Evaluating the Tax-Free First Home Savings Account
Affordable housing is a huge issue in household finance these days. Prices have increased to ridiculous levels. Governments are under pressure to address this situation, even though they are being pulled in two directions. On one hand, the real estate industry is a major part of the Canadian economy, and driving down prices would be painful for the economy in general and make a lot of homeowners who have almost all their wealth tied up in their homes extremely unhappy. On the other hand, hopeful first-time homebuyers are losing hope. In between, one finds parents with all that wealth in their homes drawing on their home equity to gift their children with down payments, even to the detriment of their retirement plans.
Along comes Budget 2022 with several provisions to make housing more affordable. Among the items on offer, found in the first chapter, Making Housing More Affordable, is Section 1.2, entitled Helping Canadians Buy Their First Home. Included in that section is a presentation of the Tax-Free First Home Savings Account (FHSA), an item that was in the Liberals’ election platform last year. Some other provisions and updates seek to address housing affordability but, in this blog post, I will confine my discussion to the FHSA.
Concerning the content of this post, beyond reading the relevant portion of the budget, I am relying on a substantial discussion within the members’ forum of the Financial Planning Association of Canada (FPAC). It is fair to say that this new FHSA has stirred up a fair bit of conversation.
A Difference Between the Election Platform and the Budget
In the election platform, the TFHSA was proposed for those under age 40. This limitation has been eliminated in the budget.
How the FHSA Works
First, the government plans to work with financial institutions to make it available beginning in 2023.
First-Time Home Buyer
You need to be a first-time homebuyer to open an account. The current definition of a first-time home buyer as it applies to Home Buyers Plan (HBP) withdrawals from your Registered Retirement Savings Plan (RRSP) requires you not to have owned a home in the previous four years. This provision appears to apply to the FHSA as well.
The maximum per person is $8,000 per year up to total contributions of $40,000. Unlike either the RRSP or the Tax-Free Savings Account (TFSA), contribution room does not accumulate year by year. Each year, the maximum contribution allowed is $8,000.
What does Tax-Free mean?
It has often been said that the RRSP and the TFSA are mirror images of each other. Contribute to an RRSP and you get a tax deduction. Withdraw from a TFSA and the money comes out tax-free. While assets are in either account type, neither interest, dividends, nor capital gains are taxed, with certain exceptions. The FHSA takes the best of both account worlds. Contributions create a tax deduction, assets grow within the account tax-free, and withdrawals to purchase a first home are also tax-free.
Limits on the Account
As with the HBP, qualifying spouses or common-law partners can combine their FHSA savings to buy their first home.
The account can be open for a maximum of 15 years. After that, it must either be withdrawn, whereupon it will be taxed like an RRSP withdrawal, or it can be transferred without tax implications to your RRSP or Registered Retirement Income Fund (RRIF). It will then be taxed as usual when withdrawn later. Such transfers do NOT affect the contribution room within your RRSP. A transfer into your RRIF is unusual in that RRIFs are for providing income, not accumulating assets.
As contributions to your RRSP also generate tax deductions, if you wish, you can make transfers from your RRSP to your FHSA without tax implications.
The HBP versus the FHSA
The HBP currently allows first-time homebuyers to withdraw up to $35,000 from their RRSPs to go toward the purchase of a first home. A couple can combine these withdrawals if they buy a house together. In the second year after the withdrawal, you must begin repaying the amount withdrawn over not more than 15 years. Amounts not repaid as scheduled will result in that portion being considered effectively a taxable withdrawal from your RRSP for that year.
The FHSA has advantages and disadvantages compared to the HBP but one thing to note is that you cannot take advantage of both programs simultaneously. In other words, you cannot take $35,000 from your RRSP and $40,000 plus accumulated income and growth from the FHSA to allow you to come up with greater than $75,000 per person. It’s one or the other.
The temptation with increasing house prices is to attempt to “juice” your returns by investing in riskier assets than would ordinarily be recommended with a five-year time horizon. This might backfire, of course, if the value of your account decreases because of prolonged investment losses.
One can imagine parents providing their adult children with $8,000 annual gifts to support participation in this account.
The biggest economic problem for me has to do with supply and demand. Providing incentives to save for home purchases will increase demand but if supply does not exceed demand, it will just be another factor causing an increase in housing prices. Reviews of corporate involvement in housing, providing additional funds to support affordable housing, and limited bans on foreign investment in residential real estate may contribute a little to increasing supply, but on balance, how much of a difference will the efforts to address supply make if the positive impact is simply negated by this new account type.
Among the observations by my FPAC colleagues included a scenario in which a qualifying person (not yet a homeowner) contributes the maximum to their RRSP while simultaneously contributing to their FHSA. At the end of 15 years, if they still haven’t bought a qualifying home, they could roll over the FHSA balance on a tax-neutral basis to their RRSP, effectively adding another $40,000 in contributions plus growth, to their RRSP. One wonders whether this will ultimately be allowed.
Finally, given that few people maximize either their RRSPs or TFSAs, providing a third tax-advantaged account is going to benefit only the lucky few households that can afford to maximize all three accounts, but who have not yet bought a home.
There are going to be some loopholes that are going to need to be either closed or acknowledged by the government as the details are worked out.
 Among the FPAC contributors to the FHSA discussion were: Cory Papineau, Winnipeg; Owen Winkelmolen, London, ON; Jason Pereira, Toronto; Aaron Hector, Calgary; Mumin Basic, St. Catharines, ON; Morgan Ulmer, Calgary; Paul Duxbury, Cambridge, ON; Markus Muhs, Edmonton; David Field, Mississauga, ON; Christine Williston, Vancouver; Jesse Martyn, Vancouver;
This is the 143rd blog post for Russ Writes, first published on 2022-04-11.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.