Record Debt, Record Insolvencies, and the Confidence to Fight a Multi-Year Trade War

The Receipt

Nearly 146,000 Canadian households filed for insolvency in the twelve months ending June 2026, the highest annual count since 2009. [7] [8] Household credit-market debt reached $3.2 trillion. [6] The saving rate fell to 3.5%. [9] Canada’s premiers say the country should be prepared to fight a trade war for two more years. Polling says 69% of Canadians agree. [3] The willingness to fight is real, broadly shared, and understandable.

The Bank of Canada says the financial system has functioned well and banks have strengthened their capacity to absorb shocks. [4] It also says some households have “very little financial flexibility to cope with a job loss or an unexpected expense.” [5] Both statements are true. The gap between them is the story. Every major institutional forecast was finalized before the Section 338 tariffs took effect on August 22. The economy those tariffs are testing was not in peak condition when the trade war started.

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Manitoba Premier Wab Kinew said it plainly on August 22: “He’s got two more years left in office. We should be prepared to duke it out for two years. And then hopefully sanity will return to America.” [1] Ontario Premier Doug Ford put it another way the same weekend: Canadians are willing to “endure economic pain rather than give in to U.S. pressure.” [2]

The Section 338 tariffs that took effect on August 22 imposed 50% duties on roughly US$20 billion in Canadian goods. [10] Talks between Ottawa and Washington are suspended with no further rounds scheduled. [11] Kinew has framed the horizon explicitly in terms of the remainder of the Trump presidency. That is roughly 29 months from now.

The economy those 29 months will test was not in peak condition when the trade war started. Between 2022 and 2024, Canada’s GDP per capita fell in five of six quarters while headline GDP grew. [12] The economy got larger. Canadians got poorer. Per-capita performance over the preceding decade was among the weakest in the OECD. [13]

The Household Balance Sheet

Canadians owe $175 for every $100 of disposable income, extremely high by international standards. [6] In a Vividata survey from early 2026, roughly half of respondents said they were living paycheque to paycheque. [20] Survey data, not a Statistics Canada measure. But 145,762 insolvency filings in twelve months is not a survey. It is a count of households that ran out of money.

Consumer insolvency filings reached 37,121 in the first quarter and 37,523 in the second, the highest quarterly counts since 2009. [7] [8] CAIRP, the association of insolvency professionals, notes that filings typically reflect months or years of accumulated financial pressure. [7] That means current filings may substantially reflect the 2022–2024 inflation and rate-hike cycle rather than the trade war itself. It also means the households filing now entered the trade war with their reserves already gone. Both readings come from the same evidence.

Among mortgage holders who renewed since January 2025, a Leger survey from July found 45% reported spending more than half their household budget on housing. Among households earning $60,000 to $100,000, that figure was 54%. [21] The Bank of Canada’s own modelling projects that the last cohort of pandemic-era fixed-rate mortgages renewing over the coming twelve months represents about 12% of outstanding mortgages, with an average payment increase of roughly 15%. [22] Nationally, an estimated 4% of mortgage holders may face difficulty in 2027, rising to roughly 9% in Toronto. [4]

Senior Deputy Governor Carolyn Rogers: “Some households face far greater strain than others, and those with the highest debt burden have very little financial flexibility to cope with a job loss or an unexpected expense.” [5]

That vulnerability becomes a question about the trade war specifically because of what the trade war produces. Not a financial crisis. Not a housing crash. An employment shock in specific regions and industries where the tariffs concentrate. If the workers losing shifts in Oshawa or the B.C. forestry belt are among the households Rogers is describing, the household-level impact is the mechanism through which the macro shock reaches the kitchen table.

The Room That’s Left

The federal deficit roughly doubled in one fiscal year, from $36.3 billion in 2024–25 to a projected $72.0 billion in 2025–26, and the fiscal position deteriorated while the economy was still growing. [16] The Spring Economic Update’s projections were built on an average oil price of US$73 per barrel. [17] WTI was approximately US$103 on the day the update was released. [18] The federal update, the PBO’s June outlook, and the Bank of Canada’s July Monetary Policy Report were all finalized before the Section 338 tariffs took effect. [19] [16]

The Bank of Canada has held its policy rate at 2.25% since October 2025. [19] Using the 0.25% effective lower bound the Bank adopted during the pandemic, that leaves roughly 200 basis points of conventional rate-cutting room. In 2008–2009, the Bank cut from 4.50% to 0.25%, delivering 425 basis points of stimulus. The room is less than half as much.

