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A Great Idea? Or A Dud?
The 2022 Federal Budget proposed a new savings account called the First Home Savings Account (FHSA) scheduled to be implemented in 2023. As currently presented, the FHSA is an alternative to the Home Buyers Plan (HBP) as the FHSA and HBP cannot be used for the same home purchase. Overall, the main benefit of the FHSA is to provide another tool to save towards the purchase of a home as well as providing additional tax benefits by reducing taxable income. So, assuming both will be available in 2023 which is the better choice?
For both the FHSA and the HBP you must:
In the saving phase the FHSA functions similarly to an RRSP by reducing the contributor’s taxable income. To examine this savings phase let’s look at two examples of people wanting to buy a home in 5 years or more.
Person 1: Bonnie, a full-time university student, works part-time making $20k per year.
Person 2: Brian, a young professional making $120k per year
As you can see from the above examples the person that would benefit from the FHSA the most is the person who, based on income, needs the least amount of help getting into the housing market. Of the pool of those eligible to take advantage of these strategies, I’m betting the majority look more like Person 1 than Person 2.
In the payout stage, the FHSA has the clear advantage since the funds will be received tax free and do not need to be paid back. Plus, the balance in the FHSA account will have the opportunity to grow and exceed the current withdrawal limit of the HBP of $35k. The inflexibility of the contribution maximums and absence of carry over room in the FHSA make it harder for the average saver to take full advantage. However, if it’s time to make that first home purchase and there are more funds available in RRSP making the HBP more attractive, then unused FHSA funds can be transferred to an RRSP. So, it can’t hurt to make the FHSA contributions.
It should be noted that the intention of the FHSA by the federal government is to address the increasing problem of housing affordability. While the FHSA may be a useful savings tool, it is unlikely to make any significant impact on housing prices. The people most negatively impacted by rising house prices may struggle to save an extra $8,000 annually to contribute to the FHSA to take full advantage of the tax benefits. It is unclear how many more people will be able to enter the market due the FHSA. More buyers in the housing market could put upward pressure on housing prices in already expensive markets such as Vancouver and Toronto.
So, will the First Home Savings Account make it easier for first time home buyers to get into the market? The jury is still out. Will the FHSA offer more financial planning opportunities for those eligible? Absolutely.
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