Seniors and Tax Debt: Solutions to Protect Assets

There is a disturbing trend in Canadian personal finance: the indebted senior. Unfortunately seniors represent the fastest-growing demographic in Canada for debt accumulation.

So why is this happening? I thought seniors had money.

Traditionally seniors DID have money, or at least they did when I was growing up, and many still do today. But more and more seniors are in debt than ever before today for various reasons:

  1. People are living longer – the average life expectancy has increased significantly over the past few decades, and the longer we live, the longer we are retired; the longer we are retired, the more money we need to have saved for that time period.
  2. People are saving less – consumer spending has trended upwards in the last few decades, and the more we spend, the less we save; in an era of lower-paying, less secure jobs with reduced benefits such as pension, we’ll all have smaller retirement nest eggs; and many pensions are being found to be more and more underfunded.
  3. Seniors are helping their adult children – we are seeing seniors help their adult children because those adult children are finding employment tougher than ever and housing more expensive than ever; many seniors have borrowed in order to help their kids with large downpayments on houses, and they may have even co-signed mortgages for them, putting their own balance sheets into poor shape.
  4. Seniors are buying more cars than ever – likely due to attractive interest rates and incentives, more seniors than ever before are carrying car loans; and their fixed pensions may not be as generous as they had anticipated, making everyday expenses more strained.
  5. Income tax debt – an area of personal finance that is often underestimated by seniors is income tax; many seniors spent their working lives having tax deducted from their payroll, so they never really noticed the impact; but in retirement, many pensions are paid in gross (before-tax) dollars, and seniors spend as though it was in net figures, so they end up owing significant taxes at the end of the year; often this figure can be daunting enough on a fixed income for seniors to be unable to pay it off, and the penalties and interest then start to kick in and balloon the number even further.

 

For example, a senior owes $3,000 in income tax because they were not remitting income tax installments to Canada Revenue Agency. Now, they not only have to pay these arrears, but also keep remitting ongoing tax. Cash flow gets crunched & the debt continues increasing.
Canada Revenue Agency then has broad powers to collect these taxes.

  1. Register a charge (lien) against your home equity. When you (or your estate executor) go to sell your house eventually, this amount comes off the top like a mortgage to CRA, leaving less for your heirs.
  2. Garnishees on your employer pension or bank account. AND, they can withhold your Canada Pension Plan or Old Age Security pension until arrears are paid. And you can be sure that they do this. But what do you live off until then?

 

With tax issues, it’s always better safe than sorry, so if you can pay down your income tax owing – even in agreed-upon installments with CRA – you reduce the chance that such actions are taken against you. Or better yet, make sure you are paying the tax on your pensions as you go. Don’t live off the before-tax, because much of that is not yours to spend.