Bestinau got that-
A day after the federal budget for 2022 revealed more details about a new tax benefit account to help first-time buyers save for down payments in an overheated housing market, the proposed Tax-Free First Home Savings Account (FHSA) received mixed reviews from financial and real estate experts.
The FHSA would allow first-time buyers to save up to $40,000 — with contributions capped at $8,000 per year — for home purchases on registered accounts that combine some of the tax benefits of Registered Retirement Savings Plan (RRSP) and those of tax-free accounts.
Some who touted the new measure as a powerful savings tool still noted that even Canadians who can maximize bills probably won’t have enough to qualify for home purchases in some of Canada’s most expensive markets, where home valuations are crossing the line. exceed $1 million on average, requiring a minimum 20 percent down payment.
Others take a vague look at the FHSA, saying that creating a registered account from scratch rather than modifying existing ones is unnecessarily cumbersome.
Jason Pereira, a financial planner at Woodgate Financial in Toronto, called the FHSA a “vanity project.”
Ottawa, he argued, could have easily added $40,000 in RRSP contribution space and made tax-free withdrawals that match that amount for the first time a home is purchased.
There will be a tax-free savings account for new home buyers. What you need to know
Setting up a new type of registered account is expensive and complicated for financial institutions, he said, adding that many may not be able to meet the government’s target of having the FHSA available by 2023.
As with an RRSP, contributions to an FHSA would be tax deductible. At the same time, eligible withdrawals from the account would be tax-free, much like those from a TFSA. As the budget put it: “tax free in, tax free out”. Any investment growth within the account would also be tax free.
It is precisely these characteristics that led James Laird, co-founder of financial product comparison site Ratehub.ca and president of CanWise Financial mortgage brokerage, to call the bill the “most important” housing measure introduced in the last budget.
“It’s a very strong, no-load vehicle that will actually help Canadians trying to save for a down payment,” Mr Laird said in an emailed statement on Thursday.
Also important is the fact that there are no repayment obligations for new home buyers who withdraw from FHSAs for home purchases, noted Jamie Golombek, director of tax and wealth planning at CIBC.
Once a homebuyer has withdrawn the money and bought a home, they would simply close the account within a year of the initial withdrawal and not be able to open a new FHSA.
Unused savings left in an FHSA after 15 years could be transferred to an RRSP or a registered pension fund (RRIF). Otherwise, tax would be charged on any withdrawals.
The FHSA is fundamentally different from the Home Buyers’ Plan (HBP), which currently allows Canadians to withdraw up to $35,000 from an RRSP to buy or build a home. While withdrawals through the HBP are tax-free, homeowners must put the money back into their RRSPs for 15 years. If you don’t, those withdrawals become taxable income. Account holders will permanently lose the associated premium margin.
With the HBP “you are basically borrowing money from yourself,” said Mr Golombek. With the FHSA, “you are actually putting money aside for a down payment and can put it aside before tax.”
But the new tax-free account would only help those who have money to deposit into it, Golombek added.
“If you don’t have the money, this won’t do anything for you.”
Even a couple with a combined $80,000 in FHSA contributions and some investment growth wouldn’t come close to a $200,000 down payment now routinely required to purchase real estate in cities like Toronto and Vancouver, Mr. Laird on.
But the FHSA would still serve home buyers in lower-cost markets well, he said. In Calgary, for example, according to Ratehub’s calculations, a home with an average price of $484,000 would require a minimum down payment of 5 percent, or $24,200. In Halifax, where the median home price is $459,200, the corresponding minimum down payment would be $22,960.
Mr Pereira also noted that the FHSA in its current form would likely invite uses that are not what the government intended. This is partly due to the admission requirements. Anyone who opens an FHSA must be at least 18 years old in Canada. And they will have to prove that they have either not lived in a house they owned in the year they created the account, or in any of the previous four calendar years.
Those parameters, combined with the ability to eventually transfer money to an RRSP or RRIF, mean Canadians who aren’t homeowners can use the FHSA as an additional way to save and invest with pre-tax dollars, Pereira said. (But FHSA funds added to an RRSP or RRIF would be taxable on withdrawal.)
Details provided with the federal budget do not include an obligation to use FHSA contributions toward the purchase of a home.
Also, as with an RRSP, the size of a tax deduction for an FHSA contribution is linked to income, Mr Pereira said. For young homebuyers who have not yet reached their highest income years and are in lower tax brackets, the benefit from the deductions will be limited compared to the benefit for higher incomes, he noted.
And a typical first-time homebuyer hoping to buy a home ASAP would have a short time horizon to invest money in an FHSA.
“Can they put this in a 100 percent equity fund and drive out the volatility for 20 years? Absolutely not,” said Mr. Pereira.
The wisest thing for someone hoping to buy a home within a few years would be to put the money into low-risk investments, Pereira added, which typically yield lower returns and offer limited benefits for tax-free compound growth.
The bottom line, Mr Pereira argued, is that an FHSA “allows you to save more money, so you can basically get to market faster.”
It doesn’t make homes more affordable — and could, in fact, do the opposite, fueling buyer demand and pushing home prices further, he said.
Your time is precious. Have the Top Business Headlines newsletter delivered to your inbox with ease in the morning or evening. Sign up today†