Tax-Free First Home Savings Account (FHSA): Coming Soon to Raymond James

Tax-free first home savings account (FHSA): Coming Soon to Raymond James

This past year, the Government of Canada announced the launch of the tax-free First Home Savings Account (FHSA). This is a new registered account which is intended to help Canadians save towards the purchase of their first home. An easy way to think about it is if an RRSP and a TFSA had a baby, and that baby was adamant on buying a house, this baby’s name would be FHSA.

Raymond James has moved forward to ensure we can offer this new savings vehicle this summer.

Here is a summary of the key features of the FHSA:

• The account is available to all Canadian residents age 18 or older who are first-time home buyers (i.e. individuals who did not live in a home at any time in the preceding four years that you or your spouse, including common-law partner, owned or jointly owned). Note that FHSA eligibility is based on the age of majority, which varies by province. For example, the age of majority in Ontario, Quebec and Alberta is 18 while in BC it is 19.
• The account has a lifetime contribution maximum of $40,000, with an annual contribution limit of $8,000 (note that for accounts opened in 2023, the full $8,000 can be contributed).
• Contribution room accumulates only after the account is opened and any unused amounts up to a maximum of $8,000 can be carried forward for use in the following year (i.e. if you open an FHSA in 2023 but don’t contribute, you can contribute up to $16,000 in 2024).
• Contributions are tax-deductible against income in the year contributed, or can be carried forward to offset income in future years, similar to an RRSP.
• Funds in an FHSA can be invested in the same securities that can be held in a TFSA or RRSP (e.g. blue chip equities, fixed income, alternative investments, etc.)
• Similar to RRSPs and TFSAs, investment earnings accrue on a tax-free basis while in the FHSA.
• Qualified withdrawals (i.e. withdrawals used to buy a first home) are non-taxable. Qualified withdrawal terms are generally in line with the terms associated with the Home Buyer’s Plan (HBP):
  • You must be a resident of Canada and still qualify as a first-time home buyer,
  • You must have a written agreement to build or buy a home with an acquisition or completion date of October 1^st of the following year,
  • You must occupy the home within one year of buying or building it, and
  • You must not have acquired the home more than 30 days before making a withdrawal.
• Unlike the Home Buyer’s Plan (HBP) option available to RRSPs, qualified FHSA withdrawals don’t need to be paid back.
• First-time home buyers can withdraw from both their FHSAs and RRSPs using the Home Buyer’s Plan option. A couple who has sufficient RRSP balances and maximized their FHSA contributions over time could withdraw $150,000+ ($35,000 each from their RRSPs and $40,000 each from their FHSAs and the investment income generated in the FHSA, to put towards the purchase of a first home, assuming both individuals qualify as first-time home buyers.
• If needed, you can make a taxable withdrawal (i.e. a withdrawal that is not used to buy a first home) from your FHSA but this amount must be included as taxable income on your income tax return.
• Unused FHSA savings, including all investment growth/income, can be transferred to an RRSP/RRIF on a tax-free basis, and does not require that the FHSA owner has RRSP contribution room. Transfers to an RRSP/RRIF can be done at any time.
• An FHSA can only be held for a maximum of 15 years or until the account holder is 71 years old.
• Similar to TFSAs, you can name your spouse a successor holder of the account and the survivor can maintain both their own FHSA and the balance of their deceased’s spouse’s FHSA, assuming they would qualify as a first-time home buyer on the date of death. If they don’t qualify as a first-time home buyer, they can elect to receive the balance as a direct transfer to their RRSP/RRIF or take a taxable distribution.
• The FHSA, in combination with the RRSP’s Home Buyer’s Plan, provides a lot of firepower when it comes to saving for a down payment. As noted above, an individual can efficiently save $75,000 ($150,000 for a couple) over 5+ years, plus the investment growth, to use for this purpose.

We see the FHSA as a great way for high-income earners at a high marginal tax rate to save for their first home but it is an even better way for high net worth families to provide gifts to kids or grandkids and maximize overall family net worth:

• Parents and grandparents can gift $8,000 per year for 5 years to their kids or grandkids.
• These kids or grandkids can use the gifts to make FHSA contributions.
• Each contribution can be deducted in the year of the contribution, or be carried forward to a year when their income is high enough to benefit from the deduction.
• The gifted funds can then grow tax-free for up to 15 years after the FHSA is opened.
• If the FHSA is not used to purchase a home, the kids or grandkids can transfer the total amount of the FHSA to their own RRSP. This transfer will not impact their regular RRSP contribution room.

In a way, the FHSA is almost an extension of the Registered Education Savings Plan (RESP) but for your kids’ first home:

• Contribute to your kids’ or grandkids’ RESPs until they head off to post-secondary school at age 17/18.
• Gift funds to your kids or grandkids so that they can contribute to their FHSAs from age 18 to 22 (assuming you reside in a province where the age of majority is 18)
• By the time the kids or grandkids finish their undergrad, they’ll have $40,000 plus the investment earnings, to use as a down payment.
• Families that have non-registered funds available may wish to gift their kids or grandkids the funds for a house purchase. The children or grandchildren can then maintain the FHSA for the full 15 years and then transfer the balance to their RRSP to fully take advantage of the tax-deferred growth. Using this strategy, the initial $8,000 contribution at age 18 would be able to grow for 54 years tax-free until the first RRIF withdrawal is required at age 72, while the full $40,000 in lifetime FHSA contributions would be able to grow for 50 years tax-free. Assuming a 6% rate of return earned in the FHSA over time, this $40,000 in contributions between age 18 and 22 would grow to ~$830,000. That is a lot of tax-free compounding and a great way to set up the next generation!

