houlden J. began by confirming that the designation of a beneficiary under a life insurance policy is a settlement within the BIA . He then observed that by reason of the beneficiary designation, the policy itself was exempt from execution or seizure by creditors pursuant to s. 162(2) of The Insurance Act, R.S.O. 1960, c. 190 (re-enacted by S.O. 1961-62, c. 63, s. 4) (now s. 196(2) of the Insurance Act, R.S.O. 1990, c. I.8). He construed the effect of the exemption as follows, at pp. 92-93:

... I believe on a close examination of s. 162(2) that it is the clear intention of the section to make the policy immune from attack by creditors while the wife is designated as beneficiary.

...

In my opinion, s. 162(2) has been drafted to provide for the group of persons who were formerly called "preferred beneficiaries". It is now possible to name a person who would formerly have been a preferred beneficiary and at the same time, if the designation is not irrevocable, to retain the right to borrow against, surrender or otherwise deal with the policy, but in my view, the Legislature by the wording of s. 162(2) has made it plain that the policy, while such a designation is in effect, is not to be "exigible for the benefit of (his) creditors": see Mulock C.J.O., in Royal Bank of Canada v. Dumart, [1932] O.R. 661 (C.A.).

Houlden J. recognized that some injustice would result from giving precedence to the exempt status of the life insurance policy. For example, an insolvent debtor could convert all his or her assets into cash, purchase a life insurance policy, and render it exempt from seizure by designating a family member as beneficiary. However, he wrote at p. 94:

At the present time, if my interpretation of The Insurance Act is correct, the Legislature had decided that an insurance policy coming within s. 157(1) or s. 162(2) is not available to creditors and, in my opinion, there is good moral justification for this position. Insurance is a very different asset from say a house or an automobile.... It is purchased to provide for the dependants of the insured and it is ordinarily paid for in small amounts over the insured's lifetime. I believe there are very good reasons for exempting policies of insurance from seizure....

Houlden J.'s reasons in Geraci largely repeat the view he expressed in an earlier article, "Life Insurance Contracts in Ontario" (1963), 4 C.B.R. (N.S.) 113, at p. 115:

If a [beneficiary] designation is made in favour of a spouse, child, grandchild or parent of a person whose life is insured, the rights and interests of the insured in the insurance money and in the contract are exempt from execution or seizure (s. 162(2)). Even if the designation of such a beneficiary is not irrevocable, a trustee in bankruptcy cannot deal with such a policy because the rights and interests of the insured are declared to be exempt from execution and seizure and by s. 39(b) [now s. 67(1)(b)] of the Bankruptcy Act property of a bankrupt does not include property which is exempt from execution or seizure. It would seem that s. 162(2) is drawn with s. 39(b) in mind as it uses the identical wording of s. 39(b).

On appeal, Jessup J.A. rejected Houlden J.'s construction of the exemption and settlement provisions of the BIA , arguing at p. 258:

If a settlement of property which comes within s. 60(1) [now s. 91(1)] of the Bankruptcy Act, both as to substance and as to time, is none the less to be taken as exempt, by virtue of s. 39(b), from the claims of a bankrupt's creditors merely because it would enjoy that exemption under provincial law apart from s. 60(1), the result would be to make s. 60(1) completely nugatory. I cannot conceive that to have been the intent of Parliament. The proper rule of construction is to harmonize all sections of an enactment and this is achieved in the present case by applying s. 39(b) in the light of s. 60(1) and not despite s. 60(1). I would, therefore, hold that property settled by a bankrupt within a year before his bankruptcy includes property rendered exempt from execution or seizure, under the laws of the relevant province, as a result of the settlement. [Emphasis added.]

Jessup J.A.'s reasoning was expressly rejected in preference to that of Houlden J. by the British Columbia Supreme Court in Re Sykes (1993), 18 C.B.R. (3d) 148. Meredith J. noted, at para. 19, that Jessup J.A.'s reasons in Geraci

... seems... to tag onto s. 167(b) [sic] words such as "unless the disposition of the property referred to amounts to a settlement referred to in s. 91". That comes close to judicial legislation.

Meredith J. was not prepared to go that route, and instead concluded that the exempt status of the life insurance policy in question was conclusive in that it was not available for seizure by creditors, even though it became exempt as a result of a voidable settlement (see also, Canadian Imperial Bank of Commerce v. Meltzer (1991), 6 C.B.R. (3d) 1 (Man. Q.B.), which adopted Houlden J.'s construction of the exemption provisions of the BIA).

