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Client Profile

Janet Wilson,* 34, is a self-employed physiotherapist. She’s thinking of starting a family with her partner, Jeff Medoza, who works in a community arts organization in their hometown of Sudbury, Ont. Janet paid employment insurance (EI) premiums when she held retail jobs as a university student, but it’s been years since she contributed.

*This is a hypothetical scenario. Any resemblance to real persons is coincidental.

The situation

Janet would love to stop working when she has her baby, but is worried that she and Jeff won’t be able to afford it. She currently takes home about $60,000 before taxes, while Jeff’s salary is $45,000. The couple has about $30,000 in a TFSA, and another $25,000 in an RRSP. Their monthly expenses are about $5,500, which they assume will go up once they need childcare.

Janet knows that, in 2011, the federal government started letting self-employed people contribute to EI. If she chooses to pay into the system, she could get up to 15 weeks of maternity leave and 35 weeks of parental leave benefits (not to mention the options of EI benefits for sickness and compassionate care, should she need them). Jeff already pays into EI through his employer, and he also qualifies for 35 weeks of parental leave benefits.

As she and Jeff contemplate having a baby (or two), Janet wonders if she should pay into EI as well. Will it be worth it? Can she draw on any of her old EI contributions? Is she better off using her savings to fund any leaves?

The issues

Janet and Jeff have to account for several factors, says CPA Ruby Lougheed Yawney: how many children they want to have, how much time she can reasonably take away from work, and whether it makes more sense to pay EI premiums or invest that money.

Navigating EI’s rules

With an annual income of around $60,000, Janet more than meets the minimum earnings requirement of $6,820 to qualify for EI. She’ll have to pay $1.88 per $100 of insurable earnings in premiums, to a maximum of $50,800, which works out to $955 a year.

Benefits are 55% of average weekly earnings, to a maximum of $537 per week. If Janet opted in to EI, she’d be eligible for up to $8,055 in maternity benefits (a maximum of 15 weeks), plus another 35 weeks, or $18,795, in parental benefits, for a total of $26,850. Lougheed Yawney reminds us that EI rates are always subject to change.

At first blush, it sounds like a good deal: spending $955 to get $26,850. But, in order to qualify for maternity or parental benefits, Janet will need to pay premiums for a full 12 months before collecting benefits. If she and Jeff want a second child, Janet would have to return to work for another 12 months before collecting benefits again. That’s a concern, since Janet doesn’t want to plan her family according to the government’s timelines.

Conversely, if Janet becomes pregnant before the 52-week qualifying period, or has a premature birth, she won’t qualify for benefits—including sickness or compassionate care benefits, which could come in handy in that situation—for the entire 35 weeks. It’s also worth noting that if Janet’s business fails, she is ineligible for unemployment benefits, even after paying into the system for 12 months. (That’s all the more reason, notes Lougheed Yawney, to make sure she has adequate disability and critical illness insurance coverage.)

As for drawing on her previous EI contributions, that’s not an option: benefits are based on a person’s employment history over the 52 weeks immediately preceding a claim (it can be 104 weeks in special circumstances that don’t apply here). As well, Janet or Jeff would have to take into account the mandatory one-week waiting period before making an EI claim.

For the math to work, says Lougheed Yawney, Janet would need to take two full maternity and parental leaves, which would yield $53,700 in benefits. “Assuming Janet works until age 65, she would pay $29,605 in EI premiums over the course of 31 years. If she has only one child, the maximum benefit is $26,850. It doesn’t make sense to pay more in premiums than she’ll receive in EI payments,” she says.

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“It’s just number crunching once you know the EI rules, which are pretty accessible,” says Lougheed Yawney. After that, seek guidance from a CPA.

Further, once a self-employed person starts contributing, she can only opt out if she has never collected benefits. So, if Janet can’t become pregnant at all, she could stop participating. But if she has one child, collects EI and then experiences secondary infertility, she’d be stuck paying premiums until retirement. Given her age and time constraints, that’s a serious consideration.

And then there are the realities of running her own business. As a physiotherapist, she can’t take a full year off and expect clients to wait. She foresees needing to offer a few appointments a week within three months of the child’s birth.

Lougheed Yawney, who is also self-employed, agrees: “I had a client call me in the recovery room after the birth of my second son. I don’t know any self-employed mothers—and that includes many of my clients—who can realistically take extended time away from work.”

Finally, if Janet works during her maternity or parental leaves, any gross weekly earnings above 25% of her benefits (or $134.25) would be deducted dollar-for-dollar from her EI cheque. At roughly $60 per physio session, she can only work a few hours before depleting her benefits.

Pay premiums or invest the money?

If Janet invested $955 a year in her TFSA rather than paying EI premiums, she’d come out ahead, even after drawing on savings to cover household expenses while she takes a few months off.

Lougheed Yawney also calculates that Janet and Jeff could sock away a little more than $5,600 (partly by saving the $955 Janet would otherwise pay) in the 12 months preceding the baby’s arrival (for the full calculations, go here).

They can put that surplus toward a self-funded maternity leave for Janet of three months. After that, Jeff could take 35 weeks’ parental leave at 55% of his salary and Janet could return to work at reduced hours. That scenario would leave the couple about $8,000 in the red after their first post-baby year, a deficit they can make up once both parents are working full-time by reducing their personal expenses by about $100 a month and forgoing savings for the year. That’s even after projected daycare costs of nearly $11,000 per year—which can be deducted from Jeff’s income as the lower-earning parent. They’ll also be able to take advantage of federal and provincial child and family benefits.

Assuming they borrow that initial deficit from their TFSA, that Janet contributes $955 each year after that to her TFSA, and that the money grows at 4% annually, she’d end up with about $146,000 after 31 years. At that rate, Janet and Jeff’s savings would exceed the benefits from two full maternity and parental leaves by the time she’s 54, provided they don’t touch the money.

“Over time, the hope is Jeff could earn more money and they can both contribute more toward retirement savings, as well as RESPs for their child or children,” says Lougheed Yawney.

The Solution

Janet won’t opt into EI. The couple will start trying to conceive and saving to cover expenses post-baby. They also plan to invest at least $955 a year into their TFSA for retirement savings, or more if possible.

Jeff will take the 35 weeks parental leave he’s entitled to as an employee. It’s an option that becomes even sweeter when the couple finds out his employer will top up his earnings, making them 85% of his salary for 15 weeks.

Client acceptance

Janet was excited when she learned that self-employed people could get EI, but is now disappointed that it doesn’t make sense for her. Regardless, she’s glad she and Jeff can afford at least a few months off.

Susan Goldberg is a financial journalist based in Thunder Bay, Ont.

Originally published in Advisor's Edge

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