The unintended gift

It was huge. Not exactly opulent, but majestic. And did I mention it was big? The room swallowed several sofas, a conference table and chairs, an oversized desk, guest chairs, assorted tables, bookcases and still left room for a decent line dance for thirty people. Plus the band. And this was my office.

Sheesh, I muttered. ‘We should subdivide into condos.’ And so began my abbreviated tenure as Minister of National Revenue in the faux-fortress stone building with massive windows overgazing Parliament Hill and the wide river. The biggest move during that time of commanding 31,000 department employees was declaring a tax amnesty as a way of bringing in a giant pile of unpaid dues. If taxpayers fessed up and sent in back taxes, I promised, there’d be no penalty, interest or bottom-paddling. As it turned out, a few billion rolled in.

Well, the CRA has not grown a great rep lately. Several hundred employees were punted for having illegally collected CERB payments during the pandemic. Then everybody went on strike for more pay, seriously impacting taxpayers waiting for reviews or judgements. Just days ago, literally at the 11th hour before a filing deadline, new rules regarding bare trusts were tossed. Lots of people had already paid their accountants hundreds, or thousands, in fees to meet the requirements.

(By the way, an expense claim on my 2022 return was rejected last April, for lack of one document. It was provided within 48 hours – and the CRA responded 11 months later.)

Okay, is there anything these guys (and their political overlords) have done right?

You bet. The FHSA.

The First Home Savings Account is not, of course, for just for buyers of first homes and it’s not a savings account. This sexed-up tax shelter is for anyone who has not recently owned real estate (in the last 4 calendar years) and it can contain any investment asset that an RRSP or TFSA does. In the first year of existence (today is the anniversary) about 500,000 of them have been opened. There will be millions more, as it becomes apparent what an unintended gift this thing is.

You likely know the facts. Up to eight grand a year can go in, for a total contribution limit of $40,000. Like an RRSP, contributions are deductible from taxable income. Like a TFSA, money can be taken out, tax-free. Astonishing. And funds can be transferred into it from an existing retirement plan (but that’s a bad idea). It stays open for 15 years of your life, between the ages of 18 and 71. The wad can be removed for a real estate downpayment or, incredibly, just flipped over into your RRSP.

In essence, this adds $40,000 in contribution room and 15 years of compounded growth to a retirement fund – regardless of earned income. That’s reason enough for every renter with no intention of every being sucked into a mortgage or property tax payments to have one of these.

In teh past year this addictive and questionable blog has had several posts about out to make the most of a FHSA. Here are a few points worth repeating.

• Don’t push your kid into opening one of these. They last only 15 years, so odds are someone starting at 18 may not be ready to buy a home in her early thirties. So use the TFSA instead for four or five years. By the way, contributions can be used to reduce taxable income in future years – so it might be wise to save them up.
• Be careful with what you stick in a FHSA. If you pick stuff that crashes the contribution is forever lost and you cannot use that loss to offset a capital gain. Stick with big-index equity ETFs instead of Tesla.
• You can gift cash to your kid or spouse for their FHSA, but unlike a spousal RRSP you fund, the tax break belongs to them, not you.
• Buying a house soon? Make the max FHSA contribution even though there’ll be no accumulated growth. The money can come out for the downpaymen free of tax and still be claimed against taxable income. Try combining it with the RRSP Home Buyer’s Plan ($35,000 per person) since there’s no rule against using both.
• Missed putting the full Monty into a FHSA you opened last year? Catch-up contributions are allowed, to a max of eight grand, plus the current year’s amount. So, a max of $16,000 in any one year.
• As with the tax-free account, designate a Successor Holder (not a ‘beneficiary’) for your FHSA.
• Wrinklies who have downsized from a house and now rent can open a FHSA after four years, fill it with tax-deductible contributions and convert it to an income-paying RRIF at age 71. Sweet.
• Owners of rental property that don’t have a personal residence can open and utilize a FHSA. Business owners who earn through dividends, not taxable income, and never build up RRSP room can use this account to create some.

There’s more. But you get the point. This thing can help buy a house (maybe in Edmunston or North Bay) however its real value to many will be in handing over fresh RRSP room, reducing annual income taxes, creating extra retirement income or family and small business tax planning. Open one.

By the way, I don’t miss that office or the power. Just the view.

About the picture: “YoYo the American Cocker Spaniel,” writes John, “resting after another long walk to the Biscuit Box and back, showing off his paws, while keeping the ole’ eagle eye focused on the photographer. Thanks for your great blog, always interesting topics, and letting us see the range of human emotions you get emailed (with the extreme ones filtered out, of course), to let the rest of us see another view on “the pulse” of the nation.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.