The debate between Houlden J. and Jessup J.A. in Geraci, which was taken up by Meredith J. in Sykes, was premised on the view that ss. 67(1) (b) and 91 BIA were in conflict. As Michael J. McCabe stated in his article, "Execution Against an R.R.S.P." (1990), 76 C.B.R. (N.S.) 218, at p. 234:

The issue, simply stated, is which takes precedence, the exemption provision of s. 67 incorporating the provincial exemptions or the settlement provision of s. 91.

In resolving this issue, both Houlden J. and Jessup J.A. undertook a "lesser of two evils"-type analysis. Houlden J. preferred to give effect to s. 67(1)(b) over s. 91, to avoid the result that every designation of a beneficiary under a life insurance policy, made within one year of bankruptcy (or within five years if the designation was made when the debtor was insolvent, or if the property interest of the debtor did not pass when the beneficiary was designated), would be voidable. He thought that instances in which such a designation would be made for the purpose of defeating creditors would be rare, and that "it is better to permit injury to the creditors [in those rare cases] than to inflict the undoubted hardship of the forfeiture of a life's investment" (at p. 94). Jessup J.A. reached the opposite conclusion, because Houlden J.'s interpretation of s. 67(1)(b) would render s. 91 "completely nugatory". Nevertheless, Jessup J.A. added, at p. 259:

It does seem unjust that moneys paid in good faith over a period of years to secure a man's wife and children should be available to his creditors....

He then suggested a legislative amendment to avoid this result.

If I had to choose between the approaches of Houlden J. and Jessup J.A., then I would prefer that of Houlden J. for two reasons. First, I think that Jessup J.A. exaggerated the impact on s. 91 of Houlden J.'s construction, since settlements which change the status of property from non-exempt to exempt are only a portion of the settlements subject to s. 91. Houlden J.'s position certainly does not render s. 91 "completely nugatory", as stated by Jessup J.A. at p. 258. Second, Jessup J.A.'s interpretation of s. 67(1)(b) clearly favours the interests of creditors over the rehabilitation interest of the bankrupt settlor. The Act itself provides no indication that this should be so in the circumstances presented by the instant case, or Geraci. I do not believe that Parliament intended the funds in exempt life insurance plans to be subject to execution and seizure by creditors, simply on the basis that a settlement occurred when a beneficiary was designated. After all, it is the designation which makes the asset exempt under the provincial legislation incorporated into s. 67(1)(b). Are we really to believe that Parliament intended the very act which renders an asset exempt to be the cause of its losing its exempt status? I do not think so. Like Houlden J., I think that it would be preferable to respect the exempt status of a life insurance policy, even where the policy became exempt as a result of a s. 91 settlement.

In any event, I reject the view that ss. 67(1) (b) and 91 BIA are in conflict, and that the resolution of the case at bar requires me to choose one provision over the other on the basis of policy considerations. In fact, I think that it is possible to reconcile the two provisions by giving effect to their distinct terms, and by recognizing their distinct roles in bankruptcy.

3. The Preferred Approach to the Problem in the Case at Bar

(v)Even if a settlement which creates an exempt asset is void against the trustee in bankruptcy under s. 91, the exempt status of the asset under provincial law remains in effect to block the claims of creditors

In reconciling ss. 67(1) (b) and 91 BIA , it is important to remember that the general scheme through which a bankrupt's estate is divided by the trustee among creditors involves two distinct stages. First, the Act provides that an insolvent person "may make an assignment of all his property for the general benefit of his creditors" (s. 49(1)), or that creditors "may file in court a petition for a receiving order against a debtor" (s. 43(1)). At the time of the assignment or receiving order, the trustee in bankruptcy is obligated to take possession of the assets forming the estate of the bankrupt. Thus, by operation of s. 71(2), the bankrupt's property passes to and vests in the trustee:

71. ...

(2) On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.

Section 16(3) BIA imposes a duty on the trustee to "take possession of the deeds, books, records and documents and all property of the bankrupt and make an inventory...." Section 158(a) imposes a complimentary duty on the bankrupt to inform the trustee of all his or her property which is in his or her possession or control, and to deliver it to the trustee. Other provisions of the Act elaborate upon the powers, duties and functions of the trustee during the property-passing stage of bankruptcy (see, in particular, ss. 17 , 18 , 19 and 24 BIA).

