-Uncover the benefits of FHSA for the first-time Canadian homebuyer. -Discover how the FHSA works. -Find out whether the FHSA is the right savings plan for you and where to learn more about it.
Homeownership is a dream that many Canadians aspire to, but with rising home prices — especially in places like Ontario or Vancouver, BC — achieving that dream is becoming more difficult.
That’s where the First Home Savings Account comes in. It’s a new savings plan introduced to help first-time Canadian homebuyers land their first home. In this episode, Jamie Golombek gives us an overview of the FHSA and how it can be used to its fullest potential. We also review some scenarios where the FHSA is — or isn't! — applicable.
The new First Home Savings Account (FHSA) is coming to CIBC this November. Connect with your advisor or visit cibc.com/FHSA to sign up for updates
Resources
Carissa Lucreziano: Welcome to Smart Advice, a podcast bringing you financial advice, investment strategies, and economic trends. I'm CIBC’s financial advice expert, Carissa Lucreziano, and today we're going to talk about the new first home savings account and what it means for first-time homebuyers.
Housing continues to be a hot topic for Canadians with mortgage rates and affordability dominating headlines for quite some time now. But why is the goal of homeownership so important to us? While research shows that owning a home can be a big part of our identity, it's a sign of financial and personal success; a rite of passage and that we are on the right track with life's milestones.
It’s also a source of great pride. Our recent poll on home ownership found that 87% of current homeowners are extremely proud to have achieved this goal. It's no secret that housing affordability has been a growing challenge in Canada, especially for first-time homebuyers.
The Globe and Mail recently reported on how long it would take to save for a down payment in various cities around Canada on a national median household income. Winnipeg, Manitoba stood out as one of the more affordable cities where young Canadians can save a downpayment in just over 29 months.
It’s a different story for those looking to buy in Hamilton, Ontario, where it will take about 78 months — that’s six and a half years — or in Vancouver, BC, where it could take a whopping 342 months. That's 28.5 years.
The government wants to tackle this issue. And one of the ways they're working towards this is the launch of the first home savings account, or FHSA announced in last year's budget. It's a new registered savings plan that is here to help Canadians break into the housing market.
There's been a lot of interest in the FHSA since it was announced. Our research found that 70% of prospective first-time buyers are interested in learning more about this new savings vehicle and how they can use it.
Joining me today is Jamie Golombek, managing director, tax and estate planning with CIBC. Jamie was the first person I wanted in my guests here to unpack how the FHSA can support Canadians towards their homeownership dreams, as he's best known for his ability to provide expert advice on how to utilize registered and Tax-Free Savings accounts.
And he's already written many articles about it. You can find his content at jamiegolombek.com. You could also find his tax tips on cibc.com/smart advice. Jamie, it's a pleasure to have you here today on our podcast. Thank you so much for joining me.
Jamie Golombek: Yeah, thanks for having me. So much to talk about on the new FHSA.
Carissa: I know it is a hot topic. And so I'm so glad you're here. This new savings vehicle it's catching the eye of many first-time homebuyers. I don't have to tell you that. But there's a lot for Canadians to know the FHSA has added to the options to the array of registered plans first-time homebuyers can use to help them save for a home.
There are technically three, right? Like the RSP homebuyers plan. And since you know, around 1992, something close to 6.2 billion has been withdrawn to have Canadians buy their first home. Then in 2009, the TFSA was launched. Now there's the FHSA. So how can the FHSA work alongside the TFSA and the RSP homebuyers plan?
Jamie: I mean, I think that's the big question. People are starting to ask now that we now have the FHSAs and in 2023. So look, I think the FHSA is the way to go. Just plain and simple. And the reason for that is that the FHSA allows a first-time homebuyer — meaning you don't currently own a home, you haven't owned one in the previous four calendar years — an opportunity to make a tax-deductible contribution of up to $8,000 a year for five years, that's $40,000.
And then, as long as you buy a qualifying home within 15 years, you can actually withdraw the entire amount. In other words, your contributions plus any income and growth, tax-free. So in other words, the FHSA is combining the benefits of the RSP, which is a tax deduction, with the benefits of the Tax-Free Savings Account TFSA in a tax-free withdrawal.
The difference and the main difference, I would say, the real advantage is that you pay no tax on the way in, and you pay no tax on the way out with the RSP even the homebuyers plan. Yeah, you can borrow from your RSP tax-free to buy a home, you have to pay it back over time. And then when you retire, you're gonna take it out, and you're going to have to pay tax.
The TFSA, you're funding that with after-tax dollars. You pay tax on your income first before you even have the opportunity to contribute to a TFSA for a down payment. So the FHSA, I think, is the way to go for anyone that qualifies as a first-time home buyer.
Carissa: Yeah, it really is the best of both worlds from, you know, like you said, the RSP homebuyers plan and the TFSA.
So you know I've read a couple articles. It says you Is there a catch to the FHSA? So what fine print do Canadians need to consider before opening this account or utilizing it? Like with the homebuyers plan and RSP, there are stipulations like, what's a qualifying home? And what's the definition of a first-time homebuyer?
