Sabbatical & Asset allocation?

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Yoder
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Sabbatical & Asset allocation?

Post by Yoder »

Howdy,

Planning on taking 2 year break internatioanlly where I will be volunteering (the 'sabbatical'), possibly with a stipend to cover basic family costs.

I have a moderate size RRSP and a larger portfolio within the CCPC. Currently I'm about 95% equities - approximately divided equally between CAN/US/global.

I have no major need for any of these funds - they are almost all for retirement. Perhaps I might need to take at most 10% of my portfolio out over the next 2 years for some added cash. As mentioned above the basic family costs will likely be covered.

I expect to be gainfully employed again once my volunteering is done. I have no debt.

I'm 38, and have not previously worried about a market crash, knowing that I would continue to plow $$ into my portfolio regardless.

I suppose my question is more philosophical than practical, but am interested in the opinions of other FWFers: would a sabbatical as I'm describing change your asset allocation? Would a sudden (but temporary) change in income affect how aggressively one should allocate?

Appreciate anyone's thoughts...
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Re: Sabbatical & Asset allocation?

Post by peter »

I'd consider how much emergency funds you might need, perhaps more than before?

I'd also consider the possible effect on your employment possibilities after the two years. If your current job is secure and you know you can go back to the same job, and want to go back to the same job, you might not change anything. If your current job is uncertain (a CCPC could be a physician or an online store importing fake Ray-Ban glasses?) you might not change anything either since nothing will change :) If your current job is certain but you don't know what will happen after two years, perhaps a more conservative asset allocation is called for? You indicate you expect to be employed again, so perhaps no changes are in order.
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Re: Sabbatical & Asset allocation?

Post by gobsmack »

I imagine the stipend you will get is probably going to be on the low side. This is going to be a unique experience and I would probably want to have an extra source of income so that I can make the best of it. I could see myself not reinvesting any dividends during this period and using that as extra income. Perhaps I would also look for easy opportunities to boost income (e.g., increase REIT allocation) but I would not drastically deviate from my current plan.

BTW: If needed, I believe (not sure) you can convert your RRSP to a RRIF during this period and then convert back to an RRSP once you are gainfully employed again. Obviously, the main drawback is that the money you take out as income will not continue to grow tax deferred.
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Re: Sabbatical & Asset allocation?

Post by gobsmack »

Should the OP be concerned about the conditions required to maintain tax residency in Canada while overseas (i.e., avoid departure tax)? I have no idea how this works.
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Re: Sabbatical & Asset allocation?

Post by Yoder »

Thanks for the good advice so far.

I should mention also that part of the taxation quandary is always: "how to get the money out of the CCPC in a tax-efficient manner".

We will be using this opportunity (when we have minimal income) to take out a larger amount of $$ from the corp in the form of dividends probably, but it will simply go from a non-registered corporate account, to a non-registered personal account. At least that is part of the plan.

I supposed one of my mostly "psychological" concerns is: how will I feel if the market drops, and I'm unable to take advantage of it - since there is no dry powder available. But I guess this sounds curiously like market timing...
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Re: Sabbatical & Asset allocation?

Post by gobsmack »

Yoder wrote:I supposed one of my mostly "psychological" concerns is: how will I feel if the market drops, and I'm unable to take advantage of it - since there is no dry powder available. But I guess this sounds curiously like market timing...
I wouldn't worry about that at all but that is only me. If this is a concern though, you could always boost your emergency fund as suggested above and treat part of it as "dry powder" should a major opportunity come up.
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cannew
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Re: Sabbatical & Asset allocation?

Post by cannew »

If any of your funds qualify, put it in a TFSA. Buy quality DG stocks and ignore them.
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deaddog
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Re: Sabbatical & Asset allocation?

Post by deaddog »

Where are you going that you won't be able to monitor your portfolio on an ongoing basis?
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Re: Sabbatical & Asset allocation?

Post by AltaRed »

deaddog wrote:Where are you going that you won't be able to monitor your portfolio on an ongoing basis?
When someone is ex-country for a period of time, the last thing one should want to think about is managing a portfolio. I didn't want too the times i went ex-pat to the USA,. Bigger fish to fry than monthly looks at statements (online access may be frozen).

Perhaps more importantly, although not likely in this case since it is a non-earning sabbatical with an intent to return to Canada, there could be tax consequences in non-registered accounts of anything bought and/or sold while out of country (depends on jurisdiction). It is best that non-registered* account activity be frozen while a 'tax resident' of another jurisdiction. It is important to know the tax consequences.

The OP should check with a tax accountant (or even CRA) to be sure s/he does not lose Canadian tax resident status while on sabbatical. Losing tax resident staus has consequences on 'deemed disposition' of non-registered assets.

* Would include a TFSA if in the USA (or better yet, no TFSA while in the USA).
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izzy
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Re: Sabbatical & Asset allocation?

Post by izzy »

This may help
http://www.taxplanningguide.ca/tax-plan ... residence/
apparently ,among other things,you can unwind a deemed disposition on resuming residency assuming you still own the asset .
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Re: Sabbatical & Asset allocation?

Post by AltaRed »

The issue is not necessarily the deemed disposition itself. It is the cap gains tax that must either be paid, until it cen be recovered, upon return, or security posted. Either way, it is cash out of pocket in the interim.

In the old days, it was a good thing to have a deemed disposition so that the ACB could be reset upon return, presumably at a higher level, but that may no longer be possible, especially in an obvious return to Canada situation.

The main reason I brought up the subject was potential complications in trading assets while out of country. The OP should be getting tax advice.
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izzy
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Re: Sabbatical & Asset allocation?

Post by izzy »

Yes but according to that reference security is not required on the first $100.000 of capital gains , If that is true it probably doesn't cause a problem for most people.Of course the devil is always in the details so its still advisable to check with an expert.
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Re: Sabbatical & Asset allocation?

Post by AltaRed »

I agree. Not a lot of investors would have that much unrealized cap gain. That must be new "concession" since I last went ex-pat in 2003. It certainly reduces the burden of administration, paperwork and unproductive burden.
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