Plan a sabbatical and ensure equity between spouses

Some professions, including teaching, allow you to set aside a certain portion of your salary so that you can be paid during an extended leave. Skandar comments: “If Maeve and Vincent were my clients, I’d ask them to check their employer’s internal policies to determine as precisely as possible what they’re entitled to. They may already know all about this, because this sabbatical is a project they’ve been discussing for some time. For Maeve, the decision to take this sabbatical involves making an arrangement with her employer. The sabbatical would be at her own expense, apart from the accumulated weeks of vacation she could use during this period. For Vincent, a deferred salary leave usually works like this: for four years, the employee receives 80% of their salary, and in the fifth year, they continue to receive the same percentage (80%), even if they’re not working. Pension fund contributions are also made. But we need to check that he has this option.”

“To understand the scope of this project,” Skandar continues, “they’ll need to make a budget of travel costs: which countries they want to visit, their modes of transportation and their cost, the length of stays and the amounts to budget for their living expenses (food, hotel or apartment rental). With this basic budget, they can ensure that the percentage of salary that Vincent will receive and Maeve’s financial contribution will be sufficient to cover their expenses. If not, they could decide to withdraw the shortfall from their individual TFSAs or RRSPs for that year. Note, however, that in the case of RRSPs, the amounts withdrawn will be added to their taxable income when they file their tax returns for the year of withdrawal. Having a realistic idea of the overall costs of this trip will help them make informed decisions.”

“As for the impact of the leave on their current financial plan,” adds Skandar, “I checked and Vincent should not be penalized in terms of his pension plan (according to the Government and Public Employees Retirement Plan) since contributions are calculated on the salary actually paid to the employee. This information obviously needs to be confirmed with his employer. As for Maeve, she’ll be able to return to her job and her savings habits.”

Could they rent out the house while they’re away? If they choose this option, they’d have to store their personal belongings, but it’s feasible, especially if the tenant is an acquaintance or a family member. “It would generate taxable income, but this income could cover their expenses (municipal taxes, heating, maintenance) and there would be someone present in the house during their absence. Be careful, though: if you rent the house to an acquaintance at a lower rate than you would have charged someone you don’t know, you won’t be able to deduct any losses resulting from renting to that person,” adds Skandar.

Would renting out the house have an impact on the principal residence capital gains exemption when it is eventually sold? “Theoretically, no,” says Skandar, “under subsection 45(2) of the Income Tax Act,[1] which, under certain conditions, makes it possible to avoid the deemed disposition for a maximum of four years. If the sabbatical or absence is extended, then there could be a problem. In his plan, Vincent should take into account the conditions of this designation.”

[1] https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html#toc18

When it comes to starting a family as a de facto couple, Skandar stresses the importance of having a notarized cohabitation agreement. “If the couple is seriously thinking about having children, they need to discuss what would happen in the event of separation and put that in writing. And the best time to make a cohabitation agreement is when things are going well, not when they’re going badly.”

Since the house belongs to Vincent, it’s also necessary to establish some guidelines. “Maeve shares the common expenses such as property maintenance and related costs: we would have to quantify her contribution and agree on a way to compensate her,” says Skandar. “If she pays half the expenses, but her contribution isn’t recognized in the couple, that’s unfair. And if you add the scenario of a family with children, it gets even more complicated. You also have to consider the less fortunate situations that can arise, such as illness or death. In fact, they should formalize this agreement before their sabbatical, to protect themselves.”

“Before leaving on a trip, you have to think about life insurance, disability insurance, a protection mandate and a will, and even advance medical directives,” says Skandar. “Asking your notary to draw up several legal documents such as your mandate and your will when you’re already asking him to draw up a cohabitation agreement often costs less than having these documents drawn up separately at different times.”