The trade-off is also harder. A trade shock weakens demand while tariffs, energy costs, and a weaker dollar push prices higher. That combination is more difficult for monetary policy to offset than a purely demand-driven contraction. The Bank’s July report identifies the trade relationship and the Middle East conflict as the two major inflation risks. [19] It also projects inflation returning to the 2% target and expects excess supply to provide some disinflationary offset. [19] The structural constraint runs deeper than the policy rate. The Bank projects potential output growth easing to 1.1% in 2026, recovering only to 1.3% in 2027 and 1.5% in 2028, held back by tariff-related structural adjustments and subdued population growth. [19] RBC Economics translated the implication plainly: as the economy’s capacity shrinks, it becomes increasingly difficult for the central bank to lower rates to stimulate demand without risking that demand will exceed what the economy can produce, thereby causing inflation. [34]

That is the trap. The Bank of Canada is not just constrained by a low rate floor. It is constrained by a shrinking ceiling.

Where the Cost Lands

In 2025, 71.7% of Canadian merchandise exports went to the United States, down from 75.9% in 2024. [23] That decline is meaningful: a four-percentage-point reduction in one year. But 71.7% still leaves the country exceptionally concentrated in one export market.

The federal government estimates Canada’s average U.S. tariff rate at 5.2%, the lowest among major American trading partners. [15] That figure is accurate. It is also dominated by the energy sector, which has been carved out of every escalation. For the auto worker in Oshawa, the rate is 25%. For the plywood producer or furniture manufacturer hit by Section 338, it is 50%. The sector-by-sector record looks nothing like the average.

The Section 338 statute does not require a formal investigation or public hearing before the President acts, nor does each proclamation require new congressional authorization. It carries no sunset clause. It expressly allows the President to suspend, revoke, supplement, or amend a proclamation. [10] [24] That legal architecture makes escalation faster and easier than anything that preceded it in this dispute.

On energy and competitiveness, several major private pipeline projects with a combined proposed capacity of roughly 2.5 million barrels per day were cancelled over the preceding decade. Canada’s revised industrial carbon benchmark is $95 per tonne as of May 2026. [26] The United States has no equivalent federal economy-wide carbon price, though California and the northeast RGGI states operate regional carbon markets at roughly US$28 and US$35 per allowance respectively. [27] [28] The national-level competitiveness gap is narrower than sometimes stated but real.

Canada’s population fell 0.1% in the first quarter of 2026. [29] Non-permanent residents declined 4.4% quarter over quarter. Permanent-immigrant arrivals were 20.2% below the first quarter of 2025. [29] The near-term population trajectory has moved below the growth path on which earlier fiscal assumptions were built. Per-capita productivity growth over the preceding decade was among the weakest in the OECD. [13]

The Case for Resilience

None of that means the financial system is on the verge of collapse. The strongest case against this reading deserves its full weight.

GDP per capita improved at an annualized rate of 0.9% in the first quarter of 2026, partly because the population declined as immigration slowed. [14] The recovery is real. It begins from a lower base. But the trajectory has turned. The IMF projects Canada among the fastest-growing G7 economies over 2026 and 2027. [15] [30] In July alone, Canada added 75,000 jobs. The unemployment rate fell to 6.4%, its lowest in two years. [31] Average hourly wage growth has exceeded headline inflation over much of the period since 2023. [31]

The Bank of Canada’s Financial Stability Report backs this up. Banks have strengthened their capacity to absorb shocks. Businesses hold more cash than before the pandemic. Profitability is solid. Even in the manufacturing sectors most exposed to tariffs, financial health has remained broadly stable. [4] The Bank said tariff impacts to date had been “less widespread than we originally feared.” [4] TD Economics assessed in March that the mortgage renewal shock was largely behind most households. [32] Most borrowers were stress-tested above current rates, and mortgage arrears remain low. [4] [22]

Household debt-to-income, while extremely high, is below its recent peak of about 185% in 2022 and has been declining. [6] Stress indicators plateaued in the second half of 2025. [4] Rogers: “It can be true that the data looks better, and people still feel stressed.” [5] For most households, the data does look better.

