Taking Ownership – A Better Path Towards Your First Down Payment

My name is Jack MacDonald, and I have recently joined Nexus Investments as an Associate Wealth Manager. I am very excited to be here, and look forward to working with our clients for many years to come!

Housing affordability has been a topic of conversation in Canada for a while, and the headlines will not be going away anytime soon. We hope the following article will be useful for any investor – regardless of age – beginning their journey to first-time home ownership. The purpose of this feature is not to suggest that buying your first home is the ultimate achievement, but to make it a more achievable reality.

Further to Dianne White’s article in October of 2024 entitled “Beyond the Down Payment: 10 Tips for Helping Your Child Buy a Home”; this article will be a guide for how the child (I prefer the term young professional!) can contribute or take over the process themselves.

A Question

In five years, would you rather have $67,021 (Path A) or $105,971 (Path B) to put towards your first home?

Path A – Invest $1,000 a month using a taxable account, or

Path B – Invest $1,000 a month using available registered accounts

Both scenarios use the same return assumptions which will be highlighted later. Therefore, the choice is obvious:

Path B is the quicker route to becoming down-payment-ready. Our “Path B Strategy” below will show how one can make the most of their registered accounts to get their down payment primed for the bargaining table.

What is a Registered Account, and Which Ones Should I Use?

A registered account is an investment account that allows for tax deferral and tax sheltering. These include RRSPs (Registered Retirement Savings Plan), TFSAs (Tax-Free Savings Account) and FHSAs (First Home Savings Account). For our plan below we will focus on RRSPs and FHSAs.

RRSPs

RRSP contributions are tax-deductible, meaning that the amount contributed to an RRSP in a given year can be deducted from that year’s earned income, potentially reducing the total amount of taxes you pay. In addition, the funds invested in an RRSP are tax-advantaged: any investment income earned from investments held within the RRSP will grow tax-deferred until funds are withdrawn, at which point they are taxed as income.

For example, if my taxable income is $120,000 and I make an RRSP contribution of $12,000, I now only need to pay tax on $108,000.  If I live in Ontario, this means that I’ve saved $5,004.^[1] This RRSP contribution has proven to be beneficial to me in two ways:

1. Any investment gains on my contribution of $12,000 will grow tax-deferred, and
2. My tax savings have generated an additional cash flow of $5,004!

These benefits are universal to all RRSP holders. However, the ‘bonus’ of an RRSP for a first-time home buyer is the ability to access the Home Buyers’ Plan (HBP). Above we mentioned that once funds are withdrawn from an RRSP, they are taxed as income. However, under the HBP, $60,000 can be withdrawn from your RRSP tax-free if it is going toward the purchase of your first home. Once withdrawn, these funds must be repaid into your RRSP over 15 years.

In our “Path B Strategy” example below, we’ll save for our down payment by contributing to our RRSP and reinvesting the resulting tax refunds.

FHSAs

A First Home Savings Account (FHSA) is a registered plan which allows a first-time home buyer to save and invest money to buy or build a qualifying first home tax-free. One can make five annual contributions of $8,000 (maximum), up to lifetime plan amount of $40,000.

Much like RRSP contributions, FHSA contributions reduce your taxable income, and any investment gains are not taxed within the plan. The ‘bonus’ that comes with an FHSA, however, is that withdrawals can be made tax-free and they do not need to be repaid as they would under the HBP.

Now to the Path B Strategy!

Key Assumptions:

• You are 18 or older, employed, and have average annual compensation of $120,000 over the most recent five-year period.
• You have annual savings of $12,000: $8,000 is contributed to your FHSA and $4,000 to your RRSP. All contributions will reduce your taxable income and thus generate additional cash flow via tax refunds.
• Your tax refund is reinvested back into your RRSP – this part is critical and the backbone of the plan. This reinvestment will also decrease the dollar amount used for calculating your taxes owing, which will ultimately lead to larger tax refunds in future years.
• Your lifestyle allows for meaningful savings. Investing $1,000 a month will require budgeting and discipline. At an annual income of $120,000 that would be an after-tax savings rate of 13%.^[2]
• You are invested in a balanced mandate (65% equity, 35% fixed income) that returns 5.89% (gross) annually. Management fees of 1.25% are deducted for a net return of 4.64% per year.^[3]

The Math

As shown above, through capitalizing on your tax refunds, it will take 5 years to turn $60,000 of savings into $105,971^[4]. See the full breakdown below:

• Savings: $60,000
• Tax Refunds: $34,065
• Investment Gains: $11,906

• RRSP Balance: $60,047 (only $60,000 can be withdrawn tax-free under the Home Buyers Plan)
• FHSA Balance: $45,924

Remember Path A?

Why does Path A result in a materially lower amount, even though you are saving the same $1,000/month and earning the same 4.64% return on your investments? Through a taxable account (i.e., not a tax-favourable registered account like the RRSP or FHSA), you are missing out on receiving any tax refunds, which significantly contribute to the final amount through the power of compounding. In addition, when it’s time to convert those investments into cash, you would need to realize the gains and the tax you would be paying reduces the value of your down payment. As a result, your final total would have been $67,021.^[5]

Side note: even if the $1,000/month was put into a TFSA (another type of registered account in which all investment gains are tax-free), the final balance would have been $68,887 ^[6]. Through this comparison, you can see how critical it is to receive the tax refund on your contributions – and reinvest them – as described in Path B.

Conclusion

There are many factors to consider when determining whether buying a particular property is the right move for you. However, by maximizing your registered accounts you can put yourself in a position where you have more choice and flexibility in your decisions than you would with a taxable account.

Hopefully, this article inspires you and helps you take the necessary steps to achieve your homeownership dreams.

Please don’t hesitate to contact your Nexus Wealth Manager if you would like to learn more about investing for your first home.