New Hope for First-Time Buyers: Liberal’s Proposed “First Home Savings Account”
The election platform for the Liberal party included a new tax measure called the “First Home Savings Account” (FHSA). Although the Liberal government did not win a majority in the recent election, it is likely they will pursue this new tax measure to help first-time homebuyers save for a down payment.
The plan would allow individuals under 40 years old to set aside $40,000 towards the purchase of a home with no tax on contributions or withdrawals.
The FHSA has the best tax benefits of a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) rolled into one.
How is the FHSA like an RRSP?
Most Canadians have an RRSP and love them because they can deduct the contributions from their taxable income and lower their taxes.
The same tax benefit would apply to an FHSA and would allow contributions up to $40,000 to be deducted from taxable income. If the individual does not use the funds in the home savings account by the age of 40 the funds would convert into a normal RRSP.
How is the FHSA like a TFSA?
The main disadvantage with an RRSP is that all amounts withdrawn including any gains generated are fully taxable and included in income in the year of the withdrawal.
On the contrary, withdrawals from a TFSA are never taxable. An FHSA will have this same benefit as the withdrawals made before the age of 40 for an eligible home purchase will be tax-free.
Is an FHSA a Good Investment Choice?
Tax perks aside, it’s important to keep in mind that RRSPs, TFSAs, and FHSAs (if they ever see the light of day) are investment accounts and are only as effective as the investments inside them. Assuming FHSAs would permit the same wide range of investments as RRSPs and TFSAs, there’s a stark difference when it comes to executing an investment strategy.
Investments are normally held in an RRSP for decades and withdrawn over a long period in retirement. That allows investors to diversify to hedge risk and get exposure to opportunities, sell strong performers when the cash is needed, and wait out weak performers. TFSAs can also be used for long-term retirement savings; but even if they are used for shorter time horizons, investors have the flexibility to delay selling when investments are down.
FHSAs, on the other hand, would likely have a hard deadline to liquidate investments when the opportunity to buy a home arises, or when the account holder turns 40. If FHSA savings are rolled into an RRSP, the tax-free status on withdrawals is gone.
It seems the FHSA is predicated on the assumption that equity markets will always go up – even for the short term. Account-holders who dream of owning a home, not wanting to put their down payment savings at risk, would need to put their cash in something safe. Guaranteed Investment Certificates (GICs) are safe but returns are low compared to equities.
Article written by Janice Hutchison, CPA, CGA.