The Rising Tide of Bankruptcy in Canada: A Growing Challenge for Seniors

Ian Wood, CFP, CIM, MFA-P

As financial advisors, we are privy to the evolving financial landscapes of our clients' lives. In recent months, a concerning trend has emerged in Canada: a sharp rise in insolvency rates.  This alarming development is creating a ripple effect that is impacting an unexpected demographic—our older, retired clients. Increasingly, we are seeing these individuals draw upon their retirement savings to financially support their adult children who are facing bankruptcy.

According to the latest statistics from the Office of the Superintendent of Bankruptcy (OSB) Canada, insolvencies in Canada increased by 13.8% in May 2023 compared to the previous month. More specifically, bankruptcies increased by 19.0% and proposals by 12.2%. The total number of insolvencies in May 2023 was 30.9% higher than in May 2022, with consumer insolvencies seeing a significant jump of 59.1%​¹​.

The surge in personal insolvencies can be attributed to a confluence of economic variables. Inflationary pressures have escalated, intensifying the financial burden of basic commodities including fuel, foodstuffs, and utilities. Interest rates have demonstrated considerable volatility, imposing substantial impacts on the servicing of loans and mortgage refinancing. Moreover, the discontinuation of governmental financial assistance programs, introduced as a response to the COVID-19 pandemic, has further complicated the economic landscape.

A parallel trend has been observed with corporate insolvencies. The easing of governmental restrictions, imposed during lockdowns, has led to a resurgence in business expenditures. In addition, the repayment of interest-free loans, extended under the Canada Emergency Business Account (CEBA), presents a substantial challenge to numerous small businesses. Certain sectors have faced industry-specific hurdles, notably hospitality, transportation, and construction industries.

What does this mean for seniors? As the frequency of bankruptcies increases, so does the financial burden on the parents of these individuals, many of whom are senior citizens. These seniors are finding themselves in a challenging position as they navigate their role in providing financial assistance to their children while protecting their retirement nest egg.

While seniors today are more financially secure compared to previous generations, they are not immune to the financial impacts of their children's insolvencies. In 2021, operating revenue of public nursing and residential care facilities rose by 5.0% to $20.4 billion. However, the operating deficit of these public facilities more than tripled during the pandemic, reaching $936.9 million, the largest deficit seen since 2014​²​. Private facilities saw a similar increase, with operating revenue rising by 5.0% to $16.6 billion​²​. These numbers are a reminder that while seniors may have more financial resources than before, they are still susceptible to economic pressures.

The result? A generation of seniors caught in a precarious situation. As the bankruptcy rates rise, many seniors are finding themselves tapping into their retirement savings to help their children weather the financial storm. This trend is worrisome as it could potentially destabilize the financial security of seniors who worked hard to secure their golden years.

This strain is amplified as the primary source of funds for many seniors is invested in registered plans like RRIFs.  This means that any funds drawn to support their children are fully taxable to the parent, and in the highest marginal tax brackets may mean drawing roughly double the amount from the RRIF than what they wish to provide in support to their children.

The rise in insolvencies, coupled with the financial strain on seniors, is a complex issue with no easy solutions. As financial advisors, it is our role to provide guidance to our senior clients, helping them navigate these challenging circumstances. Our role extends beyond merely advising on investment strategies and retirement plans; it involves helping them make difficult financial decisions such as these.

This article is the first in a three-part series aimed at providing financial advisors with a comprehensive understanding of the rising bankruptcy rates in Canada and its implications. The following articles will delve deeper into how bankruptcy and consumer proposals work, and how to provide effective advice to clients facing these issues. The goal is to equip financial advisors with the necessary knowledge and skills to guide clients through these challenging financial landscapes.

Bottom Line: In the face of rising bankruptcy rates and the resultant financial pressure on seniors, our role as financial advisors has never been more crucial. We must stay abreast of these trends and equip ourselves with the knowledge to guide our clients through these turbulent times.

References:

1. Office of the Superintendent of Bankruptcy Canada. (2023). Insolvency Statistics in Canada—May 2023 (Highlights). https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/insolvency-statistics-canada-may-2023-highlights
2. Statistics Canada. (2023). The Daily—Nursing and residential care facilities, 2021. https://www150.statcan.gc.ca/n1/daily-quotidien/220418/dq220418c-eng.htm