Baby bump – EI assistance for expecting parents

Informed use of employment insurance with a new child on the way

The decision to have children is as personal as it gets. But as impersonal as it may sound, one of the first considerations in deciding on a family expansion, is determining its impact on family finances. This means not just being ready to bear the cost, but also the potential reduced income.

At least at the start, the EI system offers some help to new parents.

Managing your expectations – Not full income replacement

Any way around it, you will be receiving less if you are not working. The general rule of EI is that is designed to replace 55% of your average weekly earnings, up to the maximum yearly insurable amount, which is presently $63,200 in 2024. That equates to a maximum of $668 per week, or less if your own income is less than that prescribed maximum. Either way, just like employment income itself, EI payments are taxable.

The general qualification requirement is that you need 600 hours of insurable employment in the 52 weeks preceding the claim. This criterion also applies to those applying for maternity and parental benefits (discussed below), in addition to showing that your regular weekly earnings from work have decreased by more than 40% for at least one week.

Types of benefits

Maternity benefits – For the expecting mother

This is for biological mothers, including surrogate mothers who are away from work due to pregnancy or a recent birth. It runs for up to 15 weeks, beginning as early as 12 weeks before the expected date, and may continue as far as 17 weeks after the due date or the date of birth, whichever is later.

As with general EI, it applies at a 55% benefit replacement rate, again up to the current prescribed dollar maximum (indexed annually) per week for the benefit period.

Parental benefits – Relief time that can be shared by two parents

Parental benefits are available to one or both parents of a newborn or newly adopted child. Both parents may be receiving benefits at the same time, or they may take them at different times. For a biological mother, application may be made for both the maternal benefit and parental benefit at the same time, allowing for seamless continuity from one benefit to the other.

Benefits may begin the week of the date of birth, or the week of placement in the case of an adoption. Benefits are available/measured in weeks, but do not have to be taken consecutively, allowing parents to start and stop according to their circumstances. There is a time limit by which all benefit weeks must be taken, based on either the standard option, or the extended option that pays less for a longer time:

- Standard parental option – All benefit weeks must be taken within 52 weeks (being 12 months)
- Extended parental option – Benefit weeks may be taken for as long as 78 weeks (being 18 months)

Once an option has been chosen and paid to either parent, the clock starts running on that time limit. As well, the option cannot be changed after payment begins, and the other parent must use that same option.

As between them, there is a maximum number of weeks any one parent may claim, being 35 for the standard option and 61 for the extended option. This condition accompanied the increase in the number of benefit weeks from 35 to 40 weeks and 61 to 69 weeks for the two benefit options respectively, as announced in the 2018 Federal Budget. The purpose of this condition/limit is to encourage more equitable sharing of parental responsibilities.

Further key details of both parental options and the maternity benefit are shown in the table on the following page.

Summary table by type of benefit
– For 2024

Personal savings strategies to get you to and through baby’s arrival

Inevitably a new child means new costs, though some lifestyle expenses may drop off as your time and attention are diverted. The net cost may be ambiguous, but most certainly your income will be less. The prudent course is to establish a savings routine early on:

1. As soon as you decide or become aware of your new addition, sit down together as parents-to-be and review your financial picture, ideally with the assistance of a financial advisor. While you may have managed without a budget in the past, parenthood will be extra difficult to navigate without good financial organization.
2. Inform yourself about the kind of products and services you may need during pregnancy and after birth/arrival. You can start by asking your own parents about their experiences, but be sure to update to the present. Beyond allowing for cost inflation over the intervening generation, educate yourself on current nutrition and healthcare practices, and safety devices (e.g. sleeping furniture, car seats), both legally-mandated and as recommended by recognized experts. Also, be cautiously skeptical about any gadget offerings you come across, some which may indeed save time and money, and others that may make you net worse-off for using them.
3. Arrive at a reasonable target for your planned weekly spending once baby arrives, and think carefully how long you will be away from work. On the income side, remember that the most you will receive from EI is just over half of your working income, and at a time when new expenses often crop up. Total up the potential weekly shortfall and multiply by the number of weeks you expect to be away from full-time work.
4. Divide the total shortfall above by the number of weeks from the present until you plan to begin your maternity/parental leave. That will tell you how much to save each week to accumulate exactly enough to carry you through the post-arrival time period. Don’t panic if this is a stretch. Rather, use it reinform your assumptions and intentions, and if necessary to motivate you to identify other savings sources to tap into.

