You can start collecting your CPP and OAS benefits in your early 60s. But is it better to hold off for another few years? Here’s what to keep in mind before you tap into these pensions.
May 17, 2017
How to finance a sabbatical
By Sarita Harbour
A sabbatical can give you an invaluable life experience, but it’s wise to do everything you can to minimize the financial price you’ll pay.
Even if you love your job, a sabbatical could be the perfect opportunity to pursue new adventures or accomplish goals you simply haven’t found the time to check off your list.
But before you start packing your bags for that distant volunteer assignment or sit down to write that novel, take some time to plan ahead financially. Careful preparation will give you peace of mind and help you make the most of your well-deserved break.
How can I live comfortably without a regular paycheque?
The good news is there are many options for financing your time away.
You can fund your sabbatical by dipping into your savings or making a withdrawal from a registered savings plan, such as a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP). (Keep in mind that although withdrawals from a TFSA are not taxed, any money taken from your RRSP will be – but if you’re not working, your tax rate may be lower. Also note that whatever you withdraw from your TFSA will be added to your contribution room the next year. But RRSP withdrawals don’t generate new contribution room – once your RRSP contribution room is gone, it’s gone for good.)
Or you could borrow against a line of credit, accepting the fact that you’ll pay interest on the money you borrow and you’ll have to make regular payments.
Establishing a deferred salary leave arrangement or plan (DSLP) with your employer, if that’s possible, is another strong option. This is a written plan that allows you to spread your salary over a longer period of time, more evenly distributing the funds between your paid working time and your unpaid leave. Essentially, you collect a smaller percentage of your pay while working and save up the difference in a DSLP to draw on during your time off, seamlessly providing a consistent salary during your sabbatical. Depending on how much salary you want to put aside (the law says you can defer no more than one-third), how long you’re prepared to manage on a lower paycheque, and what your employer will permit, you may need to set up a DSLP several years before you plan to take your sabbatical.
When you choose to fund your sabbatical with a deferred salary leave arrangement, the portion of your salary set aside isn’t subject to tax while you’re working. You will, however, have to take the money out of your DSLP no later than December 31 of the year following the year in which your sabbatical begins, and pay tax on that money.
And you can always look to your non-registered savings for a cushion. The tax impact of dipping into your non-registered savings is simple – this is your after-tax savings, so no more tax is owed (unless you’re tapping unrealized capital gains, in which case they will be realized and you’ll be taxed on half the gain – talk to an advisor for a full explanation). Withdrawals from your TFSA are also tax-free.
If you receive compensation from your employer (other than what the Canada Revenue Agency calls “reasonable” fringe benefits, such as health and dental coverage) under a DSLP while on sabbatical, expect to pay Canada Pension Plan (CPP) and Employment Insurance (EI) premiums, as well as income tax.
What are the financial implications of an extended leave?
In the short term, whether you’re participating in a DSLP through your employer or independently saving a substantial chunk of your income, you and your family will have to live on a reduced budget leading up to and during your sabbatical.
And depending on your sabbatical goals and travel requirements, your daily expenses might be higher than you encountered in your normal work routine. You probably won’t be packing your lunch or sticking closely to your regular budget if you’re doing research abroad, for example – and costs can quickly add up.
Another consideration is health insurance. Find out whether your workplace health benefits will cover you and your family while you’re on sabbatical. If not, you’ll need to arrange personal health insurance, critical illness insurance, disability insurance and other coverage – plus travel insurance if your sabbatical takes you out of the province or the country.
Finally, be mindful of your big-picture financial objectives: Will you still be able to make progress towards your long-term savings goals during your sabbatical? Ideally, you would still contribute to your retirement savings while away. If you ease up or completely stop contributions while on sabbatical, you’ll miss out on the long-term growth you would have made during this period. But don’t let this deter you entirely – think about ways to make up for lost time after you return. The point of taking a sabbatical is to gain a life experience that’s worth more than the financial disadvantages you incur by taking it – but it’s wise to do everything you can to minimize those disadvantages.
Make your plans well in advance
Before you even think about packing up, consider arranging a meeting with an advisor to review and update your portfolio. This will give you the chance to create a detailed plan for how to finance your sabbatical and arrange for any withdrawals from investments, RRSPs or DSLPs, and to make plans to catch up on your savings once you return to work.
With careful planning, a sabbatical can pay huge dividends for your personal, professional and financial life – refreshing and preparing you for adventures ahead.
