Between 2006 and 2010, between 7% and 9% of the debtors handled by Toronto bankruptcy trustees Hoyes Michalos & Associates Inc. were 60 years of age or over, says principal Doug Hoyes.

In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.

That quote is accurate. In fact, after holding steady in the 7% range between 2006 and 2009, in the first seven months of 2010 the percentage of people aged 60 or over who have filed a consumer proposal or a personal bankruptcy has increased to 9%. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.

Here’s the key problem, as quoted in the Financial Post article:

Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.

In the past, most seniors were able to retire with no debt. The fortunate ones owned their own house with no mortgage, so when they retired they were able to live comfortably from their savings and pensions. Unfortunately today an increasing number of seniors are retiring with debt, so when their income drops at retirement it often becomes impossible to both service debt and pay normal day to day living expenses. I’ve met with a number of seniors who retired in good financial shape, but as the recession worsened they ended up helping their grown children deal with their money problems, and that often depletes their retirement nest egg, and can even lead to new debt.

But there’s more to the story than that; here’s another excerpt from the Financial Post article:

Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.

This is where it gets interesting. On the day the article was published, Mr. Chevreau was contacted by a reader who said that he was 70 years old, and he owed a significant amount of back taxes, and CRA was taking all of his Canada Pension Plan income each month. As any good journalist would do, Mr. Chevreau contacted me to ask for my side of the story, since Revenue Canada’s actions to seize pension plans would appear to contradict my statement that “it’s very difficult for a creditor to garnishee a pension.”

My response to Mr. Chevreau was that yes, it is very difficult for a typical creditor, like a bank or credit card company, to garnishee a pension. However, Canada Revenue Agency is not a “typical” creditor. CRA has more power than your typical credit card company or other creditor.

On August 18 Mr. Chevreau reported on this continuing story in an article in the Financial Post titled Government gives with one hand, garnishees with other, where he tells the story of “Sam” (not his real name), the 70 year old who is not getting any CPP or OAS benefits because CRA is taking all of it, and applying it against his tax debt. Here’s an excerpt from the story:

Generally, if you owe money on credit cards or other unsecured debt, there’s no mechanism for creditors to garnishee a pension, says Doug Hoyes, a principal with Toronto based bankruptcy trustee Hoyes Michalos & Associates Inc.

According to Hoyes, the Ontario Wages Act only permits creditors to garnishee up to 20% of a person’s wages or 50% for child support. However, he says, “standard garnishment rules don’t apply to the CRA. They can do whatever they want.”

Hoyes regards the legal definition of garnisheeing wages as a court order to take some of your paycheque. But the rules are different when the government is itself the creditor. “It doesn’t go to court. They can just decide to take CPP and OAS until they get what they want.”

He has seen cases similar to Sam’s in the past, but they were “rare circumstances, generally where the tax debt was large and often where the taxpayer was delinquent in filing tax returns on time.”

CRA spokeswoman Caitlin Workman confirms the tax agency can garnishee “all types of pensions,” both government and private. This is permitted under Section 224.1 of the Income Tax Act, with similar provisions in five other acts. However, she says it’s rare to garnishee more than 20% of such benefits. “It’s very much a last resort after the taxpayer’s ability to pay has been determined.”

So there you have it. If you owe taxes to CRA, and if you get Canada Pension Plan or Old Age Security payments, Canada Revenue Agency can withhold some or all of your monthly pension payments in satisfaction of your tax debt.

As I said in the article, while I have seen cases like Sam’s, it is generally very rare that CRA would take all of someone’s pension. They will typically only take everything if you owe a significant amount in taxes, and if you were delinquent in filing your taxes on time. As the CRA spokeswoman stated, it is rare that they will garnishee more than 20% of pension benefits, but it is possible.

What Can You Do if CRA is Taking Your CPP Pension For Taxes Owing?

If you owe back taxes and CRA is taking your pension, you have a number of options.

First, you can contact CRA and work out a re-payment plan. If you have other assets that you can sell to raise cash, you may be able to pay your taxes with that money, at which point CRA will stop taking your pension. You may also be able to negotiate a monthly payment plan to free up some of your pension.

