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Discover the Tax-Free First Home Savings Account – TFFHSA

by Sylvain Lapointe
written by Sylvain Lapointe

This new registered plan would help first-time home buyers save $40,000 on a tax-free basis.  Contributions are tax deductible (Like a Registered Retirement Savings Plan – RRSP), and withdrawals to purchase a first home – including from investment income – would be non-taxable, like a Tax-Free Savings Account (TFSA).  The Budget 2022 announced key design features of the TFFHSA, including an $8,000 annual contribution limit in addition to a $40,000 life income contribution limit.

TFFHSA expected to be available at some time in 2023, with Canadian clients able to contribute the full annual limit of $8,000 regardless of the implementation date in that year.

What is First Home Savings Account? 

Key Points for opening and closing this account 

To open an TFFHSA, an individual must: 

  • Be a Resident of Canada
  • Have Minimum 18 years old
  • Must not have owned a home in year account is opened and 4 previous years

 

An TFFHSA of an individual would cease to be an TFFHSA, and the individual would not be permitted to open an TFFHSA, after December 31 the year in which the earliest of these events occurs: 

  • The fifteenth anniversary of the individual first opening an TFFHSA; or
  • The individual turns 71 years old.

 

Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. 

Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal. 

 

Qualified Investments 

  • Will work like TFSA
  • Rules on prohibited and non-qualified investments will mirror other registered plans, including penalties These rules are intended to disallow investments in entities with which the account holder does not deal at arm’s length, as well as investments in certain assets such as land, shares of private corporations and general partnership units.

 

Contributions 

The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual limit and remaining lifetime limit. The full annual limit would be available starting in 2023. 

  • Annual calendar limit of $8000 – Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year.
  • Can hold more than one TFFHSA but the total amount that an individual contributes to all of their TFFHSAs could not exceed their annual and lifetime contribution limits
  • Contributions made to an TFFHSA following a qualifying withdrawal being made (i.e., when buying a first home) would not be deductible from net income.

 

Qualifying withdrawal 

To be a qualifying withdrawal (non-taxable): 

  • Taxpayer must not have owned a home at any time during the year of the withdrawal or FOUR prior years. Exception: can make withdrawal within 30 days of moving into new home
  • Must have written agreement to buy or build a qualifying home before October 1 of the year following withdrawal and occupy as principal residence within 1 year after buying or building
  • If qualified, withdrawal may be a single withdrawal or a series of withdrawals

 

Non-Qualifying withdrawal 

If withdrawal is not qualified as above, the withdrawal is taxable and subject to withholding rates consistent with RSP withdrawals 

 

Transfers 

  • TFFHSA funds can be transferred tax-free into TFFHSA, RRSP or RRIF
  • Transfers do not affect individual’s RRSP limit and do not reinstate TFFHSA limit
  • Can transfer from RSP to TFFHSA tax-free, subject to annual and lifetime TFFHSA limits. These are not deductible and do not reinstate RRSP limit room.

 

Other considerations 

  • HBP will continue to exist. Individual may not both TFFHSA and HBP withdrawal for same house purchase
  • No spousal accounts or contributions allowed. Spouse may provide funds for TFFHSA contribution without any spousal attribution.
  • Upon marital breakdown, an amount may be transferred from TFFHSA into TFFHSA, RRSP or RRIF tax-free
  • Like TFSAs, 1% tax per month for over-contributions.
  • Upon death, treatment will be like TFSAs. Tax-Free to spouse as successor annuitant or tax-free spousal rollover to TFFHSA/RRSP/RRIF. All other cases, payments are to beneficiary, subject to withholding tax and taxable to the beneficiary.
  • If TFFHSA holder becomes a non-resident, they may continue to contribute, but cannot make a qualifying withdrawal. Withdrawals by non-residents are subject to withholding tax.
  • TFFHSAs would not be afforded creditor protection under the Bankruptcy and Insolvency Act.
  • Like TFSAs, TFFHSAs will be reported annually to CRA. Withdrawals (qualifying and non-qualifying) must be reported on a tax slip.

