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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transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis.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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InformationReal Estate

Comparing salary increases and property price escalation

by Sylvain Lapointe
written by Sylvain Lapointe

Lately, given the sharp rise in property prices, real estate has become a hot topic. It’s difficult to explain the reasons for this upward pressure on prices since one of the main price drivers in previous years is missing at the moment – I’m referring to immigration. Since the start of the pandemic, national borders have been closed to nearly all emigration. The only other factors that can account for the current property frenzy are interest rates and demographics.

 

A comparison of average house prices in Canada between August 2020 and August 2021 reveals a 13.3% increase.[1] For the Greater Toronto Area, the average increase was 17.4%, for Greater Montreal, 21.7%, and 31.7% for Vancouver Island!

 

Property prices have been going up for many years, and are roughly the same in the U.S. What distinguishes us from our neighbours to the south, however, is that they experienced a real estate correction from 2006 to 2013, while the property market in Canada hardly blinked. In fact, the U.S. housing crisis triggered the 2008 stock market crisis as well as the collapse of Lehman Brothers. Since 1975, the average annual increase in house prices in the U.S. has been 4.6%, while in Canada the rise has been 6.3%, among the highest in the world.

 

Over the same period, taking inflation into account, the overall increase was 99% in the United States and 278% in Canada.[2]

 

According to an article published in the U.S. that I read recently, this trend is anomalous and cannot last. The difference is even more striking when you compare property price increases to changes in disposable income. The only time house prices outpaced disposable income in the U.S. was during the housing crisis, while prices in Canada have outstripped disposable income since 2020.

The current situation cannot be sustained for long in the United States, let alone in Canada! In light of these statistics, if you’ve been considering buying a property in Florida, now may be the time to do so! What is certain is that there is a definite imbalance between Canadian and U.S. real estate prices; as a result, we’ll likely see some adjustment on one side of the border in the years ahead!

[1] Source : Canadian Real Estate Association: https://www.crea.ca/
[2] Why U.S. Housing Prices Aren’t as Crazy as You Think, 7 septembre 2021, Ben Carlson

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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Real Estate

Home ownership through time

by Sylvain Lapointe
written by Sylvain Lapointe

Do you have the same reaction I do regarding the rising cost of property? Do you wonder how people can afford to buy homes given the steadily increasing market prices since the early 2000s? For the past several years, I’ve been telling myself that this situation cannot last and that a market correction is imminent. In the current context, however, it seems to me that this situation may go on for some time yet.

Recently, I found an interesting stat in The Wall Street Journal that may in part explain what enables buyers to purchase homes at current price levels. The article stated that the 30-year mortgage rate had fallen to a historic low of 2.98%. Currently, mortgage brokers in Canada offer a 5-year rate of 1.84% and a 10-year rate of 2.44%.

While the information I found referred to the U.S. market, it also reflects the situation in Canada. Falling rates, over the course of several years, have allowed many homeowners to reduce their borrowing costs to levels that may be widely underestimated.

In the past 30 years, house prices have soared both in the U.S. and Canada. However, you have to look beyond pricing to gain a fuller understanding of real-estate affordability.

If you compare the 1990 median sale price of a house in the U.S. to the current figure, you find there’s been a 190% increase; however, monthly mortgage payments during this same period have risen only about 40%.

Since the beginning of the century, the median sale price has gone up 90%, while monthly mortgage payments have increased by only 8%. During the same period, inflation jumped up more than 50%.

Now, if you make the same comparisons since 2005, you find that sale price has increased by 26% and monthly payments has actually dropped by 9%.

Even if house prices have substantially gone up, the resulting increase in monthly costs has been much lower. The advantage for homeowners of fixed-rate mortgages is that monthly payments remain the same while their annual revenue generally increases over time. As a result, the cost of owning a home becomes more and more affordable as their career progresses.

Given the increase in real-estate prices, I quickly realized that people buy homes more often on the basis of monthly payments than total house price.

Of course, owning a home entails much more cost than just monthly mortgage payments. However, from a strictly financial standpoint, with such low interest rates, homeowners are only too happy to renew their mortgage. The resulting savings can enable them to put more money aside for retirement!

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

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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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