How to play the FHSA

Soon the banks will be flooding us with FHSA propaganda. Thereafter – April, I hear – accounts can be opened and deposits made into the strange little beast called the First Home Savings Account. We’ve never really seen anything like this before and as the big moment nears, it’s worth reviewing the mechanics.

No, the arrival of this thingy won’t make houses more affordable, or render it easier to buy one. In fact, if billions flow into FHSAs demand for real estate might increase and prices rise. We just don’t know. But it’s useful financial tool for anyone between the ages of 18 and 72 who’s not a homeowner now nor in the previous four years – and maybe never will be.

First, the FHSA is democratic. Like a tax-free account, everybody can contribute equally regardless of their earned income. But, as with a RRSP, people in higher-income brackets will benefit the most. So, yes, it’s completely inconsistent with the rational Trudeau used when the dude gutted TFSA contribution limits, saying they were a sop to the rich. Well, so is this.

Also, while the Libs have been stingy with the annual TFSA contribution limit (it just crawled to $6,500 this year), the first-home account allows a fat $8,000 per year right out of the gate. There’s a forty grand limit but all money in there grows tax-free, so the restriction is on contributions, not the account balance.

The big deal is that deposits into the FHSA are (as with a retirement plan) fully deductible from taxable income. So the more money made, the sweeter the deal. For someone in the top tax bracket (which moves up to $235,000+ a year) the eight thousand contribution means $4,000 less in tax. The assets held inside the FHSA will grow tax-free and all money can be Hoovered, without tax, to buy a house – which can yield a tax-free capital gain. It’s a fine example of how politicians cannot help themselves when it comes to playing favourites with one asset class. Outrageous but true.

Also note a FHSA can be funded by an RRSP. Or vice versa. Transfers are taxless, so this is one of those very rare times when funds can be removed from a retirement plan without triggering a payment.

The first-home account can be kept for 15 years. If not sucked out for a house downpayment, the assets can be transferred to a RRSP or RRIF without affecting that contribution room. Or, if you’re in a low-income year, the first-home money could be withdrawn and invested in Miley Cyrus tickets (but taxed at your marginal rate).

Now, like the TFSA, this is called a ‘savings account.’ But it’s not for saving. Rather, for investing. Anything that can be put into a regular registered account (stocks, bonds, trusts, mutuals and – best – ETFs) can go into a FHSA. If buying real estate is indeed your goal, growth should be a major consideration since a $40,000 down payment won’t get much property outside of Wawa.

The real estate funded by this account, by the way, must be a principal residence (not a rental or spec condo) you’re moving into immediately or before October 1st in the year after withdrawal. As mentioned, the account is for the houseless only. If you’re hooked up to another person who does have real estate, or did within the past few years, no go. Ownership is defined as ‘beneficial’, which is not just having your name on title, but benefitting from a spouse or partner’s property.

What happens if you set up a FHSA and have zero intention of buying a house?

No problem. You still get to contribute a max of $40,000. You still write it off taxable income. You can enjoy tax-free growth within the plan for 15 years. And you can still shelter every dollar by transferring it to your RRSP, regardless of whether you have room or not. Also know if an annual $8,000 contribution is missed, it can be carried forward to another year.

Stuff to remember: you must open a FHSA to have room start accumulating (at eight grand annually). This is a change from the TFSA where room immediately accrues each year for every adult. So whether you think a first-home account might be useful or not, ensure you open one this year. Plus, contributions to the new account can be ‘saved’ for the purpose of deducting them from taxable income. If you figure income will be higher in, say, five years, use it then to maximize the tax savings. Also, one spouse can fund another spouse’s FHSA. Neither contributions nor growth will be attributed back, and you can declare him/her/they/whatever as successor holder. Finally, you can borrow to fund the FHSA. Loan interest is not deductible, but the tax refund can be used to pay down the loan. Thanks, Chrystia.

Some people think this is just another gimmick cooked up on a napkin by politicians too thick to understand the solution to real estate people which can’t afford is not to help fund it. And of course it is.

But she’s done now, so profit from the stupidity. Every renter in the land should open a FHSA, which actually just adds $8,000 annually to the amount that can already be stuffed into a TFSA and RRSP. You’ll pay less tax, with the ability to move the assets into another shelter, growing the whole wad sweetly.

Or you can buy a slanty semi with a seven-figure mortgage on a questionable street and briefly feel clever.

About the picture: “Thanks for your blog,” writes Kuan. “Learning so much. Learning is one thing, applying it is another. Here is a photo I took of of vultures on a Mexican beach…..hmmm….signs of the times?”