Tax Free Money 🎉 the NEW FHSA

Ch...Ch...Changes 🎶 The month of April is bringing you more than just spring showers that will turn into May flowers, but also an increase in the carbon price & higher alcohol taxes. In the good news column for April is an increase to the federal minimum wage & the introduction of the Tax-Free First Home Savings Account program.

I am automatically skeptical when there are any new government initiatives announced that relate to real estate (or housing in general) because it always seems to be all flash & no substance. The "appearance" of doing something rather than the real life practicality or consequences of it. First-Time Home Buyer Incentive, I'm looking at you! (The FTHBI was not well received & has had very low participation among eligible Canadians).

So let's talk about this new savings vehicle for First Time Home Buyers, shall we?

It's a good policy. It's easy to understand and work. And the tax policy part of it is the same as an RRSP on the way in and the same as the TFSA on the way out, which makes it a very strong tax savings program.        -James Laird, co-CEO & co-founder of RateHub.ca

How it works is that it allows you to save up to $40,000 (lifetime limit) tax free to purchase your first home. The yearly maximum contribution is $8,000 – and that part is important, more on that below. It’s a registered plan like an RRSP, and like an RRSP, the contributions are tax deductible. And here’s where it gets good,  unlike an RRSP, the withdrawals are also non-taxable. Tax-free in; tax-free out.

 

Who is eligible? A resident of Canada, at least 18 years of age who qualifies as a "first-time home buyer". A first-time homebuyer is defined (in this case) as someone who has not owned a qualifying home that they lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years.

You can combine your withdrawals from the FHSA with your TFSA & the HBP (via your RRSP) when it comes time to purchase your first home to maximize your total downpayment.

 

My biggest take-aways from this program are:

• You need to have a good handle on the timing of your purchase & your ability to save since your contribution room only carries over from the previous year, so no “catching up” beyond that

 

• You can only contribute for 5yrs from the time you open the account & then hold the account for a maximum of 15yrs before any unused balance must be transferred to an RRSP, RRIF or withdrawn on a taxable basis

 

• If you have money in an RRSP, you can transfer funds tax free to the FHSA & then withdraw them tax free with no obligation to pay the funds back, unlike a withdrawal under the HBP where the funds have to be repaid within 15yrs

 

• FHSA funds can be withdrawn immediately after contribution whereas RRSP funds have to be in the account for at least 3mos

 

• The home you purchase has to be used as your principal residence

 

• If you’re purchasing in the short (or shorter term) then it could still make sense to open & contribute to the account simply for the tax deduction on the contribution – you do NOT need to (nor should you) invest the money in the account

 

• The total benefit of using the FHSA is the combination of the tax deduction from your contribution + any gains you make by investing the funds while they’re in the account (should you choose to do so)

 

• The Big Banks may not have their sh&t together for many months to come, for example TD is saying available in November, lol 🤦 but I have heard that Questrade is ready & willing to open accounts right now!

 

As always, this post is intended to bring something to your attention so that you can look into it further. Follow the links below to get a more in-depth understanding of the FHSA & how to best use it to achieve your real estate goals:

 

Recommended Reading:

 

Real Estate Tax Guru Cherry Chan’s breakdown of the FHSA - HERE

 

CPA Canada (Industry association for Chartered Accountants) also has an excellent breakdown that covers some issues that Cherry Chan didn’t -  HERE

 

The Government of Canada as a number of home-buying resources all linked up in the same place - HERE

 

 

Until next time,

AI & Real Estate

 I recently read an article about RBC (Royal Bank) getting into the real estate space with the purchase of an "AI-powered real estate company" & that has renewed conversations in our industry about the flaws surrounding home valuations powered by AI/Algorithms.

For many years Zillow (in the US) was the butt of the joke around their unreliable "Zestimates" & what a disservice their inaccurate information was for buyers & sellers.

And now we get to join in the fun too, lol! Well, to be fair, it's not new here either...

Power of Sales...Lately

The Bank of Canada made an announcement on July 15^th, 2020:

If you've got a mortgage, or if you're considering to make a major purchase or you're a business and you're considering making an investment, you can be confident that interest rates will be low for a long time.  -Tiff Macklem, Governor of the Bank of Canada

 

Then in August we found out that July 2020 was actually the hottest market in real estate HISTORY – for a blast from the past, watch  THIS video that I recorded at that time – but “a long time” turned out to be shorter than many borrowers wanted or needed, as interest rates jumped 3.5% in 6mo starting in April 2022. The prime rate was 2.45% in March of 2022 & now 6.70% in March of 2023.

 

And nobody was sounding the alarm in the early days, not economists, not regulators & not the lenders, that consumers should be locking in their rates so that they could weather this storm!