Will a new Tax-Free Savings Account help homebuyers? Experts offer mixed reviews

A day after the 2022 federal budget revealed more details about a new tax advantage account to help first-time homebuyers save for down payments in an overheated housing market, the proposed tax advantage account First Tax-Free Home Savings (FHSA) was getting mixed reviews from financial and real estate experts.

FHSA would save first-time buyers up to $40,000 — with contributions capped at $8,000 a year — for home purchases in registered accounts that combine some of the tax benefits of registered retirement savings plans (RRSP) and those tax-free savings accounts.

Some who hailed the new measure as a powerful savings tool still noted that even Canadians who can max out accounts likely won’t have enough to qualify for a home purchase in some of the toughest markets. most expensive in Canada, where home valuations cross the million-dollar mark on average, requiring a minimum down payment of 20 percent.

Others take a dim view of the FHSA, saying that creating a brand new registered account instead of 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 simply added $40,000 in RRSP contribution room and made withdrawals of that amount for first-time home purchases tax-free.

A tax-free savings account is coming for new homebuyers. What do you want to know

Setting up a new type of registered account is costly and complicated for financial institutions, he said, adding that many may not be able to meet the government’s goal of having FHSA available d 2023.

As with an RRSP, contributions to an FHSA would be tax deductible. At the same time, qualifying withdrawals from the account would be tax-free, just like those from a TFSA. As the budget described it, “in tax free, out tax free”. Any investment growth inside the account would also be tax free.

It is precisely these characteristics that led James Laird, co-founder of the financial products comparator and president of mortgage brokerage CanWise Financial, to call the account the “most significant” housing measure introduced in the last budget.

“This is a very solid tax-free vehicle that will actually help Canadians trying to save for a down payment,” Laird said in a statement emailed Thursday.

It’s also important to note that there is no repayment obligation for first-time home buyers opting out of FHSAs for the purchase of a home, noted Jamie Golombek, general manager of tax planning. and estate to CIBC.

Once a homebuyer withdraws the money and buys a property, they would simply close the account within a year of the first withdrawal and not be able to open another FHSA.

Unused savings left in an FHSA after 15 years old could be transferred to an RRSP or a registered retirement income fund (RRIF). Otherwise, the tax would apply to any withdrawal.

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. Although withdrawals through the HBP are tax-free, owners must return the money to their RRSP over 15 years. If you do not, these withdrawals will become taxable income. Account holders permanently lose the corresponding contribution rights.

With the RAP, “you’re basically borrowing money from yourself,” Golombek said. With FHSA, “you’re actually setting aside money for a down payment and you can set it aside before taxes.”

But the new tax-free account will only help those who have the money to put in, Golombek added.

“If you don’t have money, it won’t get you anything.”

Even a couple with a combined $80,000 FHSA contribution and some investment growth wouldn’t come close to having a down payment of over $200,000, which is now regularly required to buy property in cities like Toronto and Vancouver, noted Mr. Laird.

But the FHSA would still serve homebuyers in lower-cost markets well, he said. In Calgary, for example, according to calculations provided by Ratehub, a house at the city’s average price of $484,000 would require a minimum down payment of 5%, which equates to $24,200. In Halifax, where the average house 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 because of the eligibility criteria. Anyone opening an FHSA must be a Canadian resident at least 18 years of age. And they will need to be able to prove that they did not live in a home they owned the year they opened the account or in any of the previous four calendar years.

These settings, combined with the ability to potentially transfer funds to an RRSP or RRIF, mean Canadians who are not homeowners could use the FHSA as an additional way to save and invest with pre-tax dollars, said Mr. Pereira. (But FHSA funds added to an RRSP or RRIF would be taxable upon withdrawal.)

Details provided with the federal budget do not include a requirement to use FHSA contributions to purchase a home.

Also, like an RRSP, the size of a tax deduction for an FHSA contribution is tied to income, Pereira said. For younger homebuyers who have not yet reached their peak earning years and are in lower tax brackets, the benefit of deductions will be limited compared to the benefit for higher income earners. , he noted.

And a typical first-time home buyer hoping to purchase a property as soon as possible would have a short time horizon to invest funds in an FHSA.

“Can they put that into a 100% equity fund and weather the volatility for 20 years? Absolutely not,” Mr. Pereira said.

The prudent thing for someone hoping to buy a home in a few years would be to put the money into low-risk investments, Pereira added, which tend to have lower returns and offer limited benefits for tax-free compound growth.

The bottom line, Pereira explained, is that an FHSA “saves you more money so you can get to market faster.”

It doesn’t make homes more affordable — and, in fact, could do the opposite, fueling buyer demand and pushing home prices even higher, he said.

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