One of the pervasive myths of start-up entrepreneurship is that the successful entrepreneur typically uses unsecured thirdparty financing to get a new venture off the ground, so as to limit personal financial exposure should the business go belly up. The reality is, however, that the vast majority of new businesses are not financed by venture capitalists. For the most part, startups remain heavily financed from personal savings. This factor tends to aggravate the consequences of business failure, which in its most severe form results in the personal bankruptcy of the unsuccessful entrepreneur. In an unexpected move this summer, the federal government made changes to the law of bankruptcy that considerably benefit the small business owner facing the challenges of personal insolvency.

On July 7, 2008, amendments to the Bankruptcy and Insolvency Act came into effect which now provide that Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Deferred Profit Sharing Plans (DPSPs) are exempt from seizure by business (and other) creditors in a bankruptcy. Prior to these amendments, such personal savings – often built up over a lifetime of contribution – could be seized by creditors in a personal bankruptcy. This often had disastrous consequences for the small business owner presiding over a failed enterprise, especially for those owners in the twilight years of their earning capacity.

These changes remedy a prior inconsistency in the law of bankruptcy thought to be unfair to those who derived their primary income through self-employment. Previously, contributions to private pension plans were exempt from seizure in a bankruptcy. Small business owners tend not to enjoy the benefit of a private pension plan and rely on RRSPs as their primary source of retirement savings. In order to protect his or her RRSP contributions prior to these legislative changes, the small business owner would have had to purchase so-called “segregated” investments, which tend to be more expensive than ordinary registered investments but have the benefit of being shielded from creditors in a bankruptcy. The new bankruptcy law changes mean that the retirement security of small business owners is safeguarded in the same way that private pension contributions are, without the expense of purchasing the additional protection of a segregated investment. One caveat bears keeping in mind. Contributions made to one’s RRSP within the twelve month period prior to bankruptcy are not shielded from seizure by creditors under the new legislative changes. This limit prevents a debtor from evading his or her creditors by using available RRSP contribution room just prior to declaring bankruptcy.

In addition to the increased debtor protection brought about by these changes, the federal government introduced unprecedented wage protection measures this summer with the Wage Earner Protection Program Act and regulations. This legislation creates a super-priority for wage earners over other creditors, including secured creditors, in a bankruptcy or receivership. Employees who are owed wages in the six month period prior to the bankruptcy or receivership of their employer will be able to claim up to a maximum of $3,000 for unpaid wages, less income tax and other deductions.

While we’ve yet to see how this flurry of legislative activity will work itself out in practice, one thing is certain, there is nothing like the threat of an election to spur lawmakers into action, even during the summer months.