Canadian Debt Growing

Locke Consulting sign
May 26, 2021

It is not just the Canadian National Debt that is growing, but Canadian Consumer Debt is growing too, exponentially.  There are several reasons for the growth in debt but all point in the direction of the government as the main cause. 

The government has encouraged Canadians to collapse RRSPs in order to purchase real estate.

The practice of collapsing RRSPs has been commonplace for decades, the present government did not start the practice, but they did expand it.  Collapsing RRSPs creates one or both of two kinds of debt.  The RRSP money must be repaid into an RRSP over a span of up to fifteen years.  The new contributions are not subject to tax deductions, as the original contributions were, so they are made from after-tax income.  Obviously that income is not available for other household expenditures, that may well end up on credit cards or other forms of debt. 

The other debt created by collapsing RRSPs to buy real property is tax debt.  If funds are not recontributed in any of the fifteen (allowed) years a prorated amount of the collapsed fund is deemed to be income for that year and the consumer must pay the taxes, plus interest and penalties that may accrue on late payments.   In some cases, banks have loaned the money to the consumer for the RRSP that is then converted to a Homebuyers Plan, creating even more debt.

The government, through the Bank of Canada has control, or great influence, over fiscal policy, and interest rates.

Interest rates do not set themselves they are set by the central bank in accordance with fiscal policy determined by the minister of Finance.  Low interest rates encourage people to get deeper into debt by making debt appear affordable and attractive to consumers.  There would be a great deal of hesitancy about buying a $640,000 dollar home in London, Ontario if interest rates were higher.  That value is up from December 2020 when the average price for a detached home was $480,000.00.

The government has failed to implement logical and meaningful lender regulations.

All banks have posted rates and actual lending rates.  The posted rate is the rate on the wall at the bank or posted online on the bank’s website.  A posted rate of 3.7% does not mean that you will or must borrow money at that rate.  Banks all discount their posted rates – but caveat emptor, that may be a debt trap.  If the bank grants you a mortgage at 1.35% you might think you have “scored”, well at least until you sell your house and pay out the mortgage and learn that you must pay the interest rate differential based on the “posted” rate.  The government has manifestly failed to deal with this issue for decades – again this is not a partisan issue.

Payday loan companies continue to thrive, lending to the most vulnerable members of society.  They offer loans and lines of credit as well a smorgasbord of other lending products.  Thousands of welfare and pension recipients pay monthly deferral fees or repay the loans monthly prior to reborrowing to get through the next month. 

The government has failed to regulate credit card lending.

Kudos go to the Quebec government for requiring that new borrowing on credit cards must be paid back at the rate of least 5% of the outstanding balance each month. Meanwhile, in the rest of Canada the minimum monthly payment on credit cards is barely sufficient to meet the interest requirements of the credit card.  The result is that a debt on a bank issued credit card would take more than 400 years to pay off using the bank’s repayment scheme.

The other major issue with credit cards is the incredibly high interest rates that average about 19% while the overnight rate (the rate at which the lender borrows the money) is 0.25% (quarter of one percent).  Ideally, interest rates on mortgages would be higher and credit card rates would be lower.  It is estimated that Canadians are charging some $710,000,000,000.00 per annum on bank issued credit cards.  In fairness if the outstanding statement balance is paid in full each month no interest accrues on the card.  However, since the billing date and payment date are usually about two weeks apart the result is that a regular card user is constantly in debt since they only pay off the statement amount, not the full balance.

The government used the pandemic to push debt on small businesses.

During the rolling lockdowns many small businesses, up to 850,000 of them, received the government’s CEBA loans which are loaned by banks and (the banks are) guaranteed by the government.  The total value to the banks, after converting to term loans, could be up to $4,600,000,000.00 in interest alone.  Many of the businesses taking on these loans did so to survive the government’s own, highly questionable, lockdown measures.

During the lockdowns, the government pushed debt onto consumers.

Credit card spending went through the roof during the lockdown with companies like Amazon reporting 200% increases in sales and profits.  Other big box stores benefitted immensely as small businesses were forced to close down, some permanently.  Online shopping reached dizzying heights while people were forced to shop from home.  The government also pushed out its CERB payments, over $82,000,000,000.00 has been shovelled out without regard to qualifying criteria.  Many pensioners and other benefits recipients received the benefits, even though they did not qualify.  However, some were advised by provincial ODSP and Welfare administrators to apply, and in spite of the CRA knowing that they were in receipt of other benefits, they received funds.

The government tried to push through an omnibus bill that would have made it an offence to have received unqualified funds.  The penalties would have included the requirement to pay back triple the amount received as well as the prospects of either, or both, a fine and a jail sentence.  There was also income tax consequences for recipients qualified or not, which naturally come with interest and penalties.  The tax consequences still exist even though the bill containing the penalties was defeated by the opposition.

All tax debts originate with the government and become consuming and threaten the financial stability of small businesses as well as consumers

Canadians pay more taxes than probably any other people on earth.  Some of the taxes may make sense, after all the government has to maintain infrastructure, pay civil servants, keep and army, etc.  But many taxes are just gratuitous money grabs that have absolutely no practical purpose.  The carbon tax falls into this, latter, category, it does nothing to reduce carbon emissions and has a very complex credit/debit system.  In fact, some taxes probably cost about as much to administer as they generate in revenue.  

Another problem with taxes is that in spite of al the different labels they have, they end up in the same general pool of funds for governments to give to corporate friends (think about Maple Foods and Loblaws) and to pillage for other projects.  One might propose (tongue firmly in cheek) that we have only one form of taxation and call it “tax”, it could be based of a percentage of income, no tax returns need be filed, the banks can administer it by seizing a percentage of everyone’s deposits.

And that comment is a good segue back into tax debts, tax debts accumulate because not all taxes are deducted from sources of revenue.  Taxes must be self-reported and self-paid.  Small businesses and middle-income consumers often have tax bills, some of which remain unpaid and accrue penalties and interest.

Mortgage debt has been growing exponentially.

In the last four years we have seen house prices more than double in many markets with the result that mortgage financing is growing.  The two drivers of mortgage financing growth have been purchases and debt consolidation.  Both result in consumers taking on far more debt than they can logically afford.  Consolidating credit card, line of credit and loan debts into mortgages is economic madness for consumers.  This madness only creates the illusion of paying off debts, moving a $60,000.00 unsecured debt from a series of credit cards to a mortgage doesn’t make the debt go away, it just shuffles it around.

Sadly, shortly after feeling the cashflow relief, from a consolidation, the majority of consumers go right back to using the credit cards and incurring even more debt.  In the last year not only has the national debt reached astronomical heights but so has consumer debt, with no end in sight for either.  The government has the ability to apply filters and controls to stem the build up of all debt, but seems to lack the will.