Source 2022-08-09: design-of-the-tax-free-first-home-savings-account 

The information contained in this article were prepared by Sylvain Lapointe, an Investment Advisor attached to: PEAK Securities Inc.; they were obtained from sources we believe to be reliable but are not certified and may be incomplete. The author is not responsible for readers’ financial decisions following this reading. The views expressed here do not necessarily reflect PEAK Securities Inc. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund.

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EconomyInvestment

COVID-19 Crisis

by Sylvain Lapointe
written by Sylvain Lapointe

As was inevitable after an 11-year-long bull market cycle, we officially entered market correction territory on Wednesday, March 11th.

The oil war between Saudi Arabia and Russia and the corona virus contributed to this downturn and to extreme fluctuations.

It is essential not to panic during a volatile period. If your portfolio accurately reflects your investor profile, the fall in share prices may be unpleasant, but will be bearable. This is why every time I review your investments, I make sure they reflect your profile, because once a market fall begins, the time to reduce portfolio risk has already passed. Now is the time to maintain the status quo at least, or at best, for those who can afford it, to take advantage of the situation and temporarily and strategically increase the stock weighting of your portfolio by buying into solid companies that are trading at advantageous price and which will eventually recover their intrinsic value. Many investors are asking me when we’ll hit rock bottom, so that they know when to invest more. Unfortunately, no one can predict that, but what I can tell you is that at the price some companies are trading at right now, they represent excellent opportunities.

The current crisis will touch some sectors and some countries harder than others, and that hits at the heart of why it is crucial to diversify one’s portfolio. I would even go further: some companies will benefit from the current situation. One only has to think, for instance, about medical supply companies, videoconferencing supply providers, e-commerce sites, whichever pharmaceutical company comes up with the longed-for vaccine, and so on.

For me, what’s most troubling in the long-term isn’t so much the stock market, but the bond market. The bond market has seen insane performance over the past year, considering its starting interest rates. Given current futures prices and low interest rates, we shouldn’t expect much out of this asset class for the next decade. The US Federal Reserve even sprung for two surprise reductions in the federal funds rate, hoping to stimulate the economy. The average return rate on 10-year bonds is currently below 1%. Retirees, very conservative investors and pension funds will have to revise their revenue projections, given the economic context.

The people who will benefit from this situation are borrowers. Mortgage rates are very low and might fall even lower. If you’re about to renew your mortgage, you might be in for an agreeable surprise.

In 2016, Japan announced that it would introduce negative interest rates. It wasn’t the first country to do so, since Switzerland, Denmark, and Sweden had already suffered that fate. It was hard to imagine the impact of that kind of measure: having to pay interest just to keep your money in a savings account! Some economists are now signalling the possibility that the next recession could plunge the US and perhaps Canada into a negative interest rate spiral.

It’s clear that the next few years will bring a host of challenges, and that we will have to review how we build a standard portfolio. I will be available to guide and advise you so that you can benefit from this new economic environment.

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor with PEAK Securities Inc., and was obtained from sources we deem to be reliable; however, we cannot guarantee that such information is complete. The author may not be held accountable for any financial decision a reader may make based on this content. The opinions expressed herein do not necessarily reflect the views of PEAK Securities Inc. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund.

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InformationInformationInvestmentInvestment

Are market all-time highs normal?

by Sylvain Lapointe
written by Sylvain Lapointe

I read an interesting article recently in Fortune[1]. It referred to market highs and the fact that investors are worried that what goes up eventually has to come down.

Plenty of investors have a hard time figuring out how the stock market continues to charge higher in the face of trade wars and impeachment hearings. Maybe the simplest explanation is new highs in the stock market are typically followed by more new highs, regardless of what’s happening in geopolitics.

