The COVID-19 pandemic has slowed the global economy to a near-halt as consumers increasingly stay at home to curb the spread of the novel coronavirus. With a growing number of people being laid off and the future of the economy uncertain, we asked two Scotiabank financial planners— Mary Grace Policelli, Director, Total Wealth Planning, and Jennifer Poon, Director, Advanced Planning — for day-to-day budgeting advice in challenging times.
Q: I have just been laid off from my job due to COVID-19. What steps should I take to budget in preparation for the months ahead?
First, you should determine if you are eligible to take advantage of the new government relief program set out by the federal government. Canadians who lost income to COVID-19 may receive the Canada Emergency Response Benefit (CERB) of $2,000 a month for up to four months. The CERB will apply to wage earners and contract workers as well as self-employed individuals who would not otherwise be eligible for Employment Insurance (EI). For those qualified for EI, this will be applied through EI. If you do not qualify for EI, you can apply through the CRA. For more information, visit the government’s website here.
With the understanding that you will be getting this income stream, it’s time to create a budget, if you don’t have one already. An integral part of the budgeting process is a solid understanding of all your expenses. Start by dividing them into two categories — discretionary and non-discretionary. Review your expenses and remove or reduce any non-essential costs. Focus on budgeting for the non-discretionary costs that are “needs,” such as mortgage payments, rent, hydro, etc.
Also, ensure you are creating an emergency fund of three to six months living expenses, in case you are out of work longer than four months when the government’s payments stop. Finally, take advantage of any other relief available to you — mortgage support, child benefit, GST payments. If you are still in need of cash, try to avoid dipping into registered savings (such as RRSPs) since that will create a tax liability. Draw from TFSAs or savings accounts as much as possible instead.
Q: I am still employed but am nervous about the future. Should I take any steps to budget as well?
It is natural to be nervous about the future, as this is an unprecedented time for us all. It is always important to have a budget; if you don’t have one, start one now. If you haven’t been saving and want to start or your savings aren’t quite at the three to six-month target, again, review your discretionary — ie. non-essential— expenses and start cutting or reducing those costs to fund that cash reserve.
Q: What COVID-19 related financial assistance is available to me and how do I obtain it?
As part of the Government of Canada’s COVID-19 Economic Response Plan, the government will provide direct support to Canadians including Income Support for Individuals; Flexibility for Taxpayers and Mortgage Default Management Tools.
Here are some notable ones:
HST/GST credits for those that qualify: A one-time special payment by early May 2020 through the Goods & Services Tax credit for low- and modest-income families. The average benefit will be close to $400 for single individuals and close to $600 for couples. There is no need to apply — if you are eligible, you will receive this benefit automatically. If possible, file your 2019 tax return now so that you will qualify for these credits going forward.
Child benefits will also be increased by up to $300 per child for 2019-2020. This enhanced benefit will start in May. Those already receiving it do not need to re-apply.
Canada Emergency Relief Benefit: Again, this new benefit will pay Canadians whose employment has been impacted during the COVID-19 crisis $2,000 per month for four months. This can be applied for as of April and payments are expected within days of applying. More details here.
Mortgage Support: Canadian banks have committed to work with their customers regarding deferring mortgage payments for up to six months. (If approved, Scotiabank will allow mortgage deferral for up to six months on up to four properties, including principal residence, secondary and/or rental properties. More details here.)
RRIF Payments: The minimum withdrawal from a Registered Retirement Income Fund has been reduced by 25% for 2020. This only applies to individuals who have not already received their payment for 2020. More details here.
Student and Apprentice Loans: As of March 30, there is a six-month interest-free period on the repayment of Canada Student Loans. Payments are not required during this six-month period and interest does not accrue. More details here.
For more details and how to apply for federal government assistance click here. Some provinces are also offering relief programs.
The federal government is also providing billions of dollars in relief programs for businesses, including a wage subsidy of 75% for qualifying businesses to help avoid layoffs.
Q: What steps should I take to manage my outstanding debt, such as mortgage, credit card balance, lines of credit, and other loans?
Start with reviewing all outstanding debt and payment frequency and see where you currently stand. Can you sustain all payments as scheduled? If cash flow is a concern, reduce payments to minimum amounts for debt like credit card and line of credit. Don’t be afraid to contact your financial institution to see if there’s any relief they can provide.
Again, part of Canada’s Economic Response program is mortgage support for individuals that are impacted by COVID-19. Banks in Canada have affirmed their commitment to working with customers to provide flexible solutions, on a case-by-case basis. Canada’s large banks, including Scotiabank, have confirmed that this support will include up to a six-month payment deferral for mortgages, and the opportunity for relief on other credit products. Keep in mind, however, interest during this period will continue to accrue and be added to your outstanding balance.
Q: What about my retirement savings? Is that something I should withdraw from to make ends meet, or reduce my contributions?
This should be considered as a last resort. Your retirement savings are meant for retirement but if you need the money now it is certainly a source of funds. Again, you will pay withholding tax on any withdrawals from a registered account and then the full amount will be considered taxable income this year. If you are going to be in a reduced income state this year because of layoffs or lack of business a withdrawal from your RSP may make sense, especially if you are going to be in a low tax bracket. Remember that the withholding tax will not cover the tax you need to pay in most cases so you will have a larger tax bill next year. You will also lose that contribution room so that you can’t put that money back in unless additional contribution room is available.
If you have a TFSA, you may wish to consider accessing those funds first. You can contribute that withdrawal back into your TFSA starting next year. This is in addition to your regular contribution limit.
If you think you will have reduced income this year, then consider reducing or eliminating your RRSP contributions this year. Any contribution room that you don’t take advantage of will be carried forward so you can always catch up later when income allows.
Legal Disclaimer: This article has been prepared by The Bank of Nova Scotia for Scotia Wealth Management clients. It is for general information purposes only and should not be considered or relied upon as personal and/or specific financial, tax, pension, insurance, legal or investment advice. We are not tax or legal advisors and we recommend that individuals consult with their qualified advisors, including tax and legal advisors, before taking any action based upon the information contained in this article. Opinions and projections contained in this article are our own as of the date hereof and are subject to change without notice. Scotia Wealth Management is under no obligation to update this commentary and readers should assume the information contained herein will not be updated. While care and attention has been taken to ensure the accuracy and reliability of the material in this article, neither The Bank of Nova Scotia nor any of its affiliates or any of their respective directors, officers or employees make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this article or the information contained herein. This commentary may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable, and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. This article and all the information, opinions and conclusions contained herein are protected by copyright. This article may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia. Private banking services are provided by The Bank of Nova Scotia. Portfolio management is provided by 1832 Asset Management L.P. and 1832 Asset Management U.S. Inc. Financial planning and advisory services are provided by Scotia Capital Inc. Estate and trust services are provided by The Bank of Nova Scotia Trust Company. Insurance services are provided by Scotia Wealth Insurance Services Inc. Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of Scotia Capital Inc. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Insurance Agents (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc.