Nadiya Barakat*, 38, spent years dreaming about the restaurant she wanted to open in downtown Halifax. Part café, part cocktail bar with a menu of Mediterranean appetizers, Hamra would be a tribute to the Beirut café culture she’d heard so much about from her parents. After mustering the courage to leave her government communications job, Nadiya secured a lease and Hamra opened to rave reviews. A year later, the pandemic hit.
Nadiya was forced to close the restaurant for weeks. When lockdowns were lifted, she was nervous about reopening. Her wife, Michaela Tobin (41), a developer for a small video game firm, is diabetic and Nadiya worried about exposing herself — and her family — to the virus. She opened Hamra’s patio for the summer and customers returned but, by the fall, the thought of a resurging virus and trying to get by on takeout orders became too much. She also worried about more school closures and felt she couldn’t leave her twin daughters — Laura and Donya, 4 — alone with Michaela all day while she worked from home. With a heavy heart, Nadiya closed Hamra for good at the end of October, barely breaking even.
For the Tobin-Barakat clan, one radical shift led to another. Michaela already worked remotely part-time before the pandemic. She had often talked about returning to the Annapolis Valley, where she grew up, but it was a move she imagined in the distant future. Suddenly untethered to Halifax, and craving the extra space and freedom of the country, she and Nadiya pulled the trigger on a four-bedroom house in Wolfville. They would keep the kids in school in Halifax for the rest of the year and move in the summer.
The home in Wolfville cost $289,000. After a 20% down payment of $57,800, they’re paying $850 per month on their mortgage. They plan to keep their three-bedroom Halifax home, assessed at $419,000 (they just paid off the mortgage), and rent it out to students after splitting it into upstairs and downstairs units (they think they can earn about $2,800 per month, total, for the two units). In the meantime, cash will be tight. Michaela earns $120,000 per year, but her remaining savings went to the down payment for the Wolfville home. And she put $50,000 aside for renovations to the Halifax house.
Nadiya is walking away from the restaurant with no savings, trying to negotiate her way out of the remaining months on the lease. She’s also worried about being out of work for too long — another statistic in the “she-cession” caused by the pandemic. How should Nadiya and Michaela plan for the year ahead?
* These are hypothetical clients. Any resemblance to real people is coincidental.
Blair Evans, Director, tax and estate planning, IG Wealth Management, Winnipeg
Emily Rae, Senior financial planning advisor, Assante Capital Management, Halifax
Mark Therriault, Financial advisor, Nicola Wealth, Vancouver
Answers have been edited for length and clarity
Blair Evans: They’ve made some pretty significant life changes with Nadiya shutting down her business and the family moving out of Halifax.
They might be eligible for one of the three federal government benefits: the Canada Recovery Benefit, the Canada Recovery Sickness Benefit or the Canada Recovery Caregiving Benefit.
Emily Rae: There are provincial programs they could look at as well. In Nova Scotia, they may qualify for the Small Business Impact Grant Part Two.
Mark Therriault: Because Nadiya shut the doors of the restaurant and isn’t planning on returning, it doesn’t look like she’d be able to get the Canada Emergency Rent Subsidy.
The most dramatic option is for Nadiya to file for bankruptcy on the restaurant. The best option would be to find someone to sublease that space. But it would be difficult to find another restaurant that would want to open up in the middle of a pandemic.
The most likely option is to go to the landlord and try to negotiate a buyout so she can walk away from the lease. The landlord may go through court to try and seize assets and somehow get remunerated for the lease contract. But if the landlord is reasonable, Nadiya can negotiate: say, “Look, we broke even. I don’t have savings. Is there something we can do to try and work out a deal?” Often, the landlord may try to find somebody else. If [the landlord] can receive a small sum of money, it’s better than potentially receiving nothing and going through the hassle of taking this to court.
ER: Wolfville is a huge foodie town. If she loves the restaurant business, there are wonderful farmers’ markets where she could run a small business and still be able to help out with the kids’ home schooling during the week. She doesn’t have to let go of her dream. It might be a little bit smaller for now.
MT: Or she could find a managerial position at another restaurant. She could continue to pursue her passion without taking the necessary risk of being the owner. This would increase the income for the family.
