How has the current pandemic altered your financial picture? Kim Parlee speaks with Chris Gandhu, High Net Worth Planner, TD Wealth, about some ways you might regain some control over your finances in the wake of the COVID-19 pandemic.
- Hello, and welcome to MoneyTalk's COVID-19 daily bulletin for Monday, April 6. My name is Antony Okolie. In a few moments, Kim Parlee will be speaking with Chris Gandhu, the High Net Worth Planner at TD Wealth about some of the things that you can do to control all your financial life.
But first, a quick recap of today's market news. Signs are emerging that the rate of new COVID-19 infections could be slowing in hotspots across Europe and the United States. In Europe, Spain, Italy, and France all reported a dip in the death in their respective countries. And New York recorded its first fall in coronavirus fatalities in a week. But US health officials still warn that the worst is yet to come.
The price of oil is trading lower after OPEC and Russia delayed a meeting on Monday to discuss cutting output. Russia and Saudi Arabia have been in a price war that have caused oil prices to plummet.
Today is the start of the Canada Emergency Response Benefit. It's an application and portal where Canadians facing unemployment due to the COVID-19 crisis can apply for emergency income support benefits. Canadians can go to Canada.ca for more information.
UK Prime Minister Boris Johnson says, he's in good spirits after spending the night in hospital with coronavirus. The prime minister was taken to hospital for routine tests after experiencing persistent symptoms, including a temperature and a cough.
And finally, as more doctors across the US face a shortage of personal protective equipment, companies like Apple are stepping up to support the medical response. Apple has donated 20 million masks and is working to produce one million face shields per week for medical workers. And that's a wrap of today's news. Next we have Kim Parlee and Chris Gandhu on how to regain control of your finances.
KIM PARLEE: Chris, great to see you. And I know you've been talking to a lot of people who have been concerned about various aspects of their finances right now, especially if someone in their household has lost their jobs. You've got a number of tips. And I wouldn't mind just running through them.
The first one is-- and some of these tips you're saying are not obvious. So we're glad you're highlighting them for us. The first one is debt consolidation.
- Kim, good to be here. So in an impaired economy, Kim, it's natural to tighten your belt. And as part of a budgeting process, one thing that individuals should consider is whether they can consolidate their higher interest loans into a low-interest loan.
So what we've seen in the market is the Bank of Canada has been very aggressive at lowering their overnight lending rates. This, in turn, translates into a lower prime rate offered by financial institutions. And until very recently, the prime rate was close to 4%. Now it's below 2.5%.
And the prime rate is the rate that's used on variable rate products, so such as line of credit HELOCs and perhaps variable rate mortgages. So here is an opportunity for everybody to see where that high interest debt is, whether it's credit card debt, whether it's auto loans, and then try to bundle it up with this lower interest opportunity that presents itself here.
- Second one you have-- and for those who are brave enough to take a look at their online statements in terms of their portfolios right now, you're saying it could be a good time for some people to crystallize some losses.
- Right. I looked at mine, and there's definitely a bit of red on there. And that's OK. But just because you have that loss in your portfolio doesn't mean they're not useful to you from a tax perspective, unless you'd actually dispose of that security, Kim.
So that's what I mean by crystallizing losses. So once we dispose of that security, we have a capital loss. And as long as our net losses exceed the net gains for 2020, we'll have net capital losses.
And we have two things we can do with them. We can carry them back to the previous three years, so 2019, '18, '17, and reduce or completely eliminate perhaps a taxable capital gains that we reported. So we'll get a refund for that, which is nice. But anything that you don't use isn't lost. You can carry that forward indefinitely.
- The third one take a look at, and again, this goes back to some of these low rates you were talking about earlier, is income splitting, especially if you want to somehow re-enter loans at these lower rates we're seeing right now.
- Right. So Canada, being the progressive taxation country that also taxes individuals based on individuals not as couples or as families, means that we all are incentivized to-- if we have a spouse-- a couple, for example, that has a higher-income earning spouse and low-income earning spouse to shift income from the higher-income earner to the lower-income earner. And the easiest and also efficient way that this is done is by a prescribed rate loan where we lend money and enable the lower-income spouse then to invest that money and make their own investment income on it. And then they put a tax on it, not the lending spouse. And this prescribed rate is set by CRA every quarter.
If I look at what's happening today in the interest rate market, I foresee that in Q3, based on the Canadian T-bill rates in the month of April, we'll see the prescribed rate, which historically for a number of years has been at 2%, will likely drop to 1%. So it's a great opportunity to enter to new loans, or if you had existing ones at 2%, then re-enter them at 1%.
KIM PARLEE: Your last tip is a good one, and probably some welcome news to people who run their businesses because businesses are going through a lot right now, as an understatement. But you're saying it might be a good time, if you were planning to bring some family members into the business, now specifically might be a good time.
- Right. So typically, Kim, the way this is done is by the concept of an estate freeze where the original owner freezes their interest in the company, and that enables the new shareholders, the second generation, to come in. From a tax perspective, it also gives the original owner certainty because now they know what their tax liability is should they sell and exit the business or at the date of death.
Because we are in this impaired economy, Kim, obviously, all businesses can expect their valuations to drop temporarily. And that temporary drop actually is an opportunity because now you can freeze your interest at this lower valuation. So if my business was worth a thousand but now it's temporary worth 500, I now can freeze my interest at 500, thereby deferring more of the tax to the next generation. So it's a bit of a business continuity and tax planning take here.
- Great insights as always, Chris. Thank you so much for joining us, and be well.
- Thank you, Kim.
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