Starting in the fall of 2023, we will begin reaching out to clients to discuss whether it makes sense for you or your children/grandchildren to open an FHSA.

News and our views

US Debt Ceiling Deadline Nears and Both Sides’ Heels Are Dug In Deep as Usual. Since 1960, Congress has acted 78 times to permanently raise, temporarily extend or revise the definition of the debt limit. In times of split government, which is the case now, the debt ceiling debate can become hostile. Notable debt ceiling crises in the past occurred in 1995, 2011 and 2013 with the two former instances resulting in cutbacks in government spending and furloughs of federal employees, which negatively impacted short-term economic growth and equity markets. At this point, it is difficult to say how the 2023 debt ceiling crisis will end. In recent days, Treasury Secretary Yellen stated that the US could run out of money to pay its bills by June 1 (the “x-date”) if Congress does not raise or suspend the debt limit, and non-partisan forecasters agree, though the x-date could change depending on how much money the IRS collects in taxes as well as exact government spending. As is normally the case, Republicans are staunchly against new net spending and want budget cuts to accompany any debt ceiling increase while Democrats want a “clean” debt ceiling deal (i.e. one that is unblemished with spending cuts). Always the rabble-rouser, Trump called on Republicans to allow the US to default “if they don’t give you massive cuts…it’s better than we’re doing right now because we’re spending money like drunken sailors”.

Our Take: A vast majority of the time, the US debt ceiling debate and conclusion has little lasting effect on equity and bond markets. Even in 2011, the S&P 500 fell almost 20% when the debt ceiling debate ended with sequestration, sizable cuts to federal spending, and the loss of the US’s AAA credit rating (to AA+), but the S&P 500 fully recovered within six months. US Treasuries, whose credit rating was cut, performed well throughout the 2011 debt ceiling crisis. It is unlikely that Congress will not come to an agreement and even more unlikely that lasting economic damage will be done if they don’t. We believe longer-term factors – equity market valuations, potential high inflation and the impact on interest rates, onshoring of industrial production, immigration – will continue to dictate the future returns of equities and bonds, not a short-term blip in federal spending.

Investor and Consumer Sentiment Versus Investor Positioning. Weak investor and consumer sentiment are seen as contrarian equity market indicators. Lows in investor and consumer sentiment tend to be followed by periods of improving sentiment and investor willingness to take risk and invest in equity markets. Investor and consumer sentiment remain at low-to-average levels, depending on which survey you look at. Investor positioning tends to mimic sentiment to a certain degree but that is not the case now as investor positioning is remains historically aggressive. What gives?

Our Take: The difference between investor/consumer sentiment and investor positioning may be explained by whose confidence is surveyed versus who tends to invest in equity markets. High inflation makes nearly everyone less confident in the future, greatly affecting average investor and consumer sentiment, but the vast majority of investment assets (~90% in the US for example) are owned by the wealthiest 10% of the population, who are less impacted by high inflation. For this reason, the anomaly between weak sentiment and aggressive investor positioning could continue and sentiment may not be a good equity market indicator during periods of high inflation. Comparable sentiment data doesn’t exist for the last period of high inflation, the 1970s, so this is just our best guess.

Just for fun

• Starting May 16, the US trading app Robinhood will begin allowing users to trade select stocks and exchange-traded funds (ETFs) 24 hours a day during the week. Regular US trading hours are between 9:30am and 4:00pm EST and most major US brokerages offer extended hours trading, starting at 4:00am EST and ending at 8:00pm EST each weekday. Robinhood joins Schwab and Interactive brokers in offering trading between 8:00pm and 4:00am EST but it is the first to offer trading in individual stocks like Apple (AAPL), Amazon (AMZN) and Tesla (TSLA). Trading ETFs through the night is rarely volatile as high volume futures trading on foreign exchanges helps pin down the value of these ETFs because professional traders will ensure the value of the ETFs and futures remain nearly identical. On the other hand, trading in individual stocks through the night could be highly volatile as Robinhood will be the only market trading those securities at that time. It will be an interesting experiment to say the least.
• In recent weeks, Bed Bath & Beyond announced it would file for bankruptcy protection and right size its US business, a long awaited step for the struggling home goods retailer. This follows the announcement by Bed Bath & Beyond Canada in February that it would liquidate and shut down all 54 Bed Bath & Beyond stores and 11 buybuy Baby stores in Canada. Canadian Tire and a new home goods retailer, rooms+spaces, have announced the acquisition of 10 and 21 Bed Bath & Beyond Canada stores, respectively. We may rue the day bedsheets are available exclusively online!
• The fight against climate change and the reduction of CO₂ in our atmosphere can sometimes seem like an insurmountable challenge. But then you hear about cement that not only produces negligible amounts of CO₂ in the production process but also captures and locks-in CO₂ over time. Perhaps human ingenuity can save the day once again, as it has so many times in our history.