Work interrupted – Coping with an involuntary career transition

Severance planning options to help you through job loss

Job loss is a risk that all employees face. It can happen at any time, but can be a particularly widespread concern when the economy is in recession. In that case, you’ll need to be prepared that, despite your own conscientiousness, you could be displaced by events beyond your personal control.

While you may not be able to completely insulate against it happening, you can prepare yourself by establishing financial habits and obtaining tax knowledge to weather through it if it does, and emerge sooner and as intact as possible on the other side.

Having a bridge fund

As a type of emergency fund, this bridges the household until the primary or sole breadwinner can get back into financial production. Ideally, you’d have this in place well beforehand, but even if you don’t, it’s a habit and mindset that will serve you well if you’re beginning to get nervous about your workplace.

Generally, a three-to-six-month cushion is suggested. While this may serve the purpose, make sure it truly reflects your personal job outlook and spending habits. Without dwelling on it too much, ask yourself on an annual basis what your prospects would be if you had to look for work. And on the spending side, understand what goes respectively toward necessaries, discretionaries, and luxuries, and how you will place the latter two on hiatus when required.

Job loss in the moment

It’s an emotional shock, but you need to maintain a clear head in a compressed timeline. The decisions you make will have both immediate and long-term effects. Within that, tax is sometimes simply part of calculating what you have no control over, and in other cases it is a critical contributor to those decisions.

Nature of a payout

Without getting into the minutia of how each is calculated, your employer may owe you one or more of the following, all of which are subject to income tax:

- Severance pay — Based on length of your employment, when you are let go without any fault on your part
- Termination pay — In lieu of providing advance notice of the last day of employment
- Vacation pay — Earned but unused vacation entitlement
- Lump sum — Accrued benefits (e.g., banked sick days) that may be owed to you on departure

Withholding for income tax, Canada Pension Plan, and Employment Insurance will apply if severance pay is in the form of salary continuance. However, if it is paid as a lump sum, only the income tax is deducted. As well, if your employer agrees to spread payments over two or more years, that could ease the tax cost if you are in a lower bracket on each receipt.

Benefit continuation and replacement

Losing health and dental insurance can be an extra disruption, especially if you or your family have upcoming appointments. Ask if coverage could be extended for a time to relieve some of the burden.

For group life insurance, you are usually able to buy replacement coverage without medical underwriting from the current benefits company. That’s especially important if you’re no longer insurable, but otherwise you may be able to reduce your cost by shopping the market.

Retirement funds

Transfer to RRSP — When a large payment comes, you can direct some of that amount to your RRSP if you have room. This will protect against income tax, but be sure that you still keep enough cash on-hand to carry you through your expected unemployment time.

Registered pension plan (RPP) — Defined contribution plans can generally be transferred to a locked-in RRSP without any tax issues. Defined benefit plans are more complicated, with possibilities ranging from remaining in the plan, beginning the pension immediately, transferring to the plan of a new employer, or commuting into a locked-in RRSP. Your pension administrator will provide you with a package to review, so get out your reading glasses and fine-tooth comb.

Retiring allowance — Extra one-time RRSP room is available on severance pay to a longstanding employee. It is $2,000 for every year you’ve been with the same or related employer before 1996, plus $1,500 for each year before 1989 for which employer contributions to an RPP or deferred profit-sharing plan (DPSP) have not vested. Contributions must be to your own RRSP (i.e., not to a spouse), and the room cannot be carried forward.

Recovery to re-employment

On top of managing your spending, it’s important to keep your debt under control. At a minimum, make the minimum payments to keep your credit in good standing, bearing in mind that potential future employers will likely do a credit check before hiring.

If you are feeling overwhelmed, consult your financial advisor, a credit counselling service, or an insolvency trustee. They can advise on negotiating with creditors, and discuss whether debt consolidation may be appropriate.

Finally, when you do get resituated, understand and keep an eye on any probationary period you may be under. You should continue to operate with your streamlined spending rules until that period has passed, but in time things will normalize to a new routine, with your future back on track.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. This document is published by Aviso Wealth and unless indicated otherwise, all views expressed in this document are those of Aviso Wealth. The views expressed herein are subject to change without notice as markets change over time.

