Tax Season: Add Debt Reduction Discussion to the Mix

On February 17, 2011, the Vanier Institute of the Family released its 12^th report on Canadian family finances. Entitled The Current State of Canadian Family Finances 2010 Report, this document declares that "for far too many, there is too little income, too much spending, too little saving and too much debt.î Leading tax and financial advisors will want to discuss this issue during tax season, in order to find proactive ways to increase after-tax income which can contribute to debt reduction.

According to the report, average family debt has surpassed $100,000 and the debt-to-income ration is 150%. This means that for every $100 received in after-tax income, a Canadian household, on average, owes $150.00. In comparison, average family debt in 1990 was $58,600 and the debt-to-income ratio was 93%. When you factor in inflation, the Report calculates that this is a 78% increase in household debt since 1990.

And despite new investment vehicles like the TFSA, savings rates have declined during the past two decades. In 1990, the average Canadian family was able to save $8000 annually, a savings rate of 13%. This has dropped to $2500 in 2010, a savings rate of 4.2%.

Advisors should be discussing how this trend can be reversed. A possible culprit is demographicsóboomers are using the savings they created in the last decade to fund retirement or support children and parents. However, for others, savings room may possibly be eaten up for a number of other reasons, for example, overpaid taxes and too much consumer debt. The former issue can be addressed with proper tax planning; the later with a disciplined plan to replace bad debt (consumer goods) with good debt (asset-backed).