Jamie: Yeah, I mean, think the biggest caveat is you really must be a first-time homebuyer. The first-time homebuyer definition is a little bit tricky. It basically means that you can't own a home in the current year, or in the previous four calendar years. Either you or your spouse or partner owned a home in which you lived in during the current year and the previous four calendar years.
But other than that, I would say that the FHSA is really risk-free from a tax perspective, there obviously could be risk associated, depending on how you invest the money if you invest in equities, obviously.
But you know, from a tax perspective, there's really no downside because, as many people already know, if you end up not buying a home, in other words, you open up the plan because you qualify as a first-time buyer, but then you decide, now I'm just gonna rent. And in 15 years, you still haven't bought a home or the time you turn 71, whichever comes first. All you can do at that point is either take the money out and pay tax, no problem.
Or you can actually roll the entire amount into an RRSP or RRIF, which means ultimately, you'll pay tax on the withdrawal. So I would say that there really is no downside whatsoever. Even people that aren't even thinking about buying a home, let's say a full-time renter should probably open up an FHSA to be able to get that extra $40,000 plus growth of additional savings room.
Carissa: Yeah, because there absolutely is that opportunity or option that if you don't buy the home gets transferable. So you're right, there is a benefit there. You mentioned couples, so you must get a lot of questions from individuals to say okay, like, “here's my scenario, and what should I do?”
So let's unpack a couple of scenarios. And there's no one size fits all approach for sure; everybody has a different situation. And there's a lot to digest here. So let's talk about a few examples when Canadians can use or think about when they are opening or thinking to open up an FHSA.
Let's say a couple of saving for a home in like the next five years or so. And they each put aside $50,000, and they have not contributed to any registered plan. Which account — I think I know the answer to this — for which account should they prioritize and put their combined 100,000 to make the most out of their savings?
Jamie: Yeah, so obviously we'd start with the FHSA, you're going to be limited to $8,000 each, so you can't put the full 50,000 in on day one. So it's going to be $8,000 each per calendar year starting this year in 2023. So that will take them up to $40,000 over the next five years. And then the rest of the money, you might consider using the RRSP.
And the reason I say that is because you can borrow the money from the RRSP tax-free under the homebuyers plan. That being said, probably a better answer is to take a look at your tax rate today. And your expected tax rate in retirement, because that's where that whole debate of RRSPs versus TFSA comes in.
Because after all, you could borrow the money from the RRSP, that 35,000 under the home buyer’s plan and then pay it back. Or you could also take the money out of a TFSA and then pay that back whenever you want as well because you can re-contribute all withdrawals to a TFSA at any future calendar year.
So effectively, we would look at your tax rate today, if your tax rate today is relatively low and you're going to be a higher bracket. When you retire, that obviously, you want to pay tax on your income now and then put that money into a TFSA so that later on, when you're in a higher bracket and take it out, the money will be tax-free.
On the other hand, if you are in a relatively high tax bracket right now, we obviously favour the RRSP: get a tax deduction today at a high rate, and you get an income inclusion later at a lower rate. So I think the classic debate, you know what to do once you've done the FHSA, you do RSP or TFSA, lots of material on that. And you really look at tax rates today versus tax rates in the future.
Carissa: Yeah, that's really good advice. And I know that debate RRSP versus TFSA, you've written a lot about so you know, to our listeners, check that out. But it's a really great way of helping Canadians think about how they decide because if we look at just what the costs are, what the downpayment is just across the country is well over 80,000 for a combined couple. So you really do have to think about you're maxing out the FHSA, where should you put the rest of the contribution or the rest of your savings?
I was reading your Financial Post article on how you know the rules can get a little tricky with the FHSA when partners become involved. And in one of your examples, a married couple lives together at home. One person owns the home 100% outright. The other person doesn't have any ownership, although maybe they're paying bills. This will impact that non-owners eligibility for FHSA in the feature.
Jamie: Well, that's right. So I wrote about this because this was actually a question that a taxpayer wrote into the Canada Revenue Agency asking for a technical interpretation. And the taxpayer basically said, look, he owns a townhouse. His partner, I guess, has no ownership interest whatsoever. They even had a prenuptial agreement. But that home is his principal residence, he asked whether his spouse, who doesn't actually own the home would be eligible to open up her own TFHSA.
And the CRA responded that, unfortunately, you can't. And the reason for that is that the taxpayer already owns a home, he lives in it as principal residence, and therefore the spouse cannot open up an FHSA. Because even though, in this case, she didn't own her own home, the fact that her spouse currently owns a home means that she is now disqualified from opening up an FHSA.
Carissa: And that's interesting. Some people may not know that. One more example hypothetically, let's say somebody has an FHSA, they then enter into a spouse or common law relationship with a homeowner and then moves into that home. Can the person who doesn't own the home use their FHSA for a new joint home?
Jamie: Again, this was also subject of technical interpretation to the CRA which I wrote about. Interestingly, the answer here is yes. And the reason for that is that the rules are different in terms of being able to open up an FHSA and being able to take money out of an FHSA.
See to take money out, a tax-free withdrawal out, the individual must be a first-time homebuyer at the time that withdrawal is made. And interestingly, the requirements for being considered a first-time homebuyer, for the purpose of opening up the FHSA are different.
