small business owner during the pandemic
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Tax obligations and student loans fuelled a 3.3% rise in average unsecured debt levels among Canadians filing for insolvency in 2021, according to a study from Toronto-based licensed insolvency trustee Hoyes, Michlos & Associates Inc.

Canadians filing for insolvency owed an average of $50,484 in unsecured debt in 2021, up from $48,894 in 2020.

Forty percent of Canadians filling for insolvency in 2021 had outstanding tax obligations, up from 33% the year before. Among those filers, the average amount of tax debt owed was $19,776, up from $15,866 the year before. Insolvent tax debtors owed an average of $63,572 in total unsecured debt, 25.3% more than the average insolvent debtor.

Much of the increase in the percentage of filers with tax debt in 2021 was due to obligations created by the federal government’s pandemic recovery benefits, the study’s authors suggested, which people received in 2020 “with no or insufficient tax withheld at source.”

“Additionally, many self-employed and small business debtors stopped making HST payments to manage cash flow during the pandemic,” the authors stated. “With prolonged lockdowns and reduced revenue, these individuals were unable to catch up on skipped remittances.”

The study’s authors believe that tax-debt driven insolvencies will increase in 2022 as the Canada Revenue Agency increases collection actions, which slowed during the pandemic, and ends interest relief on Covid-19 benefit obligations.

“With the upcoming filing deadline for 2021 taxes, more Canadians will face an outstanding tax bill when they file their taxes, especially those who received continued Covid-19 benefits,” the authors said.

The percentage of insolvency filers with student debt increased to 22.3% in 2021, up from 20.4% in 2020. Among those filers, the average amount of student debt owed was $17,005, up from $15,251 in 2020. Insolvent student loan debtors owed an average of $52,112, 3.2% more than the average insolvent debtor.

“The pandemic has made repayment conditions worse for many millennials who are more likely to work in precarious employment impacted by Covid-19 lockdowns,” the study’s authors said.

Canadians were less likely to file a bankruptcy or consumer proposal due to credit card debt and personal loans in 2021, the study found. Average credit card balances among all insolvent debtors declined 9.3% compared to the prior year, while personal loans fell 2.0%.

Earlier this month, the federal Office of the Superintendent of Bankruptcy reported that consumer insolvencies declined by 6.6% in 2021 compared to the previous year, while business insolvencies were down 11.0% over the same period.

In the consumer sector, bankruptcies declined by 16.5% from the previous year, while consumer proposals, which make up the majority (69.5%) of consumer insolvency activity, declined by just 1.5% from the previous year.