The proposed tax-free first home savings account (FHSA) outlined in the federal government’s latest budget has generated mixed feelings from advisors.
Ty Cooke, wealth advisor with Orlic Harding Cooke Wealth Management Group, a unit of Richardson Wealth in Burlington, Ont., described the FHSA as “a very powerful tool” for the younger generations to achieve home ownership, with the tax-deductible $8,000-per-year contribution being the most enticing aspect.
However, he said the $40,000 lifetime contribution limit, “although it will help with a down payment, is still not going to provide quite enough based on an average home price of over $800,000,” Cooke said.
Ahmed El-Shaboury, associate financial advisor with Assante Capital Management in Ottawa, agreed. The FHSA “is certainly a step in the right way, [but] I’d hope the limits would be more than $40,000,” he said.”That’s not enough for the housing prices that we’re seeing nowadays.”
El-Shaboury also pointed out that individuals can’t use both the FHSA and the Home Buyers’ Plan (HBP). The HBP allows a first-time home buyer to withdraw up to $35,000 from their RRSPs to buy or build a home as long as they repay the funds within 15 years.
“It’s one or the other. I think that’s a big disadvantage for this,” El-Shaboury said. “If you combine both the $40,000 from the FHSA and the $35,000 from the HBP, it [would have given] a new home buyer $75,000. If we’re talking about a couple, it’s $150,000. That’s a good down payment for the housing market that you’re seeing now.”
Despite these concerns, both El-Shaboury and Cooke would recommend the FHSA to clients buying their first home.
El-Shaboury said contributing to the FHSA will help clients concluding their post-secondary studies, whether or not they have immediate plans to buy a house.
Aside from contributions being tax deductible and withdrawals being tax-free, El-Shaboury noted other benefits. “They have 15 years to make that purchase. If they don’t, they can, ultimately, transfer that to an RRSP,” he said.
El-Shaboury added he’ll be reaching out to clients aged 20 to 30 who have never owned a home regarding the proposed FHSA.
Specifically, he’ll talk to one of his younger clients, a working professional who maximizes her RRSP and TFSA contributions. The two have discussed her entering the housing market, but she found the prices too high.
“I’ll be reaching out to her and saying, ‘Once these are available in 2023, in addition to your RRSP contributions and your tax-free contribution, you can [add] $8,000 per year. It will be deducted from your income. So, that’s a great advantage for you. You’ll keep adding the $8,000 for the next five years and then just let that account grow,'” he said.
Cooke will also propose the account to some of his clients, primarily those just finishing school who have never owned a home. But ultimately, he’ll recommend the account if it fits the specific client’s needs and goals.
“The fact that you get a tax deduction like an RRSP, but you have the ability to withdraw it on a tax-free basis — you basically have two of the biggest advantages of an RRSP and a TFSA rolled into one, and it provides a higher amount than the [HBP],” he said.
But Zainab Williams of Elleverity Wealth Management in Milton, Ont., said that clients who’ve begun using existing accounts to save for a down payment should generally stay the course.
“If they have already started saving through their RRSP, then it would not be beneficial to stop and [resume] saving through the FHSA,” she said, since the proposal prohibits using both the FHSA and the HBP. “Also, you cannot transfer the full $35,000 from your RRSP into your FHSA account due to the annual $8,000 contribution limit.”
Since FHSA contribution room doesn’t carry forward and TFSA contribution room does, Williams said that clients who must choose between contributing to the two accounts should use the FHSA first. “This way they don’t lose their FHSA contribution room,” she said.