A shocking study on debt levels should be food-for-thought for debt-burdened Canadians who are considering making a contribution to their registered retirement savings plan (RRSP) before the March 2 deadline.
Paying down debt could be the better move.
According to licensed insolvency firm Hoyes, Michalos & Associates, Canadians on the verge of bankruptcy are carrying more debt than ever and “layering borrowing on top of borrowing”.
The study finds the average debtor not able to meet their payments owed $67,500 in unsecured debt in 2025, rising 37 per cent over the past three years.
What’s worse, the average Canadian filing for insolvency last year held 3.5 credit cards each and owed money to about ten different lenders from banks to payday loans.
The study doesn’t even include the $2.3 trillion the Canada Mortgage and Housing Corporation (CMHC) says we owe in secured mortgage debt.
Paying down debt as an alternative investment
Interest payments on credit balances owing are as high as 29 per cent, and payday or “rent-to-own” loans are in the stratosphere because they don’t need to follow the same usury rules.
In comparison, annual payback rates on basic unsecured consumer or student loans and lines of credit are usually in the mid teens.
As debt accumulates, interest owing compounds over time. In other words; you pay interest on the interest on the interest, and so on. It’s likely a hard lesson for the debtors in the study staring down the barrel of bankruptcy. Income can not keep pace as debt balloons.
For those who heed the warning early, each dollar invested toward paying down debt right now will reap a return equal to its interest rate. Put another way, $3,000 paid against your credit card balance at 29.9 per cent is equal to an investment compounding at 29.9 per cent each year.
Even with the tax break from an RRSP contribution, no legitimate investment can match a guaranteed 29.9 per cent return - or even a 10 per cent guaranteed return.
The only RRSP-eligible investment that is ‘guaranteed’ is a guaranteed investment certificate (GIC), which currently yields about 3.5 per cent.
The investment secret the finance industry keeps secret
With the RRSP marketing blitz in full swing, your bank or advisor likely won’t tell you if paying down debt is a better use for your contribution.
Registered investment advisors are required to ask prospective clients about their debt under the know-your-client rules. However, they are not required to recommend paying down debt as an alternative to an RRSP contribution - even if it is in your best interest.
According to the Ontario Securities Commission (OSC), in the case of “excessive levels of debt” advisors must refuse to provide an investment product or service to a client, but the OSC does not provide guidelines or definitions on what is considered excessive levels of debt.
Some advisors do; even going as far as recommending debt consolidation plans tied to low interest home equity lines of credit (HELOCs) to reduce debt faster, but most are only compensated when they sell investment products.
There have been calls for the OSC to draw a line in the sand and enforce it, but getting the finance industry to self-regulate can be a monumental task.
While the big banks count on interest from the loans they grant - and the credit cards they offer - to generate revenue, they simultaneously generate revenue from the products they sell from their investment arms.
The two functions are supposed to operate at arm’s length but in some cases the banks even bridge that gap directly by offering customers loans to make their RRSP contributions.
If you choose debt over RRSP this year, keep in mind the March 2 contribution deadline only applies to 2025 income. Contributions can be made any time and allowable space can be carried forward to the current year, or any year in the future when debt is less of an investment burden.
