Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Canadian Debt: Much Ado About Nothing?

By John Nicola, CLU, CHFC, CFP

As we Canadians spend the beginning of 2011 recovering from our annual Christmas spending spree, we are reminded by none other than Mark Carney (governor of the Bank of Canada) and our Minister of Finance (Jim Flaherty) that we had to mend our profligate ways.

It’s hard to argue with their numbers at first glance. Let’s consider the three charts below.



They all show an alarming trend of consumer debt increasing in both absolute terms and as a percentage of income. Specifically:

  • Debt-to-disposable income has increased from 89% to 148% (higher than Americans) since 1990
  • Debt-to-net worth has increased from 18% to 24% since 2000
  • Mortgage debt has risen from $255-billion to $891-billion and consumer credit has reached a lofty level of $422-billion from a paltry $93-billion
  • Our savings rate has dropped from 13.2% in 1990 to 4.6% in 2009

It certainly appears that we are becoming the wastrels of the western world.

Are we really more hedonistic than our American cousins? Is our housing market headed for a collapse similar to those experienced by not only the U.S., but Ireland, England and Spain? Don’t we realize that we need to save for our old age?

Perhaps there is another way to see this picture. Look at the image to your right. Is it one of a beautiful woman or an ugly hag (or is it sometimes both)?

Well as far as Canadians and their spending is concerned, we know about what is ugly. Is there any data that might counter the image of Canadian spend thrift?

I think there is and I went to StatsCAn to see if I could find any information that might mitigate our rising levels of debt. I spoke to a very nice young man named Matthew Hoffart who was most helpful. StatsCan has a well-deserved global reputation for detailed and accurate collection of data.

Before I get into that information, let me state that I strongly believe that one cannot borrow one’s way into prosperity. That is true for people, companies and governments, I also believe that one should have all relevant information before drawing conclusions. When it comes to the wasteful ways of Canadians, I think some pieces are missing from the puzzle.

First Mathew guided me to a section of their website that provides definitions for some of the key statistics mentioned earlier.

Savings Rate
The ratio between net saving of the persons and unincorporated business sector and personal disposable income, expressed in percentage.

Personal Income
The sum of all incomes received by persons residing in Canada, whether factor earnings from current production or current transfers from other sectors, plus the investment income that associations of individuals accumulate on their own behalf or on behalf of persons.

Consumer Credit
Credit extended to persons for purchasing consumer goods and services.

Source: Statistics Canada

Personal Debt & Corporate Savings

One thing that I could not help but notice about these definitions is that they refer to “persons.”

StatsCan has an entire additional set of data about debt and savings rates for corporations. When we look at the ratios above, they do not include what occurs in the corporate sector. So why would that matter?

Let’s examine the story of Dr. Andy Williams, a successful dentist who has been practicing for ten years. We’ll use the following assumptions:

  • He is incorporated.
  • His practice grosses $1-million and nets $400,000/yr.
  • He takes no salary from his company, but instead receives $125,000 in dividends as does his wife Jane. They use all of the after-tax income to fund their lifestyle.
  • They save about $100,000 per year after tax in their company and add that to their long-term retirement savings.
  • They have a $500,000 line of credit secured by a collateral mortgage on their home. They have used it from time to time for both investment purposes and to upgrade their professional office. Their company funds all payments for this line of credit because the assets are owned in their professional corporation. The reason they use their house vs. other assets is because they get a better rate from the bank.
  • If Andy were to sell his practice today, it would be worth about $750,000.

How would all of this affect our national data on spending, debt and savings rates?

When I spoke to StatsCan they confirmed the following to me:

  • The Williams’ disposable income will be their current dividend income less taxes. It will not include the $100,000 they save after taxes in their company.
  • Their corporate savings will not count towards their personal savings rate (in their case, their savings rate is officially zero; in actual fact, it is close to 30% of their combined personal and corporate after-tax income).
  • None of their investment income in the company counts towards their disposable income.
  • Their $500,000 collateral mortgage shows up as personal debt (to the extent it is being used) even though all of the funds are invested in the company.
  • Despite the fact that the practice has a market value of $750,000 and is part of their net worth, only a fraction of this value will be part of their net worth as far as Statscan is concerned. The goodwill portion (likely about $500,000 in Andy’s case) will not be part of their net worth until the practice is sold and the goodwill formally realized.

Essentially, it would be very difficult for StatsCan to discern how many of the private corporations in Canada are just incorporated professionals and business owners vs. larger enterprises. How much of a business owners’ retained earnings are in fact savings earmarked for retirement?

Professionals have only been able to incorporate in Canada since about 1980 and for most provinces the use of professional corporations has increased dramatically over the last 10 years or so.

There are at least 300,000 professionals in Canada who can incorporate. Everyone from doctors, dentists, lawyers and accountants to real estate agents and financial advisors. How many have? How much do they save corporately vs. personally? How much more is their total income than their personal income?

The fact of the matter is these questions cannot be accurately answered today. I have passed this information on to StatsCan to see if more data can be extracted that might provide a more complete answer to what Canadians may actually be doing financially.

The Canadian Situation

There is, however, some additional information that may help shed some light on how good or bad our colletctive financial situation actually is. After all, if we are borrowing at a much faster rate than our incomes are growing and our savings rates are dropping, then some or all of the following should also be true:

  • Our net worth (assets minus liabilities) should at best be flat and more likely declining.
  • Our equity in our homes should be falling as a percentage of the value of those homes (unless our home values have been increasing at much faster rates than other countries)

The charts below tell a different story; specifically since 1990:

  • The net worth of Canadians has increased from $1.8-trillion to $5.8-trillion since 1990. If one takes into account that prices have increased by about 50% in that time frame then our collective net worth is $3.8-trillion ($1990) or more than double in real terms.
  • The average Canadian’s equity in their home was 69% in 1990. Today it is 68%. The chart above from The Economist shows that, since 1990, house prices in Canada have risen less than Australia, England and the U.S. (even after the corrections in the U.S. and the UK).  What makes this more unusual is that mortgage rates in Australia are far higher than in Canada (I went to one website which had the “hottest” mortgage rate at 6.81% with the average of the major banks at 7.3%).  At the same time, house prices have risen there by 18.4% in the last year alone compared to 4.5% in Canada. Perhaps Australia is in a housing bubble, but higher mortgage rates do not seem to be having much of an impact. So are our high prices only a result of record low mortgage rates?
  • Net worth in Canada has increased from 425% of GDP to 610%. At the same time, debt-to-net worth has gone from about 21.5% to 24%. To use an example, a person with a net worth of $1-million in 1990 averaged $215,000 of debt. Today (relative to GDP) that person has a net worth of $1,450,000 with debt of about $350,000. So debt has risen in this case by $135,000 while net worth has increased by $450,000.
  • Corporate savings were about $6-billion in 1990. This was a recession year, so if we take the average of the previous three years, corporate savings were about $19-billion/yr. In 2009 they were $65-billion (another recession year) and averaged $90-billion for the three previous years. That is 200% more after adjusting for inflation. How much of those savings are really personal?

It would appear that at the personal level we have increased our debt significantly.  At the same time, even after adjusting for the effects of inflation, we have seen substantial gains in net worth and a stable level of home equity.  Additionally, corporate savings have never been higher and government debt is far lower as a percentage of GDP than it was in the early 1990’s.

I certainly do not encourage the use of debt for personal consumption, but it seems to me we have to make sure we are looking at the right data in the right way – there are almost always two sides to every story.

As William Faulkner once wrote: