If you’re one of the many Canadians who lost their jobs due to Covid-19, you are thinking of the next steps you need to take to ensure you can pay your bills and find another job. Here are some tips for handling unemployment:
Revisit and revise your budget
Set aside some time to re-examine your budgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition. You may need to cut non-essentials and keep absolute must-haves. You may also have reduced expenses in some areas such as transit costs and eating out. Look at several months’ bills to get an estimate of how much you spend and on what. This can be broken down into categories:
- Essentials: Food, housing, hydro, water, an internet connection for job-hunting, phone.
- Non-essentials: Take-out, transfers to RRSPs, TFSAs or other savings accounts, multiple streaming accounts simultaneously.
Talk to your financial advisor or financial planner
If your financial situation changes, it’s always a good idea to speak to your advisor or planner or other financial professional such as a Chartered Professional Accountant who can advise you on how to tap into your financial options without paying too many penalties.
Tap any emergency funds
The best way to avoid accruing additional debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition is to start by utilizing money that is easily accessible – such as an emergency fund savings accountSavings account A bank account intended for depositing funds. Pays interest and lets you withdraw cash at any time.+ read full definition. If you don’t have a savings account, you also may be able to withdraw funds from a Tax-Free Savings AccountTax-Free Savings Account A Tax-Free Savings Account (TFSA) is a registered savings account that provides tax benefits. In most cases, investment income, including capital gains and dividends, earned in a TFSA is not taxed, even when withdrawn. There are annual contribution limits but you can carry forward any unused contribution room from previous years.+ read full definition (TFSA) before needing to access money through options that charge interest such as a line of creditLine of credit An account that you set up with a financial institution (often a bank) to borrow money. It lets you borrow what you need, when you need it, up to a certain limit.+ read full definition, or credit cards. Beware that credit cards are often high interest forms of credit.
If you are withdrawing from your Registered Retirement Savings PlanRegistered Retirement Savings Plan A plan that lets you save for retirement while lowering your income taxes. You choose how you want to invest your savings. You don’t pay tax on any money in your account until you take it out.+ read full definition (RRSP):
- There will be an amount for taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition that will be held back by the financial institution and they will pay it directly to the government on your behalf. This is known as withholding taxWithholding tax Tax that comes off your pay or other income and goes to the government before you get any money.+ read full definition. The rate is 10% if you take out up to $5,000, 20% if you take out between $5,001 and $15,000 and if you take out more than $15,000, the tax goes up to 30%. The amount you take out is taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition so you may need to pay more tax than the amount withheld, depending on your total income and tax situation.
- You will lose the contribution roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition you originally used to make the contributionContribution Money that you put into a savings or investment plan.+ read full definition to the RRSP.
If you are withdrawing from a Tax Free Savings Account (TFSA):
- You don’t have to pay a withholding tax but you may be subject to foreign non-resident withholding tax if you own foreign stocks. Also, if CRA determines you are carrying on a business in the TFSA (such as the business of trading), there may be tax implications.
- The amount withdrawn will be added to your contribution room the following year. For example, if you withdrew $20,000 from your TFSA in June 2020, that amount will be added to your new TFSA contribution room in January 2021. Your 2021 limit would total $26,000 (the $20,000 you withdrew plus the $6,000 newly acquired contribution room) plus any unused amounts from previous years.
Deferring mortgage and credit card payments
You can apply to your financial institutions to defer your mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition payments and/or credit card payments. These deferrals give you some breathing room with your finances. You can apply to your mortgage lenderLender Any person or organization that lends money.+ read full definition and credit card company and once approved, defer your monthly payments for an agreed upon period of time. The interest will accrue on your debt. You may wish to check with Equifax or Transunion about how the deferred payments interact with your credit score.