From The Editor: How Much?
Q1 | March 2023
Topic: Wealth Planning
March 30, 2023
Image used with permission: iStock/PRImageFactory
Download This IssueDownload this full issue of Nexus Notes Quarterly
From The Editor: How Much?
Q1 | March 2023
Canadians love talking about real estate, particularly the affordability of housing in cities like Toronto and Vancouver. In fact, wondering how young people will find the money to buy a house could be a national pastime.
Perhaps in response to this preoccupation, the government has introduced a new program, the Tax-Free First Home Savings Account (FHSA), to aid people in getting started as homeowners. It allows individuals to contribute a lifetime maximum of up to $40,000, parcelled out in $8,000 annual limits, and features a variety of tax benefits. Indeed, many of these benefits are reminiscent of the Canadian “registered home ownership savings plan (RHOSP)” that was phased out in 1985.
The FHSA represents a collection of features from other types of registered accounts. Like an RRSP, contributions are tax deductible and don’t need to be claimed in the year they are made. Instead, one can carry the amount forward to future years if one thinks that might be an advantage. But unlike the RRSP, if you want the contribution to count in the current year, you must make the deposit by December 31st. Contributions in January and February of the following year can’t be applied back to the previous year. Similar to the TFSA, if the withdrawal is used to purchase a first home, there are no taxes payable on the money withdrawn. And as with both the RRSP and TFSA, any investment income earned in the FHSA is tax-sheltered.
The FHSA fills a similar role to the RRSP’s Home Buyers Program (HBP), as they are both meant to help first time home buyers purchase a property. But neither program is clearly superior to the other. Which program will work best depends on a first-time buyer’s individual financial circumstances. For instance, one can build a higher amount in the FHSA, and the withdrawal doesn’t need to be paid back, but it will take a minimum of 5 years to fully fund the FHSA. In theory, the HPB could be funded in two years but needs to be paid back.
Settling which is best may be beside the point because they can be used together, borrowing $35,000 from an RRSP through the Home Buyers Program and saving $40,000 in the FHSA. When combined that’s $75,000 in total (or $150,000 for a couple), using both programs could be a powerful tool. Although saving this amount of money might be a stretch for many young people, we know that many parents are preparing to help their kids meet the challenges of getting into the housing market.
Some of the unique features of the FHSA worth highlighting include the following:
- One can carry forward unused contribution room, but that is only triggered when an account is opened.
- A maximum of one year’s worth of room can be carried forward.
- If a home isn’t purchased, the money can be rolled over to your RRSP without needing available RRSP contribution room.
- If you name someone other than your spouse as the beneficiary of the account, there could be tax consequences to said beneficiary. If there is a balance in the FHSA at death, the non-spouse beneficiary must include it in their taxable income. This is very different from when you add non-spouse beneficiaries to an RRSP or TFSA account.
It is early days, and only time will tell how much this new program will improve housing affordability. At this time, there remain some formidable administrative challenges to managing these accounts. So, whether we can play a role in managing such accounts is still undecided.
As stated earlier, the utility of the FHSA and the HBP differ according to an individual’s circumstances, and we are here to help our clients (and their children) navigate the best way forward. We hope you’ll feel encouraged to discuss the suitability of these programs with us.
Also, in this issue of Nexus Notes, John Stevenson makes an argument for optimism with our long-term investment approach in “Don’t Worry, Be Happy.” In a similar theme of positivity, Kathleen Peace delves into the Harvard Study on what drives happiness in our lives.