The S&P has now hit 26 and counting new all-time highs in 2019 alone. And that’s following 18 new all-time highs in 2018, 62 in 2017, 18 in 2016, 10 in 2015, 53 in 2014, and 45 in 2013. Because of the financial crisis, 2013 was the first time the S&P had reached new highs since peaking in 2007.

One of the hardest parts about investing in the stock market is there is always something to worry about. This is true even when things are going well, as they are now with markets at or near all-time highs depending on the day.

Roughly 5% of all trading days for the U.S. stock market have seen a new all-time high since 1928, and it’s probably the same for Canada. You can look at this one of two ways: (1) all-time highs are perfectly normal in the stock market given that, historically, they happen 1 out of every 20 trading days; or (2) if 5% of all trading days close at all-time highs, the other 95% must be in a state of drawdown.

Since World War II, the stock market has spent nearly 40% of the time within 5% of all-time highs while 54% of the time stocks have closed within 10% of an all-time high. The inverse of this would mean almost half the time stocks are in a double-digit drawdown throughout history. Part of the reason for this is the fact that stocks can go long stretches of time between new highs.

Here are the numbers of all-time highs in the S&P 500 by decade through December 1, 2019:

[1] Fortune, Ben Carlson, November 14, 2019

S&P 500 New All-Time Highs

  • 1950s
  • 1960s
  • 1970s
  • 1980s
  • 1990s
  • 2000s
  • 2010s

 

  • 141
  • 224
  • 35
  • 190
  • 310
  • 13
  • 232

The problem we face as investors when dealing with all-time highs in the stock market is twofold. First, new all-time highs tend to cluster as strong performance often begets more strong performance in the markets. Rising markets attract buyers because investors are human. But eventually one of these all-time highs will be THE all-time high that will remain in place for some time. And those long clusters of highs can be followed by periods like the 1970s or 2000s where stocks rarely hit new highs because they were littered with nasty bear markets.

So, on one hand, don’t be afraid of all-time highs. If you plan on being in the stock market over the long-term, you’re going to have to get used to the fact that stocks mostly go up over time and new highs are completely normal. In fact, following an all-time high, stocks are up roughly 70% of the time going out one, three and five years into the future.

On the other hand, the reason 1 out of every 20 days has been a new all-time high historically is because you can’t set your watch to it. Eventually, one of these highs will be the top. Just know that there are so many highs in the market that it’s impossible to predict with any degree of certainty which one that will be.

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor with PEAK Securities Inc., and was obtained from sources we deem to be reliable; however, we cannot guarantee that such information is complete. The author may not be held accountable for any financial decision a reader may make based on this content. The opinions expressed herein do not necessarily reflect the views of PEAK Securities Inc. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund.
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InvestmentReal Estate

Is renting throwing away money?

by Sylvain Lapointe
written by Sylvain Lapointe

skyscrapers-1081737__340

I came across a good article from Robb Engen[1] comparing the cost of ownership vs. the cost of renting.

Most people tackle the rent vs. buy problem incorrectly by framing it as the cost of monthly rent versus the cost of a monthly mortgage payment. Others argue that a better comparison looks at the true cost of home ownership, which not only includes the mortgage payment but also things like property taxes, insurance, and maintenance.

However, according to PWL Capital’s Ben Felix, neither argument paints a truly fair comparison of rent vs. buy. What you need to look at the total unrecoverable costs in each scenario.

For example, a monthly rent payment is a total unrecoverable cost – an expense that does nothing to improve the renter’s net worth. A mortgage payment, on the other hand, only has partial unrecoverable costs – the interest paid on the mortgage. The other portion reduces your mortgage amount and therefore increases your net worth.

A winning point for home ownership, right? Not so fast.

We need to add up all of those additional costs that a home owner bears like property taxes, insurance and maintenance, plus any upfront money spent on a down payment, land transfer tax, title insurance, home inspection, etc. to close on the home.

There’s also an opportunity cost on the down payment and other closing costs. That money could have been invested instead of putting towards buying a home.