Once the bankrupt's property has passed into the possession of the trustee, the Act provides the trustee with the power to administer the estate. For example, the trustee may, with the permission of the estate inspectors, sell or dispose of assets (s. 30(1)(a)), lease real property (s. 30(1)(b)), carry on the business of the bankrupt (s. 30(1)(c)), or divide certain property among the creditors (s. 30(1)(j)). The ultimate purpose of these administrative powers is to manage the estate, in order to provide equitable satisfaction of the creditor's claims. This, then, is the estate-administration stage of bankruptcy, one distinct aspect of which is the distribution of the estate among creditors.

During the property-passing stage of bankruptcy, the trustee is empowered under s. 91 of the Act to set aside certain settlements which have reduced the size of the estate. Thus, s. 91 outlines the circumstances in which a settlement will be voidable at the behest of the trustee in bankruptcy. If a settlement is declared void against the trustee, then the settled property reverts back to the bankrupt's estate, and falls into the possession of the trustee in bankruptcy. Several other provisions of the BIA have relevance to the property-passing stage. For example, s. 94 renders certain assignments of book debts void against the trustee; s. 98(1) empowers the trustee to take possession of any money or proceeds from the sale of settled property to a third party, where the original settlement was void; and s. 99 dictates that while property acquired by the bankrupt after the bankruptcy vests in the trustee, it may be transferred by the bankrupt to a good faith purchaser, unless the trustee intervenes in the transaction (in which case the transaction is void against the trustee).

After-acquired property is also dealt with in s. 68, which constitutes a complete code in respect of a bankrupt's salary, wages or other remuneration. The provision stipulates that after-acquired remuneration will not pass to and vest in the trustee unless the trustee intervenes by applying for a court order directing the payment of the remuneration (or a portion of it) to the trustee (Marzetti v. Marzetti, [1994] 2 S.C.R. 765, at p. 794). Where the trustee obtains such a court order, then the remuneration which passes into his or her possession is also divisible among creditors, even if it would otherwise be exempt from execution or seizure under provincial law. This is because s. 68 operates "notwithstanding section 67(1)", with the result that a provincial exemption for remuneration which would otherwise be incorporated into s. 67(1)(b) is ineffective: Marzetti, at pp. 792-93 and 795. I note that Parliament considered it necessary to exclude explicitly after-acquired remuneration from the operation of s. 67(1)(b), thereby overriding the exempt status of the remuneration under provincial law, in order to ensure that in those circumstances where such remuneration passed to the trustee, it was also divisible among creditors. This supports the view that absent a specific override of s. 67(1)(b), exempt property which passes to and vests in the trustee, whether as a result of ss. 71(2) or 91, will not be divisible among creditors.

Unlike provisions of the Act such as ss. 71(2), 91 or 68, s. 67(1) tells us nothing about the property-passing stage of bankruptcy. Instead, it relates to the estate-administration stage by defining which property in the estate is available to satisfy the claims of creditors. It effectively constitutes a direction to the trustee regarding the disposition of property. Thus, property which is divisible among creditors is defined very broadly in s. 67(1) as:

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

However, the trustee is barred from dividing two categories of property among creditors: property held by the bankrupt in trust for another person (s. 67(1)(a)), and property rendered exempt from execution or seizure under provincial legislation (s. 67(1)(b)). While such property becomes part of the bankrupt's estate in the possession of the trustee, the trustee may not exercise his or her estate distribution powers over it by reason of s. 67.

Thus, it can be seen that ss. 91 and 67 relate to two different stages of 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. This two-stage analysis is similar to the one adopted by Henry J. of the Ontario Supreme Court in Re Pearson (1977), 23 C.B.R. (N.S.) 44. That case was concerned with the issue of whether a trustee in bankruptcy could revoke the designation of a beneficiary under a life insurance plan, and substitute the estate as beneficiary. Although the plan itself was exempt from the BIA , the trustee sought to defeat the exemption by exercising a "power" under s. 47(d) [now s. 67(1)(d)]. Henry J. dismissed the trustee's application, and in doing so characterized the effect of the exemption provisions of the Act as follows, at pp. 48-49:

What comes into the hands of the trustee on the occurrence of the bankruptcy are the rights and interests of the insured in the insurance money and in the contract as they stood at the date of the bankruptcy. When that event occurred, those rights and interests were, by s. 170 of The Insurance Act, exempt from execution or seizure. In my opinion, so far as the creditors of the bankrupt are concerned, that situation crystallized at the time the bankruptcy occurred, and that property by virtue of s. 47(b) [now s. 67(1)(b)] of the Bankruptcy Act was impressed with its character of not being divisible among the creditors, for all the purposes of the bankruptcy.

