Lifestyle | How to finance a sabbatical project?

The situation

Igor*, 37, is considering a one-year sabbatical from his job in cybersecurity in the financial sector. He plans this long mid-career break in three years, for the year he turns 40^e birthday.

During this sabbatical, Igor plans to carry out travel projects and extended stays abroad. He estimates his travel budget at around $35,000 during this year of break, which he plans to finance mostly by withdrawals from his registered savings accounts (TFSA, RRSP).

These accounts total nearly $130,000 in financial assets at present; an amount that Igor expects to be able to increase to around $200,000 within three years and the start of his sabbatical, thanks to his strong savings habits, a reasonable lifestyle and his good employment income ($97,000 per year).

Despite a seemingly favorable financial situation for his sabbatical project, Igor is seeking advice on financial and budgetary preparation for the next three years before the start of this leave.

“What savings contributions should I prioritize between my TFSA and RRSP accounts in these few years before my sabbatical?” Igor asks in a conversation with The Press.

“So, which of these registered savings accounts should I plan to withdraw funds from as my primary source of income during my sabbatical year? What are the financial and tax rules to watch for with either of these registered savings accounts?”

Igor’s situation and questions were submitted for analysis and advice to Antoine Chaume Legault, who is a financial planner and wealth management advisor at the Montreal firm Assante Capital Management (Équipe Major).

Advice

Right from the start, financial planner Antoine Chaume Legault compliments Igor on the management of his personal finances, particularly with his strong savings habits.

“Igor is already in a good financial position, which bodes well for preparing his one-year sabbatical project,” notes Mr. Chaume Legault. “He is also in a favourable position to understand and manage the long-term cost of a year of interruption in income and contributions to his registered savings accounts.”

What cost? Essentially, explains Mr. Chaume Legault, it is a matter of estimating the value of the financial assets that will be “missing” in all the retirement savings that Igor would have accumulated until his retirement at age 65, without this one-year interruption in his retirement savings contributions, and the loss of 25 years of cumulative return on these assets.

To calculate this estimate, the financial planner relies on a few assumptions based on Igor’s planned lifestyle budget during his sabbatical. Among other things, Igor will withdraw approximately $35,000 from his TFSA and $20,000 from his RRSP as income during this year of leave. He will also stop contributing $25,000 per year to his RRSP and TFSA accounts.

“In total, this is an amount of approximately $80,000 that is considered a shortfall in retirement savings during this sabbatical. However, assuming an average return of 7% per year on this $80,000 asset, during the 25 years between his sabbatical at age 40 and his retirement at age 65, I estimate the “missing” value in Igor’s retirement savings at around $434,000 when he is on the threshold of retirement at age 65,” says Antoine Chaume Legault. Even far in the future, this is a long-term “opportunity cost” that Igor should not ignore during his sabbatical preparations.”

Financial preparations

That said, according to his target timeline, Igor still has three years to optimize the budgetary and financial planning for his one-year sabbatical. To this end, Antoine Chaume Legault has prepared a list of financial priorities for him to achieve over the next three years before his sabbatical at age 40.

First, he advises her to maximize her annual contributions to her registered savings accounts, starting with the TFSA, considering that it can serve as her main source of non-taxable income during the sabbatical. In comparison, her RRSP account takes second priority since withdrawals made during the sabbatical will then be taxable income.

“That’s why Igor should budget for a maximum withdrawal of about $20,000 from his RRSP, in order to minimize his taxable income during his sabbatical,” says Chaume Legault. “On the other hand, with his TFSA, if he can maximize his available contributions during the four tax years [2024 à 2027 inclusivement] Until his sabbatical, with an average return of 5% per year, Igor could accumulate up to $95,000 in his TFSA, from which he can make withdrawals as tax-free income during his sabbatical.

In the meantime, in order to optimize the management of financial assets in RRSPs and TFSAs in anticipation of this long leave, Antoine Chaume Legault suggests that Igor reduce their risk profile by directing them more towards investments with more stable income than investments in stock markets. “The more he increases his current investment income, the less he will have to draw on the capital of his registered savings accounts during his sabbatical, thereby reducing his long-term financial cost,” summarizes Mr. Chaume Legault.

Personal preparations

Furthermore, the financial and budgetary preparation for a one-year sabbatical involves a few other precautions in terms of personal affairs, indicates Antoine Chaume Legault.

First, regarding medical insurance during long stays outside Quebec planned during his sabbatical, he advises Igor to take advantage of the RAMQ’s exemption from loss of public health insurance coverage during stays of more than six months outside the province.

“This is the seven-year exemption [une fois tous les sept ans] available from the RAMQ, which allows you to maintain public health insurance coverage throughout the year despite stays of more than six months outside Quebec, explains Mr. Chaume-Legault. At the same time, Igor should check his personal travel and medical insurance coverage, either through his employer’s group insurance or through a personal contract with a life insurer.

Furthermore, in planning the budget for his sabbatical, Antoine Chaume Legault advises Igor to plan to sublet his current accommodation during this year of long stays abroad.

“With the agreement of his landlord, of course, Igor could generate sublet income to offset his residential expenses in Quebec – nearly $25,000 per year – during this year of long stays abroad. With this sublet income, Igor’s budget deficit during his sabbatical would be less of a burden on his financial situation.”

Similarly, Mr. Chaume Legault suggests that Igor consider accepting telework contracts during his long stays abroad. “If it suits him, especially since he already works in IT and cybersecurity, such contracts could serve as additional income during this sabbatical year, thereby reducing the impact on his long-term financial situation.”

Finally, as a tax preparation for this sabbatical, Antoine Chaume Legault emphasizes that “if he plans to stay outside Canada for more than six months during his one-year leave, Igor will have to inquire with the tax authorities about the conditions for maintaining his “tax residence” in Canada.”

Tax residency? “That is to say, he will have to continue to file his tax returns in Canada and Quebec on all of his taxable income in Canada and abroad during his sabbatical year,” summarizes Mr. Chaume Legault. “Igor will thus be able to keep his annual contribution room in TFSAs, TFSAPPs and RRSPs. But he will also avoid the erroneous perception that a long stay abroad would allow him to “exempt” himself from tax in Canada. Taxation does not work like that, and it could be complicated to manage upon returning from this long stay abroad.”

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