Rent vs. Buy: They did the Math with a renter in Toronto who’s paying $2,000 a month to rent a 575-square-foot condo. The same condo is listed for $449,000.

To purchase the condo our renter would need to put down 5 percent, or $23,450, plus add another $17,062 to the mortgage due to CMHC insurance (required on all mortgages with down payments of less than 20 percent), for a total mortgage amount of $443,612.

Our upfront costs are not done, however, as we need to add in land transfer taxes of $10,910, lawyers fees of $1,000, title insurance of $449, plus a home inspection for $500.

Total upfront costs = $36,309. The opportunity cost of this amount in 25 years at 6 percent a year = $155,834.

Now let’s look at the unrecoverable monthly costs. The mortgage is amortized over 25 years and has an interest rate of 3.50 percent. Of that payment, $1,200 goes towards interest. Then we have property taxes coming in at $375 per month, and we’ll also add the difference between home insurance and tenant insurance, which is $40 per month. We also need to add expected maintenance costs, which they estimated at 1 percent of the property value per year, or $375 per month.

Total unrecoverable monthly = $1,990

The unrecoverable costs for the renter and homeowner are nearly identical. The total monthly payment for the homeowner, including property taxes, insurance, and maintenance, is $3,005. Just $1,015 of that is building equity in the home. So, back to the rent vs. buy argument.

Rent and Invest the Difference

We have to assume our renter has an extra $1,015 available in their cash flow each month to invest. What are the expected returns for a 60/40 balanced investment portfolio over 25 years – maybe 6 percent?

$1,015 per month invested for 25 years at 6 percent per year = $686,627. Add the opportunity cost of the down payment and other upfront expenses and you’d have a portfolio worth more than $842,000.

Historically, many people would be surprised to learn that the return on real estate has been closer to inflation. Certainly with the run-up in home prices over the last two decades one should not expect significant gains from this asset class moving forward.

So the expected future value of the $449,000 condo in 25 years at 2 percent growth per year is $736,600.

Final thoughts

Is renting really a waste of money? Hardly. This is just one example showing how to frame the rent vs. buy comparison, but you can make a strong case for renting and investing the difference of the true cost of home ownership. Plus, we didn’t even get into the opportunity cost of the homeowner forgoing RRSP and TFSA contributions due to the higher cost of home ownership.

Who comes out ahead in this case? Clearly it’s our renter, who invested steadily for 25 years and ends up with a portfolio of $842,000. That’s compared to our homeowner who has a mortgage-free home in 25 years worth $736,600.

The next time you hear an argument that renting is throwing away money, stop and consider things like unrecoverable costs and the true cost of home ownership before drawing your own conclusion.

 

[1] Boomer and Echo website, November 22nd, 2018.

 

 

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor with PEAK Securities Inc., and was obtained from sources we deem to be reliable; however, we cannot guarantee that such information is complete. The author may not be held accountable for any financial decision a reader may make based on this content. The opinions expressed herein do not necessarily reflect the views of PEAK Securities Inc. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund.

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Investment

Clarifying Book Value

by Sylvain Lapointe
written by Sylvain Lapointe

Global strategy

I often receive questions from investors about the usefulness of book values and whether it should be used in the portfolio performance calculation. I came across an interesting article written by Edgepoint[1] that explains very well the calculation of this value, its usefulness and the wrong conclusions that investors often derive from it. Exceptionally, I used the complete article that I find very well written.

Who would have thought “book value” was so confusing? Clarifying a common issue on your account statements.

When investors view their account statement, a common misconception is to compare the difference between the “book value” (also known as adjusted cost base, or “ACB”) of their portfolio vs. the market value, in order to determine how much money was made or lost in their account over a given period. It sounds pretty straightforward, right? At least that’s what Accounting 101 taught us. However, comparing these values usually leads to inaccurate conclusions regarding actual account performance.