So in other words, in this particular scenario, they would be able to take money out of the FHSA that they already had, and use that to buy, let's say, a new home for that couple. So a little technical, but that's why it's important to make sure you get some great advice before contributing to an FHSA.
Carissa: Yeah, you read my mind, I was just getting- every situation is so different. advices is absolutely key. Another big topic. And you know, what we see a lot about is transition of wealth. And a big goal for Canadians is wanting to help their children, their grandchildren financially, by transitioning wealth during their lifetime, actually experiencing them enjoy a monetary gift that is going to have such an impact on their financial well-being.
And one in three Canadians plan to do this in part or whole by helping their children, their grandchildren, with the down payment towards a purchase of a home. Now, this is an immense kickstart for those fortunate to receive a gift of this size of magnitude, considering that 20% down payment for medium home prices, just over 100,000 in Calgary and around you know, to 20 to 30 in Toronto and Victoria, BC.
So if you're a parent or a grandparent, how can you use the FHSA to help your grandkids? Or if you can't? What are the ways that you can?
Jamie: Yeah, well, this is a brand new opportunity, obviously, that's opened up in the last few months. And the opportunity, of course, is to help that child or grandchild open up their own FHSA. Now, you cannot open up an FHSA for somebody else. The individual themselves, once they reach the age of majority, can open up an FHSAs at age 18, or 19.
What you could do though, is gift them the money to contribute to the FHSA. So let's say you've got a parent or a grandparent that wants to give money to a child or grandchild, they could consider gifting $8,000 a year, once that child or grandchild is the age of majority, that child or grandchild may not have any income. So therefore you wonder, well, can they even use the tax deduction?
Well, the good news is that the deduction for the FHSA Contribution does not have to be made in the year of contribution. In fact, it can be carried forward to any future year. So you have parents or grandparents gifting money to the kids or grandkids, the kids or grandkids are opening up their own FHSA, is tributing the $8,000 and then hanging on to that contribution deduction. And they may be using that in five or 10 years time when they have some income. And that income deduction becomes tax deductible against that particular income.
So I think it's a big opportunity. And we're already seeing a lot of discussion about that, certainly among higher income and higher net worth families that are thinking, “how can we tax effectively help our children and grandchildren save for that downpayment?”
The best news of all, of course, is that because these funds are going into the FHSA, we are not concerned about the normal attribution rules that could apply if the money was invested in a typical nonregistered type environment.
Carissa: Yeah, that's very important and great advice and he could actually not only utilize the FHSA but also TFSA and others. So getting all of those plans if there is the funds available and depending on the amount out this gifted because start to get all of those vehicles going at the same time. I think it's so important that you mentioned about deferring the deduction, and how important and impactful that can be.
So, again, advice is key here from, you know, a financial advisor as well as an accountant. So, great, great tips. I know you have your weekly column in the National Post and your regular on BNN. And others, where will we see you next? And you know, is there more coming on FHSA for the fall?
Jamie: Yeah. So again, I mean, I think as these plans become, you know, more and more popular, there's gonna be lots of discussion, we've started to do some modeling in terms of if you contributed the $8,000 a year and you also maybe get a tax refund, and you contribute that refund into a TFSA. And then use the homebuyers plan, you know, how much could a couple actually save?
And, you know, the recent example that I was writing about just a few weeks ago, was a column I published on that exact topic, which found that just with sort of average rates of return, you could probably save up to $260,000 with a couple if you start right now, and save over a period of time. So I mean, these numbers do add up over time, depending on when you're going to buy your home.
But I think the most important thing to do is if you are a first-time homebuyer by definition, again, don't own a home this year, don't own a home in the previous three, four years. Why wouldn't you think of contributing to an FHSA rather than an RRSP? Or a TFSA? Because you get a tax deduction right now. And then if you do buy a home, you do not have to pay tax on that withdrawal?
Carissa: Yeah, yeah. Well said, and you know, if the earlier we know this for everything, the earlier you start saving, the better. But in this case, if you start to invest in your, you know, not looking to buy a home within 8, 10 years, like that's a huge runway to save.
Jamie, thank you so much for joining me today. Great conversation, really important topic for Canadians. It was a pleasure to have you here.
Jamie: My pleasure. Thanks, Carissa.
Carissa: There's a lot to think about when it comes to saving for your first home. So I hope this episode inspired you to think about your own situation, and what makes sense for you personally. Despite barriers like inflation and rising interest rates, it's clear that the dream of homeownership persists among Canadians. You've seen that there is still considerable optimism with 44% of Canadians saying it's a good opportunity to get into the market right now.
The FHSA is coming to CIBC this November, connect with your advisor or visit cibc.com/fhsa to sign up for updates. You can also listen to CIBC economist Benjamin Tal talk about the housing environment in our recent podcast episode, Rent versus Buy, and on the topic of investing in real estate, and sign up for our upcoming virtual event with Scott McGilvery at cibc.com/smartadvice.
Thank you for tuning into this episode of smart advice to make sure you never miss an episode, subscribe or follow on your favourite podcast platform. Thank you for joining.