I adopt this as a correct statement of the law. Therefore, while an asset which is exempt under provincial law passes into the possession of the trustee at the time of bankruptcy, the exemption itself bars the trustee from dividing the asset among creditors where s. 67(1)(b) is operative.

Relating this to the circumstances in the case at bar, at the time of Dr. Ramgotra's bankruptcy application, his property interest in the RRIF passed to and vested in the trustee in bankruptcy by operation of s. 71(2) BIA . Mrs. Ramgotra's future contingent interest as the designated beneficiary under the RRIF was not captured by s. 71(2), since it had been settled on her prior to bankruptcy. It was open to the trustee in bankruptcy to apply to have this settlement set aside under s. 91(2) BIA . As I noted above, the settlement was void under s. 91(2) and, consequently, Mrs. Ramgotra's future contingent interest passed to and vested in the trustee. The trustee in bankruptcy possessed the complete set of property interests associated with the RRIF. But the trustee could not divide the RRIF among creditors because its exempt status under s. 67(1) (b) BIA continued regardless of s. 91. In other words, the role of s. 91 is to bring settled property back into the estate of the bankrupt in the possession of the trustee. Therefore, while s. 91 could be employed to bring Dr. Ramgotra's RRIF fully into the possession of the trustee in bankruptcy, it has no bearing on the issue of whether or not the RRIF is exempt under s. 67(1)(b).

The appellant has argued that when a settlement creating an exempt asset has been set aside under s. 91, then the exempt status itself is no longer effective. In other words, the existence of a valid settlement is a logical precondition to the enforceability of a s. 67(1)(b) exemption. This argument found favour in Re Yewdale, supra, where Tysoe J. stated at p. 204:

While s. 67(1)(b) does provide an exemption for insurance annuities, it cannot be viewed in isolation. An asset can only be properly exempted under s. 67(1)(b) if the transaction creating the asset is valid. If the transaction is void under s. 91 (or any other provision), the exempted asset must be considered to revert to its form prior to the invalid transaction. If its prior form was not an exempted asset, s. 67(1)(b) is not applicable.

With respect, I cannot agree. The effect of s. 91 is to render certain settlements void against the trustee in bankruptcy. However, in the case of a life insurance policy, it must be remembered that what renders it exempt under s. 67(1)(b) is the designation of a beneficiary. According to s. 158(2) of The Saskatchewan Insurance Act, the exempt status of the life insurance policy continues so long as the designation is "in effect". To reach the conclusion of Tysoe J. in Re Yewdale, I would have to find that the designation in the case at bar is no longer "in effect" for the purpose of preventing distribution of the funds in the RRIF to Dr. Ramgotra's creditors, because the designation "is void against the trustee". However, I do not think that the fact a beneficiary designation is void against the trustee under federal legislation necessarily results in it no longer having effect vis-à-vis the claims of creditors under the provincial legislation which s. 67(1)(b) incorporates. As I stated above, ss. 91 and 67(1)(b) are directed at different stages of bankruptcy, and play different roles. Section 91 assists in identifying the property of the bankrupt which comes into the possession of the trustee, whereas s. 67(1)(b) is relevant in determining the property in the trustee's possession over which he or she may exercise his or her administrative powers. I therefore prefer a construction of ss. 91 and 67(1)(b) which recognizes their distinct roles in bankruptcy, as opposed to a construction which holds one to be a precondition of the other.

Therefore, even though Dr. Ramgotra effected a void settlement under the second branch of s. 91(2) when he designated his wife as beneficiary of his RRIF, that does 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), meaning that it is not property which is divisible among creditors. Given this, even though 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 Dr. Ramgotra prior to applying for his discharge: Thompson v. Coulombe (1984), 54 C.B.R. (N.S.) 254 (Que. C.A.), at p. 257; Zemlak (Trustee of) v. Zemlak (1987), 66 C.B.R. (N.S.) 1 (Sask. C.A.), at pp. 9 and 11. Despite the fact that Dr. Ramgotra's settlement was void against the trustee, the exempt status of the RRIF is an absolute bar to the appellant bank's claim.