The book value includes all your contributions to the fund. However, if you elect to receive the fund distributions in units, your book value is adjusted by the automatic reinvestment of distributions. In simple terms, when a fund pays a distribution you get taxed on it, but when the distribution is in fund units, the book value increases at the same time by the amount of the distribution to avoid double taxation. This information is reported on your T3 slip.

Therefore, your book value could increase even if you don’t contribute more money to your portfolio, making it a misleading metric to use to evaluate how your portfolio has done. Book value will also be impacted by your withdrawals.

Why can’t we just forget about book value? Book value is actually used for non-registered plans when calculating capital gains and losses for income tax purposes. Any capital gains or losses triggered by a redemption or a switch, are reported on a T5008 tax slip.

How can I tell how much I’ve made if I can’t use book value? You should look for the “amount invested” in your statements and compare it to the “market value” to calculate how much you’ve made or lost on a given investment. “Amount invested” excludes any reinvested distributions, but will include all your contributions and withdrawals. You can find this information on most dealer account statements.

I can’t believe I’m saying this, but show me the math!

Okay! Here’s a hypothetical investor. What was the client’s return?

– Client invested $40,000 on July 9, 2015

– She received three years of distributions totalling $11,000

– Book value is (40,000 +11,000) = $51,000

– Current market value = $51,880

Old me (wrong calculation)

Return = (Market value – Book value) /Book value

= (51,880 – 51,000) /51,000

= 1.73% cumulative return

New-and-improved me (right calculation)

Return = (Market value – amount invested) /amount invested

= (51,880 – 40,000) /40,000

= 29.7% cumulative return

The mystery of book value, solved!

Book value is not an appropriate representation of the total amount invested. Rather, it’s used to calculate capital gains and losses for income tax purposes. To calculate your true performance, use your market value and amount invested from your statement. While this information may not appear on your monthly statements, most dealers put it on their annual statement with the actual return. If you don’t have this information, please contact your advisor for assistance.

[1] https://www.edgepointwealth.com/downloads/Clarifying%20book%20value.pdf

 

 

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc., but do not form part of the advisor’s activities as an investment advisor; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities is a member of the Canadian Investor Protection Fund.

 

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Investment

Why must the market fall?

by Sylvain Lapointe
written by Sylvain Lapointe

photodune-21269701-planning-risk-and-strategy-deadline-time-in-business-600x400

 

I reread an interesting article written in August 2015 by Joshua M. Brown,  which is really fascinating and applies perfectly to this past year, 2018.

His logic is that the market must experience a descent at times because without a risk of decline, there will never be gains.

Let’s try to imagine a world without stock market slumps. What price would you be willing to pay for a publicly traded company’s share knowing that it could never lose value? For what other reason except for the sake of liquidity would you sell this share?

In theory, an investor would be willing to pay an exorbitant sum for such an investment and hold on to it indefinitely. Eventually, the investor would certainly come into his or her money. Wouldn’t this be the ideal environment? According to the author, such a scenario would be a horror story and I quite agree with him. Stock market indices would deal in astronomical prices without any backing. They would remain high for very long periods of time without clear increases.

An equilibrium would eventually be reached, but in this reality, the market would have weakened because if there’s no risk, there’s no gain either. And investors would say: “I’m going to do other things with my money!”

The only reason shares gain value is because they can lose it. It’s this risk that keeps investors on the lookout to avoid paying outrageous prices for a company’s shares.

The return of volatility this year is undoubtedly a good thing because historically, when popular belief is that stock markets can’t fall, serious corrections result from this. And the technology bubble has certainly been one of them.

Fear is the most fundamental factor in the investment process. It must constantly be on investors’ minds to profit from any eventual increase.

The stock market investor is rewarded for braving this fear because many don’t dare to face it.

 

 

 

1 Investment advisor at Ritholtz Wealth Management LLC.

 

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc., but do not form part of the advisor’s activities as an investment advisor; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities is a member of the Canadian Investor Protection Fund.
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