This summer, Bridget and I will be celebrating our 24th wedding anniversary on the first of July. We’re not sure where the last two and a half decades have gone, but we’re finally planning to check off one of our bucket list items – a trip to Scotland. We had always planned to go to celebrate our 20th anniversary, but of course, the virus-which-shall-not-be-named changed our plans. We’re pretty excited, and have managed to score a cottage on the Isle of Skye for a week. It is, I’m told, a photographer’s dream to stay there.
Our other bucket-list item from the first years of our marriage was to buy a house. We were fortunate enough to be entering the housing market at a time where things were still quite affordable. Ironically, at that point, rates had come down to an affordable 6% – almost exactly where things are today. The difference, of course, was that rates had been significantly higher, and had dropped down. That’s the opposite situation of today, where rates have shot up to 6%.
We had a lot of luck on our first house – we bought it from Bridget’s elderly great-aunt and grandmother, who were finding the house a bit too much to keep as they turned 90 years old. We did a private sale, to keep real estate costs low, and it was better for us to mortgage it through Mary and Margaret, than to go through a bank. For them, the interest on the mortgage payments was well beyond what they would have gotten on a GIC. Plus, in aunt Marg’s words, they could come back to haunt us for the rest of their lives if we ever missed a payment. As sweet as she was, we were much more terrified of her-even as a ghost- than we would have been of a bank manager should we ever have been in a position to default!
Just a few years before, the Federal Government introduced its first home-purchase incentive program, the RRSP Home Buyer’s Plan (HBP). Under the terms of the HBP, we were able to borrow up to $25,000 each from our RRSPs to put towards a downpayment on a first home. Today, that limit is now $35,000, thanks to a long-needed adjustment to keep up with rising house prices. With HBP, borrowers “lend” themselves their RRSP funds at 0% interest, and then have to repay over a maximum of of 15 years. That program, like for thousands of other Canadians, worked very well for us – especially since Bridget received a large amount of retroactive pay from her employer a few months before. She rolled those funds into her RRSP, so paid no tax, and then we were able to use the full amount for the downpayment 91 days later. When it was all said and done, we managed to put together a 50% down payment on our first home, an accomplishment we remain proud of to this day.
How times have changed.
A couple of decades later, things have changed substantially. With mortgage interest rates bottoming out under 2%, housing prices have inflated well beyond anything remotely reasonable over the last 30 years. Its been very clear to us as Financial Planners that the confluence of still-too-high housing prices mixed with the sudden jump in interest rates, has put many young families at risk.
Meanwhile, those who have been priced out of the housing market have been sitting and biding their time, waiting for housing prices to drop. While that has happened to some extent, I don’t think many young families will be able to afford to save the kind of down payment that Bridget and I were so fortunate to acquire man years ago.
The federal government has taken notice of this, and, along with its provincial counterparts has tried to bring housing back down to a reasonable ratio of price to average family income.
First Home Savings Account
One of the most interesting introductions in the last year has been that of the First Home Savings Account (FHSA). From a tax perspective, the FHSA is a bit like the love child of the RRSP Homebuyers Plan and the TFSA. Like a TFSA, money grows tax free, and can be withdrawn on the purchase of house without creating a taxable event. It also has a flat amount that can be contributed each year, currently $8000. Like the TFSA, any unused room can carried forward. However, unlike the TFSA, you only accumulate the $8000 a year once you open the account, and you can accrue a maximum of $40,000 over your lifetime. You also have to wind up the plan within 15 years of starting it. Like the RRSP, a participant receives a tax rebate against each deposit. This makes the plan particularly attractive for higher income earners, as lower income earners won’t have as much in tax savings. Unlike the HBP, however, there’s no need to repay the funds. In order to open a FHSA, you must be 18 or older (19 in some provinces), but under 72. Like the HBP, you must not have owned a home in the current or 4 previous calendar years, and neither should have your spouse or common law spouse, if you have one at the time you open the account. CRA maintains a terrific checklist for qualification criteria at Opening your FHSAs – Canada.ca
Some weird quirks
As the FHSA is a new initiative, there’s a few things to keep in mind that can be a bit unusual:
1) Not every institution has a FHSA plan available, as they are so new.
2) It might be to your advantage, if you qualify, to open an account even if you don’t plan to purchase a home.
3) You could fund your FHSA from your RRSP, but it may not be a great idea.
4) If you leave Canada after open a FHSA, or are a US citizen, it could get tricky.
Under the current rules, if you fail to purchase a new home, you must close the account after 15 years, and you may then roll the FHSA into your RRSP. This rollover does not currently use up any of your RRSP room. As a result, theoretically, just by opening a TFSA with a nominal amount, you could give yourself an extra $40,000 in RRSP room if you never plan to purchase a home with the funds. (Of course, you would have to have not previously owned a home to start up the plan.)
Additionally, the ability to fund the FHSA from your RRSP is interesting as well. I’m not sure this would be a good strategy in most cases. Unlike a regular deposit, there is no tax savings on the transfer, and you would lose the extra tax savings as you are still subject to the $8000 a year limit. If you elect to move funds into the FHSA, the withdrawals would be tax free, but you would never get back your RRSP room, or the extra potential room created by the FHSA in the first place. Sill, its good to know this is a possibility.
You can open a FHSA while resident in Canada, but if you leave Canada you can still contribute – however, you lose the tax-free withdrawal ability. Instead, you’ll be subject to a 25% withholding tax. Depending on your marginal tax rate while you contributed, this could still be a positive outcome.
Finally, if you are a US Citizen resident in Canada, be aware that the FHSA, like the TFSA was created after the US-Canada tax treaty was signed – so it would likely be taxable to you on your US taxes. Like always, talk to a good cross-border accountant before proceeding.
A welcome change
The birth of the FHSA is a welcome change, and a very attractive option for many people. I wish we had something similar when Bridget and myself bought our first home. I’ll be encouraging my kids to start up their own FHSA as soon as they can – because even if they don’t end up buying a home, the RRSP rollover provisions provide them with a pretty good tax incentive.