Saturday, April 1

Posthaste: Rise in tax-driven insolvencies ‘just the tip of the iceberg,’ warns study

Good morning!

Canadians’ finances have fared better than expected during the pandemic, with consumer insolvencies on the decline rather than on the rise, as you would normally expect in a downturn.

Insolvencies, kept in check by low interest rates and government income support, are almost a third lower than they were before the pandemic, finds a new study by insolvency trustees Hoyes Michalos.

But the amount insolvent Canadians owe is creeping up. Their average in unsecured debt rose 3.3% in 2021 from the year before to $50,484, the highest Hoyes Michalos’ annual bankruptcy study Joe Debtor has seen since 2016.

What drove that rise wasn’t credit cards and personal loans, but an increase in money owed to the taxman and student loan debt.

“Tax debts have returned as a primary debt driver of consumer insolvencies,” said Doug Hoyes in a release. “This is despite a slowdown in collection activity by the Canada Revenue Agency these last two years.”

Four in 10 insolvent debtors owed taxes — on average $19,776, up from a low of $15,866 the year before. Taxes owed can include income tax, HST, source deductions and property taxes.

Insolvent tax debtors owed on average $63,572 in total unsecured debt, 25.3% more than the average insolvent debtor.

“Much of the increase was due to tax obligations created by CERB and CRB payments made in 2020, which had little to no taxes withheld at source,” said Ted Michalos. “In our view, this increase in tax insolvencies is just the tip of the iceberg.”

Hoyes Michalos sees three changes in 2022 that will push tax-driven insolvencies even higher.

  • CRA collection action on tax debts, which eased somewhat during the pandemic, will ramp back up. “We have already seen a slight uptick in collection behaviour by the CRA. We expect more aggressive action to resume in 2022,” said the study.
  • Interest relief on taxes owing from COVID-19 benefits ends April 30, 2022
  • More Canadians, especially those who received CERB and CRA, will face a tax bill, rather than a refund, this year

Hoyes Michalos also flags student loan debt as a growing concern. Average student loan debt among insolvent debtors that carried it rose 11.5% to $17,005, the highest since their study began in 2011.

“Heavily indebted Canadians just can’t seem to catch a break,” said Michalos. “COVID-19 has caused a decrease in income for our average client, yet their housing and other costs of living continue to soar, with no sign that inflation will slow down any time soon. Insolvent debtors are left with just $200 a month, after paying for necessities, to put towards their debts. It’s unmanageable.”