As the spread of Covid -19 forcing businesses to close shops and tumbling stock markets are evaporating millions from investment portfolios, all of us are wondering what financial impact the crises will have on our business and personal finances and what steps we can take to minimize the financial impact. These are unprecedent times and there’s still so much we don’t know about the spread of the virus which makes the potential economic fallout extremely uncertain. Some of you have called me for my advice and we discussed a plan based on your specific needs. For everyone’s benefit I have put together a list of basic steps that almost all of us can take immediately to lesson the impact of these crises and be ready to expand when the crises are over.
1. File your Tax return:
If you are expecting a tax refund file your personal tax return and get your tax refund ASAP. The government doesn’t need the cash it owes you, however you can use the tax cash refund to strengthen your personal finances. You don’t need to visit the accountant’s office to file your tax return; everything can be done online via email. CRA is now accepting digital signatures thus you can even sign your tax return electronically. If your return is not complicated, you can file it yourself by using tax software from CRA’s website. Otherwise call your accountant and file your personal tax return online and get your refund ASAP.
2. Hold off on paying off debts or RRSP loan:
If you bought RRSP using a bank loan. Don’t be in a rush to pay it off with your tax refund. Instead put your tax refund in your TFSA account (provided you have room in your TFSA). The reason being that bank loan interest rates are going down, they might even go to zero or negative for secured RRSP loans (negative interest rates means they will pay you to borrow money on a secured RRSP loan). You may want to start 2020 contributions early and secure a low interest rate loan in the next few months.
3. Preserve cash:
Cash is king especially during cries, so preserve cash wherever, or however you can. Hold off on paying your income taxes, utility bills and mortgage payments, use already approved LOCs to pay for expenses. CRA is waiving interest and penalties on all tax amounts owing until September 1, 2020 (they might extend it further depending on when people are allowed to reopen). City of Calgary already announced to waive utility payments for three months. Almost all of the major banks are allowing customers to defer mortgage payments, so you may want to talk to your mortgage provider about deferring mortgage payments for all your mortgages (including rental properties). You may also want to use already approved LOCs to pay for business and personal expenses.
4. Apply for Emergency and support benefits from the Government:
Individuals: Government announced $27 billion in direct emergency funding, something is available to almost everyone. Prime Minister said that no one should worry about having zero income if they are forced to stay home. If you are self isolated or taking care of a family member in self isolation you can get money even if you are a contractor or self employed, EI sickness benefits start from day one you called in sick, if you are temporarily laid off because your employer closed business you get EI benefits immediately. Additional child tax benefits and GST credits will be paid automatically to qualified individuals starting in May 2020.
Businesses: Businesses that stay open can get 10% subsidy from the government for payroll up to 3 months. Low interest loans guaranteed by BDC are available to small and medium businesses to weather the storm. Workshare program has been expanded to include all businesses. This program allows businesses flexibility to reduce hours of all employees during the downturn in business and still have them on payroll and be available to work when needed. Employees get EI benefits for reduced hours. Employer may want to take advantage of these temporary measures to preserve cash for future expansion.
Applications for emergency benefits start Monday and cheques will be issued in April. Consult CRA website for more information.
5. Get ready to refinance mortgages:
Mortgage interest rates have come down dramatically during last few weeks and they might even go further down. Prime rate in US is already at zero and I wouldn’t be surprised if it goes to negative. In other words, very cheap money and or free money will be available soon. Thus, if you have any commercial or residential mortgages coming up for renew or are at variable rates you may want to consider refinancing them at historically low rates soon. You may also want to draw on your secured LOCs to pay for business expenses or credit card bills to lower your interest payments or use the cash to invest when markets return to normal.
6. Load up your TFSA and nonregistered investment accounts for market bounce:
Stock markets have come down more than 30% from the all-time highs and they might even go lower. There will come a time when markets are ready for substantial bounce back and you want to be ready to invest when markets go back up. Use your approved LOC if you don’t have savings to fill your TFSA account or non registered investment accounts.
TFSA is a great place to invest as there is no tax on gains. Remember not to exceed your TFSA limit as the penalties for excess contributions are huge.
I have heard that some of the brokerage firms are very busy now due to turmoil in the markets and its impossible to get through the phonelines to talk to someone for advice. I would suggest you consider opening an online self-directed brokerage account for your TFSA and nonregistered investments so that you can buy investments directly and quickly when markets turn. There is a lot of information available online. You can do some research yourself and select the investments you want to buy. For inexperienced investors I would recommend that you stick with sector or index ETFs or mutual funds instead of individual stocks until you get some experience.
Summary: The full impact of corona virus on business and personal finances is uncertain. However, it is certain that it will have significant impact on everyone’s finances at least temporarily. Thus, we need to be vigilant and take steps immediately to lesson the impact and be ready to expand when the crises are over. We need to immediately preserve cash and expand use of available credit to strengthen our financial position. Defer any and all payments that we can defer, use credit to pay for business and personal expenses, take advantage of government benefits and incentives, be ready to deploy cash when the crises are over in a most tax efficient manner.
I hope information provided is useful, feel free to call me if you need to discuss any of these steps further or want to discuss a specific business plan for your own business.
Kam Grewal (403)667-2924