Family Formation & Housing

For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.

Giving with a Warm Hand: through the new FHSA

Image via Pixels: Rahul Pandit

By Michael J. Wiener

Special to Financial Independence Hub

I expect to be leaving an inheritance to my sons, and I’d rather give them some of it while I’m alive instead of waiting until after both my wife and I have passed away.  As the expression goes, I’d like to give some of the money with a warm hand instead of a cold one.

I have no intention of sacrificing my own retirement happiness by giving away too much, but the roaring bull market since I retired in mid-2017 has made some giving possible.  Back then I thought stock prices were somewhat elevated, and I included a market decline in my investment projections to protect against adverse sequence-of-returns risk.

Happily for me, a large market decline never happened.  In fact, the markets kept roaring for the most part.  As it turned out, I could have retired a few years earlier.  A large market decline in the near future is still one of several possibilities, but the gap between our spending and the money available is now large enough that we are quite safe.

Our lifestyle has ramped up a little over time, but not nearly as much as the stock market has risen.  We just aren’t interested in expensive toys.  Owning a second house or a third car just seems like extra work.  Our idea of fun travel is to go somewhere with nice hiking trails.

So, we have the capacity to help our sons with money, but there is another consideration: what is best for them?  I’m no expert in the negative effects of giving large sums of money to young people, but I’m thinking it makes sense to ease into giving.

Ease into giving with the FHSA

This is where the new First Home Savings Account (FHSA) is convenient for us.  Our plan is to have our sons open FHSAs, and we’ll contribute the maximum over the next 5 years.  This will give them an extra tax refund each year, and if they choose to buy a house at some point, they can use the FHSA assets tax-free as part of their down payment.  If they don’t buy a house, they can just shift the FHSA contents into their RRSPs without using up any RRSP room. Continue Reading…

More on the FHSA [Tax-free First Home Savings Account]

The FHSA and reasons why younger Canadians should really opt in to opening this account with any intention to buy their first home over time …

By Mark Seed, myownadvisor
Special to Financial Independence Hub

The New Tax-Free First Home Savings Account (FHSA) Facts:

  • Think of the FHSA as a hybrid of the Registered Retirement Savings Plan (RRSP) / Home Buyers’ Plan and Tax-Free Savings Account (TFSA): FHSA contributions are tax-deductible like the RRSP and qualifying withdrawals out of the account are not taxed just like the TFSA.
  • To be eligible to open and contribute to your FHSA you must be:
    • A Canadian resident + 18 years or older + *a first-time home buyer. (Meaning, existing homeowners AND folks that owned a home in the *last four preceding years of trying to open the FHSA won’t qualify to open this account).

*An individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home (or what would be a qualifying home if located in Canada) that either (i) they owned or (ii) their spouse or common-law partner owned (if they have a spouse or common-law partner at the time the account is opened).

  • The FHSA can hold stocks and bonds and ETFs just like the TFSA and RRSP.

FHSA Contributions and Tax Deductions:

  1. Individuals would be able to claim an income tax deduction for FHSA contributions made in a particular taxation year; contributions currently capped at $8,000 per year up to a $40,000 lifetime contribution limit. So, a solid 5-years of striving to max-out the account for tax-free withdrawals.
  2. Like the TFSA, your unused FHSA contribution room can be carried forward to the following year but only up to a maximum of $8,000.

FHSA Holding Period and Withdrawals:

The account can stay open for 15 years OR until the end of the year you turn 71 (not very likely???) OR until the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.

FHSA worst-case? What if you open an account and you don’t purchase a home??

Any savings not used to purchase a qualifying home could be transferred to an RRSP or RRIF (Registered Retirement Income Fund) on a non-taxable transfer basis, subject to applicable rules. Of course, funds transferred to an RRSP or RRIF will be taxed upon withdrawal.

All that and more, is highlighted in this comparison graphic below via @AaronHectorCFP and more details from Cut The Crap Investing with even more Q&A.

Weekend Reading - The New Tax-Free First Home Savings Account (FHSA)


My FHSA Thesis

Overall, pretty great stuff with the FHSA and a major opportunity for younger investors who are really trying to find ways to sock away more money for their very first home.

