Lifestyle | Going abroad: deferred leave or year without pay?

What financial strategy can be used when one spouse wants to go work abroad for a year and the other has to put their professional life on hold?

The situation

It’s decided, Marcus*, 39, a university professor, will go abroad for a year to do research. He will then receive 90% of his current salary.

His partner Stella*, 40, a public sector health professional, and their two children will follow him. To limit housing costs, the couple plans to exchange their house with another university professor.

The stay is planned from summer 2027 to summer 2028, following the rhythm of one school year, but two financial years.

“I wonder what is the smartest and most adequate way to finance this year,” writes Stella, who plans the year abroad three years in advance.

“I have some professional business projects of my own that I want to develop during this year, but obviously this will require time and a little money at the start,” she continues.

Stella’s employer allows her to take deferred leave and be paid 80% of her salary during the sabbatical and the following four years. However, if her business plan works out or she wants to change employers, Stella will have to pay back this deferred leave in one go.

If she opts instead for 12 months without pay, she will then have to pay $13,000 to buy back her retirement fund and ensure she has RRSP space to do so.

What also bothers Stella, who is not married, is the 50/50 sharing of family expenses. Yes, she wants to follow her partner into the adventure, but she comes out the financial loser, whatever the solution chosen, while her partner will continue to be paid, she believes. They have a cohabitation contract and a will, she specifies.

“I lose RRSP contribution room by earning a lower salary, I would also have two years of lower income for the Quebec Pension Plan (QPP) and I lose part of my income other than my usual salary,” explains Stella, emphasizing that her spouse has accumulated more capital than she has because of scholarships and help from his parents.

How can the couple’s situation be made fair? From a tax perspective, is it better for Stella to take a year without pay or deferred leave?

The analysis

Sylvain B. Tremblay, financial planner, vice-president of private management at Optimum investment management, and his colleague Matthieu Leclaire, financial planner, vice-president of private management, analyzed the file.

“The first observation is that this is a couple who are in a very good financial situation. Marcus has a good status as a university professor with a defined benefit pension fund. His sabbatical year will not affect the assessment of his plan, because in the calculation, it is the number of years multiplied by the average salary of the three best years that counts,” observes Sylvain B. Tremblay.

“If Marcus invests his savings at a 5% rate of return until he retires, he will have $3.5 million in savings in addition to his annual pension of $90,000,” continues the financial planner.

At age 65, the pension plan pension decreases and is coordinated with that of the QPP.

Stella also has a good indexed defined benefit pension fund.

Two choices were analyzed by the planners.

80% over 5 years

From 2027 to 2031, she would have 80% of her gross income of $135,000, or $108,000. The difference between the current after-tax income and the deferred leave income is about $18,900.

“If she chooses this option, she will not be penalized in her plan, because her retirement fund gives her an annuity based on the five best years,” explains Matthieu Leclaire.

However, since income averaging reduces the tax impact, Stella will lose some of her RRSP contribution room.

Contrary to what she believed, her Quebec Pension Plan (QPP) pension will not be affected, because the maximum calculation amount of $68,000 will be reached.

“With this option, the first year is very motivating, because you don’t work and you make 80% of your salary. Then, for the next four years, you work, but you are paid 80% of your salary. It’s less pleasant,” says Sylvain B. Tremblay. “Maybe this option will give her a clear conscience, because a salary will come in. It’s up to her to decide.”

Unpaid leave

“With this option, Stella must plan to buy back her retirement fund to obtain the maximum, although their standard of living does not require it,” maintains Sylvain B. Tremblay.

The planner points out that unpaid leave allows her to be flexible and not tied to her employer, in case she changes her mind during her leave.

“The decision to choose one or the other option should not be made based on tax,” insists Sylvain B. Tremblay, “because the tax impact is not significant.”

Since the leave is spread over two fiscal years, a tax saving is to be expected, but it will reduce her RRSP contribution room. On the other hand, by working a little during the two fiscal years, she will reach the maximum amount of $68,000 for the calculation of the QPP.

“Her contributions to the Quebec Pension Plan (QPP) will not be affected,” says Matthieu. “She does not have to worry about a penalty from the QPP.”

To make the right decision, Stella must instead evaluate the psychological aspect of each option. Which choice does she feel most comfortable with? advise the two planners.

3-year strategy

If it makes her feel better, Stella can make saving her priority. She could set aside $30,000 to $40,000 per year until 2027. By choosing the unpaid leave option, she could withdraw $90,000 to $120,000 as needed.

“The next years of TFSA contributions can be used to finance the project abroad. In which short-term product? A balanced strategy. It is better not to be bold,” advises Sylvain B. Tremblay.

She can continue to maximize the RRSP and RESP.

Fair family finances

Stella also wanted advice about sharing family expenses.

“As this is a thorny issue in the cottages, it might be fair to consider sharing expenses according to each person’s income, or even according to their personal assets,” suggests Matthew Leclaire.

In short, with their current income and lifestyle, the couple has enough money to fund a year without Stella’s income.

“Unpaid leave appears interesting for its flexibility, especially if a career change is planned after the leave. Furthermore, if security prevails, then deferred leave will allow you to be more relaxed, but will be for a longer period,” concludes Matthieu Leclaire.

* Although the case highlighted in this section is real, the first names used are fictitious.