The First Home Savings Account, which the Trudeau government launched on April 1, is a terrible idea. Let us count the ways.
It’s supposed to be about making housing more affordable, but it won’t do that. It’s expected to cost Ottawa and the provinces at least $1.4-billion a year, and that’s likely an underestimate. It will incentivize low- and middle-income Canadians to save less for retirement and spend more on housing. And a disproportionate share of the FHSA program’s benefits will likely go to higher-income Canadians – including families with the means to gift kids or grandkids a $40,000 tax-deductible, tax-sheltered nest egg.
The FHSA is bad tax policy. The FHSA is bad housing policy. The FHSA is bad public policy. Also, I’m going to rush out and open one as soon as possible.
I’m in a position to benefit from the Trudeau government’s vote buying, and you may be, too. As for everyone else? You’re going to pay for our (undeserved) tax break.
The Trudeau Liberals promised the FHSA on the campaign trail in 2021, and the program launched at the start of April, though so far only one financial institution – Questrade – is set up to offer the accounts. But the big banks and online brokerages are expected to add the FHSA to their menus in the coming months.
You can open an FHSA if you do not own a home, have not owned one in the past four years and are at least 18 years old (or 19 in some provinces). The annual contribution limit is $8,000, and unused contribution room carries forward. The lifetime contribution limit is $40,000.
As with a registered retirement savings plan, you get a tax deduction when you contribute, and gains in the account – you can invest in stocks, bonds and so on, also like an RRSP – are tax-free. Withdrawals are tax-free, similar to a tax-free savings account (TFSA), so long as you buy a home.
Combining all these features breaks a tax policy taboo, which is that a savings program such as this should offer tax deferral, but not tax elimination. Money goes into an RRSP tax-free but gets taxed coming out; TFSAs do the reverse. But the FHSA escapes taxation at both ends.
All of which is designed to push more Canadians to put more of their savings into housing. That will push up housing prices, which is, to put it politely, counterproductive. The impact on prices will be hard to see and may be small, as two-thirds of Canadian households already own a home – disqualifying them from the FHSA – while people who are eligible tend to be young, lower income or both.
But there are significant exceptions. In Toronto and Vancouver, roughly half of households are renters. And because housing prices are high, many renters have high incomes.
A renter in Toronto who earns $150,000 and contributes $8,000 to an FHSA would get an income tax refund of nearly $3,500. The higher the income, the bigger the benefit.
Most lower-income people don’t have $8,000 sitting around, but one group with little to no income could be big winners. I’m talking about the children of well-off families.
Every Canadian adult – even if they’re in school and not working – gets $8,000 a year of FHSA contribution room, to the lifetime maximum of $40,000.
Parents and grandparents can also contribute to a young adult’s FHSA. The tax deduction is useless to a 19-year-old student with no income, but it can be carried forward until many years after graduation, when they’ll have a higher income – and a tax bill that can be lowered by thousands of dollars.
Parents and grandparents with the means to do so can set their progeny up with a gift that will keep on giving, including a tax deduction, tax-sheltered growth and tax-free withdrawal. All paid for by other taxpayers.
An FHSA is supposed to be used to purchase a home, but if not, the savings can be moved into an RRSP, on a tax-free basis and with the transfer not limited by a taxpayer’s available RRSP room. So someone who has maxed out their RRSPs can get an extra $40,000 of contribution room.
For Canadians in a position to benefit, it adds up to a big tax break. As a renter with a decent income, I’m one of those beneficiaries. My taxes will be lowered by a hefty five-figure amount, and I know friends and relatives who will be doing likewise, for themselves or for their kids.
We’ll take the money. But Ottawa shouldn’t be giving it to us.