4. The Application of Provincial Fraud Legislation

In the lower courts which have considered the issue presented by the case at bar, considerable concern has been expressed over the fact that the conversion of a non-exempt asset into an exempt asset is a convenient means for a bankrupt to reduce the size of his or her estate available to creditors. Thus, the bankrupt's intention in effecting a transaction, and the impact of the transaction on creditors, have both been important factors directing the jurisprudence related to ss. 91 and 67(1) (b) BIA . Of course, in the case at bar, Dr. Ramgotra acted in good faith, and not for the purpose of defeating his creditors' claims. One could well imagine more troubling circumstances, however.

In her case comment on the Saskatchewan Court of Appeal decision in the instant case Lisa H. Kerbel Caplan ((1994), 26 C.B.R. (3d) 252), argues that at common law, the role of intention has focused "on the settlor's intention that the donee hold the settled property in its current form or in a traceable form", and not on the settlor's purpose in making a settlement (at p. 253). Like her, I am of the view that 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 (or territorial) fraud legislation: Fraudulent Conveyances Act, R.S.N. 1990, c. F-24, s. 3; Assignments and Preferences Act, R.S.N.S. 1989, c. 25, s. 4; Assignments and Preferences Act, R.S.N.B. 1973, c. A-16, s. 2; Frauds on Creditors Act, R.S.P.E.I. 1988, c. F-15, s. 2; Civil Code of Québec, art. 1631 ("Paulian Action"); Assignments and Preferences Act, R.S.O. 1990, c. A.33, s. 4(1), and Fraudulent Conveyances Act, R.S.O. 1990, c. F.29, s. 2; The Fraudulent Conveyances Act, R.S.M. 1987, c. F160, s. 2; The Fraudulent Preferences Act, R.S.S. 1978, c. F-21, s. 3; Fraudulent Preferences Act, R.S.A. 1980, c. F-18, s. 2; Fraudulent Conveyance Act, R.S.B.C. 1979, c. 142, s. 1, and Fraudulent Preference Act, R.S.B.C. 1979, c. 143, s. 3; Fraudulent Preferences and Conveyances Act, R.S.Y. 1986, c. 72, s. 2. (Note: the Northwest Territories has no legislation on fraudulent conveyances or preferences.) In fact, several lower courts have suggested that bad faith settlements, made for the purpose of defeating creditors, may be set aside under these statutes. Although it is not strictly necessary to decide this issue in the case at bar, since Dr. Ramgotra was found by Baynton J. to have acted in good faith, I am mindful of the need to provide some guidance to bankrupts, trustees, creditors and lower courts.

Generally, where a conveyance has rendered property exempt from execution or seizure by creditors under provincial legislation, but the conveyance itself is void against those creditors pursuant to provincial fraud legislation, then the exemption is not in effect vis-à-vis those creditors. In terms of the law of bankruptcy, I would hold that a bankrupt cannot enjoy the benefit of a s. 67(1)(b) exemption where the property in question became exempt by reason of a fraudulent conveyance declared void pursuant to provincial law. I note that Houlden J. concluded in Geraci (trial), at p. 92, that a s. 67(1)(b) exemption has force even where the property became exempt under provincial law as a result of a fraudulent conveyance. I do not agree. In my view, a precondition to s. 67(1)(b) protection is that the property in question is exempt against the claims of creditors under provincial law. A fraudulent conveyance rendering property exempt is void against creditors, as illustrated by s. 3 of the Saskatchewan Act:

3. ... every gift, conveyance, assignment or transfer, delivery over or payment of goods, chattels or effects or of bills, bonds, notes or securities or of shares, dividends, premiums or bonus in a bank, company or corporation, or of any other property real or personal, made by a person at a time when he is in insolvent circumstances or is unable to pay his debts in full or knows that he is on the eve of insolvency, with intent to defeat, hinder, delay or prejudice his creditors or any one or more of them, is void as against the creditor or creditors injured, delayed or prejudiced. [Emphasis added.]

Since a fraudulent conveyance rendering property exempt is void against creditors by operation of provincial law, the property is not exempt from execution or seizure by creditors under provincial law, as required by s. 67(1) (b) BIA . Section 67(1)(b) therefore has no application, once a fraudulent conveyance is found to have occurred.