Continue Reading…

The tax-free First Home Savings Account

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

The first home savings account goes live on April 1, 2023. [It was confirmed in Tuesday’s 2023 federal budget.] The FHSA is a program to help first time home buyers save for a home, in tax-free fashion. The program can be used on top of the current Home Buyers Plan (HBP) that is part of the RRSP savings vehicle. We can also throw in the Tax Free Savings Account (TFSA) for ways that Canadians can save in tax-free or tax-deferred fashion. The first home savings plan is a wonderful addition to the Canadian saving and investing landscape.

Here’s the government of Canada link for the first home savings plan.

And here is a simple overview from TD Bank.

And special thanks to financial planner Mark McGrath for his tweets and help. Mark is a Wealth Advisor at Wellington-Altus Private Wealth.

Be sure to follow Mark on Twitter. He often provides wonderful insights on financial planning basics, and is always happy to answer questions.

What is the first home savings account?

The First Home Savings Account is a type of registered savings plan for Canadians saving to buy their first home. Canadian residents aged 18 years or older can open an FHSA to save towards the purchase of a home in Canada.

There are limits to how much you can put in your FHSA:

  • $8,000 – yearly contribution limit
  • $40,000 – lifetime contribution limit

Contribution amounts are tax deductible, just like the RRSP program. They will reduce the amount of income taxes that you will pay. The annual contribution limit would apply to contributions made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year can not be attributed to the previous tax year.

Contribution room carries forward to the next year if you don’t put in the full amount. Carry-forward amounts only start accumulating after you open an FHSA for the first time. The carry-forward room does not automatically start when you turn 18.

An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023).

Who can open a first home savings account?

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning you cannot have lived in a home that you or a spouse/common-law partner owned in the current year or the previous 4 calendar years. And you can only use the FHSA once.

Combine FHSA with the RRSP home buyer’s plan

As you may know you can remove up to $35,000 from an RRSP account to be used for a first time home purchase. It’s called the Home Buyer’s Plan (HBP). You can use monies from both the HBP and the FHSA for that first home purchase. You can combine amounts.

There is no limit to how much you can use from your first home savings plan. Meaning, for your first home purchase.

What can you hold in an FHSA?

An FHSA can hold savings or investments. The same qualified investments that are allowed to be held in a TFSA can also be held in an FHSA. This could include ETFs, stocks, mutual funds, bonds, savings accounts and GICs.

What if you don’t use the FHSA funds for a home purchase?

Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.

Withdrawals that are not qualifying withdrawals would be included in the income of the individual making the withdrawal. Financial institutions would be required to collect and remit withholding tax on non-qualifying withdrawals, consistent with the treatment applicable to taxable RRSP withdrawals.

Transferring your FHSA to your RRSP or RRIF

Your FHSA must be closed by December 31st on the soonest of:

a) the 15th year after you open it

b) the year you turn 71

c) the year following the year of your qualified home purchase The balance can be taken as taxable cash or rolled over, tax-deferred, to your RRSP. Continue Reading…

Buying a House in Canada: Why I couldn’t wait to NOT be a Homeowner

By Kyle Prevost, MillionDollar Journey

Special to Financial Independence Hub

By the end of the summer of 2021 I was no longer a homeowner.

In many countries that statement would be a simple matter of personal finance. Selling an asset, paying off a loan (mortgage) and moving on to another living space.

But not in Canada.

No, in Canada selling our house means that my wife and I are making a massive change to our identities. A core shift in our very essence.

Many would say we are taking a careless step backward on the path to living a fulfilled “real adult” life.

Several friends and family will likely believe that we are crazy for tossing away “the best investment one can ever make.”

The absolute obsession with homeownership in Canada continues to astound me. The emotional connection between Canadians and their real estate has been well documented, but that doesn’t make it any more logical! Even though my wife and I have owned a home for years, this was much less because we subscribed to the traditional “own at all costs” mentality, and more due to the fact that rural Manitoba housing vs rent decisions are quite different than most places in Canada.

We’ll certainly miss some of the small luxuries (goodbye big garage) of our old home, but here’s some of the reasons why we believe selling our house will be a weight off of our shoulders.

1.) Endless Fear of Hearing a Strange Noise

Is that the furnace taking its last breath?

Perhaps it’s the water treatment system deciding to spring a leak?

Is that rain I hear – is it possible our septic system is backing up?!

My dad loves fixing stuff.  His day is not complete until he has improved the physical world around him.

I am not my dad.

