According to a September 11 report from Stats Canada, households increased holdings of financial assets and reduced non-mortgage and consumer debt during the second quarter this year. The household debt service ratio, which is the total obligated payments of principal and interest on credit market debt over household disposable income, had the largest decline on record. It dropped from 14.54% to 12.40%. Incredibly, there was only $1.58% of credit market debt for every dollar of household disposable income. But, is the good news temporary?
There was also an increase in household disposable income of 10.8%, largely due to an increase in government support. When coupled with a decline of 13.7% in household spending, the savings rate in Canada increase to 28.2% from 7.6% in the first quarter of the year and 3.6% in the last quarter of 2019.
Some of these positive results were, however, the result of government transfers to households to mitigate the effect of the pandemic on those individuals whose incomes dropped or were economically disadvantaged. Therefore, these good results may be temporarily positive.
Importantly, relating to the threat of insolvency as uncertainty continues with the pandemic, the report points out: “as payment deferrals and income replacement programs wrap up, consumer insolvencies are likely to increase to recession levels at the end of this year and into the next.” Those clients affected by the unemployment rate, which the authors expect will take until mid 2021 to come back to pre-pandemic levels, are particularly vulnerable.
This month’s transition out of emergency relief benefits has also brought with it big tax obligations: the payment of tax balances due for the 2019 tax year, together with quarterly tax instalments for June and September are due on September 30. Further, Canadians must start planning how they will pay their 2020 taxes given that CERB and other benefits received are taxable.
Bottom Line: Despite the good job Canadians are doing in shoring up their balance sheets, there are some financial storm clouds on the horizon in the final quarter of the year. That makes the now a good time for tax and financial advisors to proactively kick-start new conversations to plan for a tax-efficient 2020 that includes proactive tax audit defence.
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