BE: Another thing we see people in this environment do is take advantage of educational opportunities. If there are courses that she wanted to take but never had the time while running her successful restaurant, now could be a great time.
ER: Renting the Halifax property requires a really good business plan. They need to know what the expenses are: $2,800 in rent sounds nice, but after you take out property taxes and general maintenance, what’s the return on that?
MT: I assumed about $8,000 of expenses for insurance, taxes and miscellaneous things. So they’d be making about $25,000 a year — call it net cash flow after expenses — on the Halifax rental. The cash flow would be about 5.3% based on the current market value, which in this environment is a pretty attractive return.
They should consider making Nadiya the property manager of the rental property. They can pay her a salary for managing the property and finding tenants. Then that $25,000 of income is all being taxed in Nadiya’s hands. And because she doesn’t have any other income, they’ll pay very little tax on that. That would be a decent tax savings on that passive revenue. She should check with an accountant to make sure the employment arrangement is structured properly.
BE: For the Halifax home, if they’re incurring $50,000 of expenses to renovate the property, that’s a capital improvement. They can add it to the cost base. Then when they sell the property, any capital gain would be reduced by that $50,000.
The way they have it now, there’s debt on their principal residence but the mortgage is completely paid off on their rental property: definitely not ideal from a tax perspective, because you’ve got non-deductible debt on your personal home. One option in this situation is cash damming, which involves borrowing on a line of credit to pay all of the rental home expenses. The interest on the line of credit would be deductible. Then use the gross rental income, the full $2,800, to pay off your personal property.
ER: Following that train of thought, the $50,000 they’re thinking of putting into renovating the place — it would be better to use that cash to pay down the Wolfville mortgage and borrow that renovation amount on a line of credit so the interest is deductible.
MT: They could also consider putting the rental into a holding company. There are some liabilities if something happens within the home. You have insurance to cover that. But let’s say the students staying in the home have people over and somebody falls down the stairs and breaks a leg. That student may sue the homeowner.
A holding company is considered its own entity: it’s adding a layer of protection, of separating out that particular asset from personal property.
There are some costs to having a holding company. You can get incorporated online, so there’s a one-time fee to set it up. Filing a separate tax return would be an ongoing expense.
BE: One of the most important parts here is understanding Nadiya and Michaela’s goals and concerns. I like to start a timeline. This way, the comprehensive financial plan will address their goals and concerns at every point on the timeline, rather than just in the short term.
ER: When one person leaves the workforce, it affects not only household finances but also things like Canada Pension Plan payments. Because they’re losing years of contributing, they’re not able to save as much. Maybe they have to save an extra $200 a month to get them to their retirement goal.
MT: To build up savings, I would get a mortgage or line of credit against even 50% of the equity in the Halifax property, and then invest the borrowed money. For instance, they could get a five-year mortgage for under 2% or a line of credit at prime. The interest would be fully tax deductible, so the cost of borrowing is cheap. If they were able to find an investment that would provide 3% or 4% cash flow, even if there’s some volatility in the asset value, the reality is they would still make more cash flow [than required] to cover those interest payments. It could be REITs or commercial mortgages; dividend-paying stocks would be an option, but the market is more volatile. It depends on their appetite for risk.
Over five years, the idea would be that they’d also make some capital appreciation on their investment. This would increase their ability to save without having to come up with additional capital.
BE: On another note, it’s important to do an insurance needs analysis and look at different types of insurance: life insurance, disability insurance and critical illness insurance.
ER: Michaela has diabetes, which could affect insurance ratings. She should make sure that she doesn’t get a carrier that would rate her higher.
MT: Term insurance would be the best option for both of them. Get a cheap term — I would say probably a term-10 policy. They’d want enough coverage to allow the other partner to have her lifestyle covered for at least five years. They’d want higher life insurance for Michaela.
Also, it sounds like Michaela works for a startup. I’m not sure if she has employee benefits, so she should look into applying for a group disability plan. Individual disability insurance can be quite expensive, but most insurance companies in Canada have group disability plans. You’re essentially pooling your insurance [with others through] the insurance company.
BE: Having an emergency fund is really important, especially for landlords — if the water heater blows, you have some money available to cover that cost. The important thing is understanding what they can afford. An emergency fund could be six months of expenses. They may not have that much available now, but working up toward having that amount would be key.