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-Free First Home Savings Account (FHSA) was getting 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 a year – for home purchases in registered accounts that combine some of the tax perks of registered retirement savings plans (RRSP) and those of tax-free savings accounts.
Some who praised the new measure as a powerful saving tool still noted that even Canadians who can max out the accounts likely won’t have enough to qualify for home purchases in some of Canada’s priciest markets, where home valuations cross the $1-million mark on average, requiring a minimum down payment of 20 per cent.
Others are taking a dim view of the FHSA, saying creating a whole new registered account instead of tweaking 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 corresponding to that amount for first-time home purchases tax free.
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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 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, just like those from a TFSA. As the budget described it: “tax free in, tax free out.” Any investment growth inside the account would also be tax free.
It is precisely these features that led James Laird, co-founder of financial products comparison site Ratehub.ca and president of CanWise Financial mortgage brokerage, to call the account the “most significant” housing measure introduced in the latest budget.
“It is a very strong no-tax vehicle that will actually help Canadians who are trying to save for a down payment,” Mr. Laird said in an e-mailed statement on Thursday.
Also significant is the fact that there are no repayment obligations for first-time homebuyers who withdraw from FHSAs for home purchases, noted Jamie Golombek, managing director of tax and estate planning with CIBC.
Once a home buyer has taken out the money and purchased a property, they would simply close the account within a year of the first withdrawal and wouldn’t be able to open another FHSA.
Unused savings left in an FHSA after 15 years could be transferred to an RRSP or a registered retirement income fund (RRIF). Otherwise tax would apply to 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 over 15 years. Failure to do so results in those withdrawals becoming taxable income. Account holders permanently lose the corresponding contribution room.
With the HBP “you’re basically borrowing money from yourself,” Mr. Golombek said. With the FHSA, “you’re actually putting money aside for a down payment and you’re being able to put it aside on a pre-tax basis.”
But the new tax-free account would only help those who have money to put in it, Mr. Golombek added.
“If you don’t have the money, this is going to do nothing for you.”
Even a couple with a combined $80,000 in FHSA contributions and some investment growth wouldn’t come close to having a down payment of more than $200,000, which is now routinely required to buy property in cities like Toronto and Vancouver, Mr. Laird noted.
But the FHSA would still serve home buyers in lower-cost markets well, he said. In Calgary, for example, according to calculations provided by Ratehub, a home priced at the city’s average, $484,000, would require a minimum down payment of 5 per cent, which works out to $24,200. In Halifax, where the average 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 aren’t what the government intended. That’s in part because of the eligibility requirements. Anyone who opens an FHSA will have to be a Canadian resident of at least 18 years of age. And they will have to be able to show that they either did not live in a home they owned in the year they set up the account, or in any of the preceding four calendar years.
Those parameters, combined with the ability to eventually transfer funds into an RRSP or RRIF, mean Canadians who aren’t homeowners could use the FHSA as an additional way to save and invest with pre-tax dollars, Mr. Pereira said. (But FHSA funds added to an RRSP or RRIF would be taxable upon withdrawal.)
Details provided with the federal budget do not set out an obligation to use FHSA contributions for a home purchase.
Also, as with an RRSP, the size of a tax deduction for an FHSA contribution is tied to income, Mr. Pereira said. For young home buyers who haven’t reached their peak earning years yet and are in lower tax brackets, the benefit of the deductions will be limited compared to the benefit for higher income earners, he noted.
And a typical first-time homebuyer hoping to buy a property as soon as possible would have a short time horizon for investing funds in an FHSA.
“Can they pop this into a 100-per-cent equity fund and ride out volatility for 20 years? Absolutely not,” Mr. Pereira said.
The prudent thing for someone hoping to buy a home within a few years would be to put the money into low-risk investments, Mr. Pereira added, which tend to have 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 that you can basically get into the market faster.”
It doesn’t make homes more affordable – and, in fact, might do the opposite, fuelling buyer demand and driving home prices up further, he said.
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Erica Alini