Canada’s fiscal picture is far worse than it appears on the surface, and we at TriVest Wealth Counsel worry that regular Canadians and foreign investors may be shocked when they do some digging into last week’s federal budget. Despite a change in leadership earlier this year, the government is doubling down on “generational investments” without introducing new revenue sources, resulting in a projected

$78.3 billion deficit

, a staggering $36 billion increase from the 2024 Fall Economic Statement.

The

budget outlines

$500 billion in new private sector investment and $89.7 billion in net new spending over the next five years, offset by $60 billion in cuts over five years, primarily through reductions in the public service.

To justify this ballooning deficit, the government points to Canada’s low net debt-to-GDP ratio,

claiming it stands at 13.3 per cent

, the lowest in the Group of Seven major economies (G7). The government also touts that this puts it at the lowest deficit-to-GDP ratios in the G7, second only to Japan, arguing that this strong fiscal position enables Canada to respond to global challenges. However, this narrative relies heavily on a controversial accounting approach.

According to the

Parliamentary Budget Officer

(PBO), the government’s net debt figure includes the substantial assets of the

Canada Pension Plan

(CPP) and Quebec Pension Plan (QPP), which are uniquely structured compared with other G7 nations.

The government knows full well that these assets may significantly reduce Canada’s net debt figure, but they are not available to the federal government to service its debt. Instead, the PBO considers them as earmarked for future pension obligations and they are managed independently. Including them in net debt calculations assumes they could be liquidated to pay off government liabilities, an assumption that doesn’t hold in practice without jeopardizing retirees’ benefits. Therefore, when adding this back in, Canada’s true debt-to-GDP on a gross basis is

over 43 per cent

.

This accounting approach leads to a distorted picture when comparing Canada’s debt to other countries and therefore is a critical blind spot in sovereign risk analysis. When measured by gross debt, which includes all liabilities without subtracting financial assets, Canada ranks 5th highest in the G7 and seventh worst among 32 advanced economies, according to the Fraser Institute think tank.

Canada’s decentralized fiscal structure significantly complicates international debt comparisons. Unlike unitary states such as France, Japan or the United Kingdom where most public services are funded and managed centrally, Canada delegates substantial fiscal responsibilities to its provinces. These include core services such as health care, education, infrastructure and social programs, which in other countries are typically funded through the central government’s budget.

As a result, provinces carry significant liabilities that are often excluded from international comparisons focused solely on federal debt. This omission also creates a misleading picture of Canada’s true sovereign credit risk. When provincial debt is included, Canada’s gross debt-to-GDP ratio jumps to approximately

113 per cent

, placing it among the highest in the G7 and within the 10 most indebted advanced economies globally. For context, France’s credit rating was recently downgraded with a debt-to-GDP ratio of 116 per cent.

Ignoring provincial debt in global comparisons is akin to evaluating France’s fiscal health without accounting for its regional governments, or assessing Japan’s without its prefectures. But in Canada’s case, the provinces are not just administrative units; they are fiscally autonomous entities with their own borrowing powers, budgets and long-term obligations. This makes their debt structurally and economically relevant to Canada’s overall credit profile.

In short, excluding provincial debt from sovereign analysis understates Canada’s fiscal exposure, misguides investors and distorts comparisons with countries that centralize their public spending. For a true apples-to-apples assessment of sovereign risk, Canada’s provincial liabilities must be included.

Looking ahead, the fiscal trajectory is deeply concerning. Debt servicing costs are accelerating, crowding out other spending priorities and increasing vulnerability to future rate hikes. The government’s reliance on deficit financing without corresponding revenue measures suggests a structural imbalance that could persist for years.

Compounding this issue is Canada’s position as the

most indebted household

sector in the G7 and, according to the International Monetary Fund’s 2025 Financial System Stability Assessment, it ranks third worst globally, behind only South Korea and Australia. This level of leverage makes the economy highly sensitive to interest rate shocks and weakens the consumer base that underpins GDP growth. A highly indebted household sector also limits the effectiveness of monetary policy and increases the risk of a consumer-led downturn, especially with the ongoing tariff dispute with the United States.

Adding to this concern is the ownership structure of Canada’s federal debt, especially since

non-resident investors

own approximately 36 per cent of Government of Canada debt as of May 2025, which is far above the long-term average of 23 per cent. With ballooning deficits, poor capital efficiency and high interest payments, Canada is at risk of a sovereign credit downgrade. We wonder what the impact will be from foreign selling, especially as the bond market is not pricing this in — at least not yet anyway. Credit rating agencies have so far maintained Canada’s high-grade status — Fitch Ratings affirmed

Canada at AA+

in July 2025 — but the underlying metrics are deteriorating. A downgrade would have significant implications for borrowing costs, investor confidence and the Canadian dollar.

As a result, we currently hold zero Government of Canada bonds, anticipating rising risk premiums, widening spreads and potential downgrades. We strongly encourage investors to take a hard look at the fundamentals.

In our view, the combination of high household leverage, misleading debt metrics and unsustainable fiscal policy creates a toxic mix for bondholders. Canada’s sovereign credit risk is no longer theoretical; it’s visible in the numbers and it’s being ignored. Those who continue to hold long-duration Canadian bonds may be underestimating the storm ahead.

We may eventually find ourselves longing for a return to the fiscal discipline of the Paul Martin and Jean Chrétien era, when decisive leadership helped Canada avert the 1994–1995 debt crisis. At the time, investor confidence in Canadian bonds had eroded so severely that there were moments when bond prices effectively went “no bid,” reflecting a market unwilling to purchase government debt at any price. The bond market reacted sharply to Canada’s rising debt levels, triggering a surge in yields and a liquidity crunch. In response, then finance minister Martin and then prime minister Chrétien implemented sweeping reforms. Inheriting $42 billion in deficits, they delivered what amounted to 10 consecutive budget surpluses, cut program spending by 9.7 per cent in real terms while protecting health transfers, paid down $36 billion in debt and maintained a $1 billion contingency cushion.

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That is exactly the kind of leadership, rooted in fiscal prudence and accountability, needed today to restore investor confidence and stabilize Canada’s fiscal trajectory. Until such a time, we’re more than content to avoid buying Government of Canada bonds and funding the ongoing fiscal mess unravelling in Ottawa. For the country’s sake, we hope foreign investors don’t catch on too soon, and that this government somehow rights the ship before they do. Because frankly, I’m not sure we have what it takes to survive another debt crisis this time around.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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