Canadians living at the financial edge may be pushed to the brink when the tax man comes calling, according to a new study from licensed insolvency trustee Hoyes, Michalos & Associates Inc.

According to the firm’s annual Joe Debtor study, tax obligations returned as the primary driver of consumer insolvencies in 2021 as the pandemic strained household balance sheets, and the insolvency experts believe there’s more pain ahead as the world returns to a more normal state.

“We believe that this increase in tax insolvencies is the tip of the iceberg,” the firm said in a release, forecasting that stronger action from the Canada Revenue Agency (CRA), an end to interest relief on COVID tax obligations, and the upcoming tax filing deadline will lead to an increase in insolvencies.

Four out of every 10 insolvency filings were among those owing taxes in the last calendar year, in spite of a slowdown of collection activity at the CRA and a temporary interest-rate holiday on past-due taxes.

Hoyes, Michalos said tax debtors owed an average of $19,766 in taxes and interest in 2021, up nearly 25 per cent from a year before. The study is based on an analysis of 2,900 personal insolvencies in Ontario last year.

In the release, Hoyes, Michalos said a combination of accruing debt on pandemic-related wage benefits and pressure on small business owners contributed to the increase of debt among tax-owing Canadians.

“Much of the increase in tax debtors in 2021 was due to obligations created by [Canada Emergency Response Benefit (CERB)] and [Canada Recovery Benefit (CRB)] payments made in 2020 with no or insufficient tax withheld at source,” the firm said.

“Additionally, many self-employed and small business debtors stopped making HST payments to manage cash flow during the pandemic. With prolonged lockdowns and reduced revenue, these individuals were unable to catch up on skipped remittances.”

Pandemic income supplements could throw a wrench into the plans of those who availed themselves of it. The likes of the CERB were doled out of a pre-tax basis, meaning claimants would have to inform the CRA of its usage and pay the CRA after the fact.

Overall, the average insolvent debtor had $50,484 in unsecured debt in 2021, up 3.3 per cent from the year before to hit the highest level since 2016. Those with tax debt on average owed the CRA $19,776, with taxes outstanding making up 31 per cent of overall debt.

Insolvent debtors owing the CRA were also deeper in the hole than those who were up to date with Ottawa, owing on average $63,572 – 25.3 per cent more than those without tax debt.

In the release, Hoyes, Michalos said it believes that as the CRA gets back to more normal operations, collection efforts will ramp up and insolvencies will rise as a result.

“During much of 2021, CRA was limited in its ability to enforce collection. With collection agents working from home, the ability to issue Requirements to Pay, garnishment notices, or freeze bank accounts was limited, and CRA policy seemed to remain soft on collection activity during much of the pandemic,” it said.

“This cannot continue indefinitely, and we have already seen a slight uptick in collection behaviour by the CRA. We expect more aggressive action to resume in 2022.”

Overall, insolvencies in Ontario fell 10.8 per cent year-over-year in 2021, and national volumes dropped 6.6 per cent, about a third below pre-pandemic levels, according to Hoyes, Michalos.