Can a life insurance beneficiary designation be set aside as a fraudulent conveyance of property? This question has generated some conflict in the lower courts. In Geraci (trial), for example, Houlden J. found at p. 89 that the beneficiary designation could be attacked under s. 2 of Ontario's Act, since it was a conveyance made with the fraudulent intent of defeating creditors. The Court of Appeal, per Jessup J.A., agreed, at p. 259:

I agree with the learned trial Judge that the declaration made by the bankrupt, changing the beneficiary of his policy of insurance to his wife while he was insolvent, was a fraudulent conveyance within the meaning of s. 2 of The Fraudulent Conveyances Act and, if it were necessary to do so, I would hold that it was therefore fraudulent and void against his creditors and that such a void designation does not attract the protection against creditors provided by either s. 162 or s. 157 of the present Insurance Act.

Geraci was not followed on this point in Sovereign General Insurance Co. v. Dale (1988), 32 B.C.L.R. (2d) 226 (S.C.). There, the defendant had transferred the funds from a non-exempt RRSP into an insurance annuity which was exempt from execution or seizure under s. 147 of British Columbia's Insurance Act, R.S.B.C. 1979, c. 200, because his wife was the designated beneficiary of the plan. The plaintiff, who had obtained judgment against the defendant, sought to set aside the transfer of the RRSP funds into the annuity on the basis that it was a fraudulent conveyance. Gibbs J. held that the defendant had the necessary intent for fraud because he effected the fund transfer in order to hinder the plaintiff from realizing on its judgment. He then turned to the question of whether the transfer was a "disposition of property" which could be set aside under the British Columbia's Fraudulent Conveyance Act. After stating that Jessup J.A.'s reasons in Geraci were obiter on this point, and that the issue remained unresolved, Gibbs J. held at pp. 230-31:

In my opinion, it is not appropriate to look at the consequences that flow from the naming of the wife as beneficiary under the insurance contract to determine whether an interest in property has been disposed of. That seems to have happened in a number of the cases cited. With respect, I think that is the wrong approach for whatever statutory protection might or might not be afforded to the "interest" conveyed cannot be determinative of what the "interest" is. In my view, the task must be to inquire whether the "interest", if that is the correct terminology, has any of the commonly understood incidents of property. When I follow that course I am led to the conclusion that it does not.

...

Until a vesting occurs, the expression "interest" is probably nothing more than a convenient label to describe a future expectation which may never become a reality; for instance, the insured may change the beneficiary, or the beneficiary may predecease the insured. Until vesting, if that ever occurs, the expectation of the beneficiary is not real property, or personalty; it is not a chose in action; it is not merchantable; it is not exigible. At the most it is expectancy based upon a contingency. It has been held to be within the broad definition of property in the Bankruptcy Act which includes a future contingent interest incident to property, but it does not follow that it is subsumed within the single word "property" in the Fraudulent Conveyance Act. In my opinion, it is not.

Thus, according to Gibbs J., the transfer of funds at issue was not a conveyance of "property" which could be set aside under the British Columbia Act.

I do not intend to resolve this issue in the case at bar. However, I would make the following observation. The technical question of whether a life insurance beneficiary designation is a "property conveyance" does not arise under art. 1631 of the Civil Code of Québec, which allows creditors to set aside fraudulent "juridical acts":

1631. A creditor who suffers prejudice through a juridical act made by his debtor in fraud of his rights, in particular an act by which he renders or seeks to render himself insolvent, or by which, being insolvent, he grants preference to another creditor may obtain a declaration that the act may not be set up against him.

However, the other provincial statutes all refer to some sort of "conveyance" or "disposition" of "property" with the "intent to defeat" creditors' claims. All the provincial fraud provisions are clearly remedial in nature, and their purpose is to ensure that creditors may set aside a broad range of transactions involving a broad range of property interests, where such transactions were effected for the purpose of defeating the legitimate claims of creditors. Therefore, the statutes should be given the fair, large and liberal construction and interpretation that best ensures the attainment of their objects, as required by provincial statutory interpretation legislation (see, for example, The Interpretation Act, 1993, S.S. 1993, c. I-11.1, s. 10). I agree with the following observation by Professor Dunlop in Creditor-Debtor Law in Canada (2nd ed. 1995), at p. 598, that the purpose of fraudulent conveyance legislation:

... is to strike down all conveyances of property made with the intention of delaying, hindering or defrauding creditors and others except for conveyances made for good consideration and bona fide to persons not having notice of such fraud. The legislation is couched in very general terms and should be interpreted liberally. [Emphasis added.]

