Dale Jackson

Personal Finance Columnist, Payback Time

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Investment industry marketing campaigns are in overdrive right now trying to convince Canadians to contribute to their registered retirement savings plans before the March 1 deadline.

RRSP season brings big commissions for the industry, but for the millions of Canadians drowning in debt it could bring misery as interest rates inevitably rise.

The average Canadian household currently owes $1.77 for every dollar earned, according to Statistics Canada. Despite a small drop at the onset of the pandemic, the debt-to-income tally has ballooned from less than 90 cents in the 1990s.

Most is mortgage debt at manageable interest rates below five per cent annually; but when you strip that out, Canadians owe more than $24,000 per capita in non-mortgage debt. That includes student or consumer loans, where interest rates often exceed 10 per cent, and credit card balances, which often exceed twenty per cent on outstanding balances.

According to the latest Statistics Canada figures, credit card balances have climbed more than twenty per cent a year from 2000 to the onset of the pandemic. By February of 2020, Canadians owed a total of $90.6 billion on their credit cards compared with $13.2 billion in 2000.

The appeal of RRSPs is the ability to shelter investments from being taxed until they are withdrawn at a low marginal tax rate, normally in retirement. Overall tax savings can be huge for Canadians taxed at high marginal rates; but for most Canadians the tax advantage is minimal.

Tax savings aside, a dollar invested in paying down higher-interest debt beats a dollar invested in the markets - hands down. There is no investment that can generate a guaranteed return of ten per cent like paying down debt at a rate of ten per cent. Any qualified investment adviser knows this.

Registered investment advisers 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 when it is glaringly obvious.

According to the Ontario Securities Commission (OSC), in the case of “excessive levels of debt” advisers 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 advisers 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 the banks even bridge that gap directly by offering customers loans to make their RRSP contributions.

If you are torn between paying down debt or investing this RRSP season, don’t ask an investment adviser. Tabulate your debt and crunch some numbers to determine the dollar amount of interest compounding each year - and keep in mind one of the only comparable, guaranteed, returns on an investment is a guaranteed investment certificate (GIC), which pays about one per cent. 

If the task is overwhelming, ask a licensed debt councillor. Depending on an individual’s circumstance, it often makes sense to do both if debt is under control.

Keep in mind, the March 1 RRSP contribution deadline only applies if you want to reduce your 2021 income. Contribution space can be carried forward to the current year or any year in the future when your debt is more manageable.