If you can’t make a plan directly with Canada Revenue Agency, you could try to get a debt consolidation loan; you borrow from a bank, and use the money to repay CRA. If you pay your taxes in full, CRA will release the flag on your pension payments.

If you don’t qualify for a loan, which is often the case once you retire because your income has dropped, your next option is a consumer proposal. In a consumer proposal a settlement is reached with all of your creditors, including CRA. In many cases you may end up paying less than the full amount owing. If your largest debt is taxes, CRA must agree to your proposal, so a consumer proposal is not always an option where tax debts are involved.

If a consumer proposal isn’t possible, your final option for dealing with tax debt is personal bankruptcy. Upon your discharge from bankruptcy in Canada your tax debts are discharged.

Owing money to the tax man isn’t fun at any age, but it can be even more stressful if you are a senior citizen on a pension, so if you have tax debts, contact a licensed bankruptcy trustee for a no charge initial consultation to review your options.

Finally, my thanks to Mr. Chevreau and the Finanicial Post for bringing this issue, and possible solutions, to the attention of senior Canadians.

Here’s something that may shock you: A house is NOT an investment.  It is a consumer good, just like a toothbrush.  You use it, you throw it away, and then you replace it.

I know that many of you will strongly disagree with that statement, but think about it: if you own your home for the next forty years, it is likely that you have to:

• Replace the roof
• Replace the furnace and air conditioning system, and all appliances
• Repair the plumbing
• Paint the walls
• Replace the carpet
• And do whatever exterior painting and landscaping is required.

My point is that you may not “throw out” your house all at once like you do with your toothbrush, but you do replace, piece by piece, over many years.  An investment, like a savings bond, does not need repairs, maintenance and replacing, so a house is not an investment.

Here’s a challenge for you: do the math.  Add up what you have spent, or will spend over the next five years on your house (see the list above).  Then take that number and average it over the number of months between repairs.  If you need to replace the furnace and air conditioning system every 20 years (that’s every 240 months), and it will cost $12,000 to do it, that’s a replacement cost of $50 every month.  Add in the cost of every other item on the list, and you will quickly see that the replacement cost of a house is somewhere between $200 and $500 per month (and a lot more if you have an old house).

Now add to that replacement cost the monthly cost for your mortgage, property taxes, and routine maintenance each month.  That’s the true cost of owning a house.

Home owners often tell me that owning a home is cheaper than renting.  “My mortgage payment is only $1,200 per month” they tell me.  In truth, when you add in property taxes and repairs and maintenance and extra utilities due to the size of your house, the cost may be closer to $2,000 per month.  If rent would cost you $2,000 per month than you are correct; renting and owning cost the same.  But if you could rent a nice apartment or townhouse for $1,000 per month, it’s clear that in the short term renting is much cheaper than owning.

But wait, you say: “House prices go up, so even if I am paying more each month for my house, in the long run I’ll make money.”  Maybe, but only if, in my example, your house is increasing in value by over $1,000 per month.  A few years ago when the real estate market in Canada was booming, that was possible.  For the last two years the residential real estate market has declined in Canada, so your house has actually lost value each month, which increases its cost.

So what’s my point?  Am I saying you should never own a house?

No, that’s not what I’m saying.  I’m saying you should view your house as a place to live, not as an investment.  If your repair costs are low and you buy and sell at the right time the value of your house may increase.  But it is also possible that it will not go up in value, so do the math before blindly assuming that your house is an investment.

Over the last year I have filed a large number of bankruptcies for people who bought a house two years ago, at the peak of the market, with no money down, and now their incomes are reduced and they want to sell, but if they do they will lose a huge amount of money.  They can’t afford the loss, and combined with their other debts they have little choice but to file bankruptcy in Canada.

I want to spread the word that you don’t need to be house poor.  Ask your home owning friends what it really costs to own a home, look at your own numbers, determine what it costs to rent, and only then can you make an informed financial decision about whether or not you should own or rent your house.