Given the need for a broad and liberal interpretation, I would suggest that 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".

5. The Application of the Statute of Elizabeth

In the Court of Appeal, Jackson J.A. suggested that An Acte agaynst fraudulent Deedes Gyftes Alienations, &c. (Statute of Elizabeth), 1571 (Eng.) 13 Eliz. 1, c. 5, would be available to challenge fraudulent transactions rendering property exempt from execution or seizure. The Statute of Elizabeth is the model for the fraudulent conveyance legislation of the common law provinces, as discussed above. Its archaic language states that:

... all and every Feoffement Gyfte Graunte Alienation Bargayne and Conveyaunce of Landes Tenements Hereditams Goodes and Catalls or of any of them [[which were] contryved of Malyce Fraude Covyne Collusion or Guyle [with the] Purpose and Intent to delaye hynder or defraude Creditors] [shall be] clearely and utterly voyde frustrate and of none Effecte.

In Nicholson v. Milne (1989), 74 C.B.R. (N.S.) 263 (Alta. Q.B.), Virtue J. considered the applicability of the Statute of Elizabeth in a situation where the defendants had each rendered RRSP and mutual funds exempt under Alberta's Insurance Act, R.S.A. 1980, c. I-5, s. 265, by transferring the funds into life insurance policies under which family members were named as beneficiaries. The issue before Virtue J. was whether the transfers could be set aside under Alberta's Fraudulent Preferences Act, or alternatively under the Statute of Elizabeth. He observed that the principal difference between the two statutes was that the provincial legislation required the gift or conveyance to have been made when 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, whereas this was not a requirement under the Statute of Elizabeth. He then decided to proceed under the Statute of Elizabeth, in order to avoid dealing with the insolvency issue. He found that the fund transfers were effected for the purpose of defeating creditors, and then decided that the transfers, and the beneficiary designations, were "conveyances" subject to the Statute of Elizabeth, at p. 274:

The term "Conveyance" (like the term transfer) is itself wide enough to encompass every method of disposing of, or parting with, property or an interest therein, absolutely or conditionally. The word is of general meaning and, given a liberal interpretation, includes the transactions here which resulted in the transfer of entitlement to the benefits of the R.R.S.P. property from the debtor to another in such a way as to remove it from execution by creditors. In my view, such a transaction comes within the meaning of "conveyance", as that term is used in the Statute of Elizabeth.

Thus, the fraudulent transfers and beneficiary designations were void, and the funds in the life insurance policies were not exempt from execution or seizure under the Insurance Act (see also Technurbe Building Construction Ltd. v. McKinley (1989), 76 C.B.R. (N.S.) 106 (Alta. Q.B.)).

Several of the provincial fraudulent conveyance statutes impose an insolvency requirement, like that contained in Alberta's Act: Nova Scotia, New Brunswick, Prince Edward Island, Saskatchewan and Yukon. Thus, assuming without deciding that the Statute of Elizabeth remains in force in those jurisdictions, it would allow creditors to challenge fraudulent conveyances 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.

There remains some controversy as to whether the Statute of Elizabeth is in force in all of the common law provinces and territories. Professor Dunlop discusses this issue in Creditor-Debtor Law in Canada, supra, and suggests at p. 597 that the Statute has likely been repealed in British Columbia, Manitoba, Newfoundland and Ontario, where pure fraudulent conveyance legislation (i.e., legislation without the insolvency requirement) has been enacted. Since the matter was not argued in the case at bar, it would be inappropriate to decide here whether the Statute of Elizabeth remains in force in any particular jurisdiction. Suffice it to say that if the Statute is in force in a province or territory, then it will be available to challenge fraudulent conveyances rendering property exempt from execution or seizure under provincial law. I should add that my comments above concerning the issue of whether a life insurance beneficiary designation is a "property conveyance" apply equally in the case of the Statute of Elizabeth.

6. Conclusion

When Dr. Ramgotra transferred the funds from his two RRSPs into an RRIF under which his wife was the designated 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 though 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 Dr. Ramgotra's creditors and, in particular, the appellant bank.

The appeal is therefore dismissed with costs to the respondents.