RBC Economics estimated in August that the Section 338 package targeted roughly 5% of Canadian exports and that its direct macroeconomic effect could be relatively modest, while concentrated effects on affected businesses would be severe. [25] A country with strong banks, liquid businesses, a flexible labour market, and wage growth above inflation has real capacity to absorb a concentrated trade shock. The 4% mortgage-difficulty estimate, even the 9% Toronto figure, implies that 91 to 96% of mortgage holders are expected to manage. And the political consensus to hold firm has value in itself: a country that capitulates at the first sign of household stress has no negotiating position at all.

The aggregate picture of the Canadian economy in mid-2026 is not one of crisis.

What “Duke It Out for Two Years” Does Not Price In

But those assessments were completed before Section 338 took effect. They test a milder trade environment than the one Canada is entering now. The “duke it out” framing does not account for five things.

First, the compounding problem. About 71.7% of Canadian merchandise exports go to the United States. [23] Every month at 50% tariffs is a month where supply chains are being restructured away from Canadian suppliers. Those relationships do not snap back when tariffs are removed. The documented record shows that some trade-disruption damage does not reverse. The Bank of Canada has described what is happening as “structural damage to potential output.” [33] The longer the fight lasts, the more permanent the trade diversion becomes.

Second, the household buffer is already gone. You are asking the most indebted households in the G7, with a 3.5% saving rate, to absorb 29 months of elevated costs, soft employment, and constrained credit. Nearly 146,000 households exhausted their reserves in the past twelve months. [8]

Third, the assumption that tariffs disappear on January 20, 2029 is unsupported. Section 338 has no expiry clause. [10] [24] No incoming president is obligated to lift these tariffs. Bilateral tariff regimes, once established, tend to persist: they create constituencies on the U.S. side that benefit from reduced Canadian competition.

Fourth, the Bank of Canada is policy-constrained in a way that makes this different from previous downturns. In 2008–2009, the Bank had 425 basis points of room to cut. Now it has roughly 200, and the nature of the shock means the rate tool may not be available at all: cutting risks stoking inflation from the weak dollar and energy prices, while holding lets the economic damage deepen. [34] Two years without the central bank’s primary tool is a fundamentally different situation.

Fifth, every institutional forecast that concluded “resilient” was written before August 22. The Section 338 tariffs represent a step-change, not an incremental escalation. The existing projections are already stale.

A battery with a known charge can be drained and recharged. An economy under sustained stress is closer to a biological system: the stress does not just deplete capacity, it can damage the capacity to recover. The Bank of Canada is documenting exactly that, in its own terms.

The question for anyone making the “duke it out” argument: what is Canada’s economic capacity on January 20, 2029, after 29 months of 50% tariffs, record insolvencies, the highest household debt in the G7, a constrained central bank, and structural reductions in potential output? “Hopefully sanity will return to America” is not a recovery plan. The Bank of Canada’s own numbers suggest a significant share of the damage will not be reversible.

What Would Change This Assessment

Five conditions would require revising this assessment. Each is specific, testable, and capable of proving it too pessimistic.

• If household debt-to-income falls below 170%, the saving rate remains at or above 5%, and consumer insolvencies decline for two consecutive quarters, the household-buffer finding weakens materially.
• If mortgage arrears, consumer-credit delinquencies, and insolvency filings remain stable or decline through at least two quarters of the Section 338 regime, the claim that existing household vulnerabilities are being amplified by the trade shock weakens.
• If the Bank of Canada delivers at least 100 basis points of cumulative easing while CPI remains within the 1–3% target range and inflation expectations remain anchored, the monetary-constraint finding weakens.
• If Canada secures sustained tariff relief returning targeted-sector effective rates to approximately their pre-escalation levels for at least six months, the prolonged-trade-pressure premise weakens materially.
• If a post-Section-338 institutional forecast incorporating the tariffs continues to project resilient household consumption, stable financial stress, recovering investment, and no material deterioration in unemployment through 2027, the composite assessment should be reconsidered.