My 3-reserve approach: Emergency–Bridge–Buffer

[This article also posted to Linkedin here]

Last week I posted a comment on social media linking back to an FP Canada survey that noted, among other interesting observations, that “almost four in 10 (37%) Canadians say they rarely or never put money aside in an emergency account.”

In my cover comment, I mentioned that I myself had three types of such funds or reserves – emergency, bridge and buffers – and that they served me well recently when I was going through career transition. (For those not familiar with the latest lingo, that means I was between employers.)

Someone asked me what I meant, and how I quantify those. I gave a short response (it being fleeting social media), but thought I’d provide here a bit more detailed explanation of how I view and use these three types of reserves.

What’s your emergency?

The problem with a blanket emergency fund is that most people don’t define what constitutes an emergency.

The classic ‘I’ll know it when I see it’ view is no help. That could make it anything from just a slush fund – as in literally, ‘I could really go me a slush on this hot day’ – all the way up to it never being touched because it would require worldwide armageddon.

In my 3-part distinction, an emergency is something that is truly unexpected due to its nature and/or timing, that demands an immediate and significant financial response. It’s a medical diagnosis no-one expects, or property damage beyond what you reasonably insured for, or maybe even a new addition to the family well after you’ve auctioned all the stuffies on Kijiji.

So, mea culpa, I’m not giving it a specific definition myself. I am however setting aside an amount every week (which was reduced but not paused during career transition) so that we’re prepared for that non-ventuality. If that emergency doesn’t come as we’re nearing our work-optional threshold, it may accelerate that date a bit, keeping in mind (and keeping in reserve) that emergencies can happen at any life stage.

A bridge to … when

I started with the emergency fund above, in keeping with what people expect to discuss as the primary reserve. I too have written using this umbrella reference. Getting more nit-picky on how I parse it out personally, what many people call an emergency fund, I call a bridge fund. So despite that I’m writing on it second, I believe this to be the first priority topic and target among the three.

It’s a bridge fund because it allows you to keep moving forward in your life journey when the road beneath you has been washed away.

With all due respect to thumbnail wisdom, an arbitrary target like 3 or 6 months has nothing to do with specific circumstances, though I wouldn’t argue against this as impetus to begin funding one’s reserve.

Ideally your bridge fund is based on how much time it takes to get re-situated or re-employed, based on a clear understanding of yourself, your skills and the state of your industry. That’s on the income side, or more aptly the absence of income.

Express that in terms of weeks and multiply it by your ‘lean budget’ (deferring discretionaries and luxuries), and there you have your accumulation target. Now determine how much you can devote to that from your current weekly budget and that tells you how long it will take to get your bridge fully funded.

Buffering up the budget

The last component – buffering – is a practical application of the budget categories we use to keep our financial lives in order. I’ll assume here that you are not just using a single current/chequing account for all purposes.

For me, there are about 10 major categories, with 50 or so individual line items. Of these, a couple dozen warrant their own distinct sub-account at your favourite financial institution. Though I’m paid bi-weekly, there is an auto-transfer from my main account to each of these sub-accounts, regardless whether I expect to spend anything that particular week. For example, my electric bill is paid monthly, but the account gets a weekly drip.

Now here is where the buffering comes in. My spreadsheet sums actual past monthly amounts in each category to arrive at an average monthly cost. (I update about quarterly.) This then is divided by 4 for the weekly drip. The benign deception (to myself) is that though I’ve effectively divided by 48, the drip occurs in every one of the actual 52 weeks. Thus each account is modestly indexed by about 2% over the year.

It’s a small and almost unnoticeable cost for me to pay (myself) over the year. In truth, I started doing this as a way to slowly index for year-to-year inflation, rather than having an unpleasant surprise that shocks the budget and knocks my resolve every January.

And yes, I do skim out some from the accounts occasionally, but I haven’t been compelled to top-up any of them in any serious way. In fact for the larger ones, like the appliance account, it’s a couple months ahead of need, despite having to use it for its intended purpose twice this last year.

That’s it, three ways that I use reserves to create comfort space in my finances.