My lack of handyman skills has now become a joke that I’m comfortable laughing at, but for years I was incredibly self-conscious about possessing nearly zero masculinity-affirming fix-it ability. You want someone to work hard doing menial chores such as cutting lawns, raking leaves, shovelling snow, or lifting heavy things from Point A to Point B – I got you covered.

Anything that requires technical skills or mechanical problem-solving ability… not so much.

Because my father’s handyman-dominant brain was not passed down to his oldest son, I lived in perpetual fear of things breaking when I owned a home. I never really got this “pride of ownership” thing. For me it was definitely more of a “fear of ownership”. I had so much of my net worth tied up in this one asset – that required constant maintenance – and I really had no idea what it was doing. “Learning by doing” constantly scared me as errors were quite costly.

Hiring any specialized help on something like an air conditioning unit always seemed to cost triple what was estimated, so that just exponentially added to my anxiety levels around maintenance.

Renting = not my problem!!!

2.) Renting is Simply a Better Financial Decision Than Buying – in 2021 Canada.

I know … that’s a big statement.

It’s probably worth an article all on its own.

It will probably lead to crazy comments (as all real estate articles in Canada do).

But it’s quantifiably true.

We’ll get into the “fringe” elements of why owning can be so expensive in a second, but for now let’s just look at the direct dollars and cents comparison.

Before we get too deep into this, I don’t want to argue with you unless you have viewed the following content by some of Canada’s smartest personal minds.

i) Preet Banerjee compares renting a house and renting a mortgage and then explains why he is a renter.

ii) John Robertson (my vote for most underrated personal finance philosopher – and it’s not even close) tells you why he is a renter and presents the best rent vs buy calculator that I’ve ever seen.

iii) Here’s Ben Felix’s 5% rule in action. I personally believe that Ben is shooting a bit high on real estate estimates (today’s giant houses are not comparable to historical returns data he quotes), and a bit low on property taxes + maintenance costs. He also isn’t factoring in closing costs (which are a pretty big deal when you move the number of times the average Canadian does), nor the difference between renters insurance and home insurance. I do like his methodology, but the 5% rule of thumb for non-recoverable costs is pretty badly slanted towards real estate due to the factors mentioned above. I could probably live with a 6% rule – but find a 7% rule to be a much more true measure (speaking as a soon-to-be former homeowner of ten years).

iv) I’ve talked to many real estate experts who claim “the 1%” rule of thumb is a great filter for a potential landlord looking to add a revenue-generating property to their real estate portfolio. That means that if you can’t get at least 1% of your purchase price in monthly rent, then it’s not really worth considering the property. The flip side of that is that if you’re renting for substantially less than 1% of the purchase price of a comparable home – then you’re getting a good deal. Bryce over at Millennial Revolution explains his rule of 150 which comes to similar conclusions.

Those are all great looks at accurately comparing financial costs vs benefits of purchasing a house to live in.

So, let’s use them to look at a few options across Canada at the moment.

Toronto Real Estate

The average price of a property sold in the GTA in May of 2021 was $1,108,453 (a massive 28% gain over a year earlier) while the average rent is closer to $2,100 (down 14%).

  • Our 1% rule of thumb says that a $1,100,000 house better get you $11,000 per month in rent – or it’s not a good buy.
  • Using John’s or Preet’s calculators we see that renting is WAY ahead given these parameters.
  • My modified Ben Felix 7% rule tells us that if we can rent for $6,466 – then it’s a pretty good deal to rent.  If we stick to his original 5% rule, we need to rent for less than $4,618 to be a good deal.
  • Bryce’s preferred rule of 150 means that the $2,100 rental average, would dictate a mortgage payment of $1,400 as a good measuring stick for if they should buy.  A $1,400 mortgage (HAHA – good one) would correlate to a purchase price of roughly $350,000 (depending on a few variables.

Conclusion: By any measure… this makes no sense.

Buying a House in Calgary

Maybe this is just a Toronto thing. Let’s go to a city that has seen its housing market really fall on tough times as a result of the oil collapse, PLUS rent has actually gone up over the last year.

The average rent in Calgary is roughly $1,200 and the average cost of a property is $510,000. Those stats might be skewed a bit by average home type in the rental world vs average home type in the purchase world. Let’s say average rent for comparable might be $1,500.

  • Our 1% rule of thumb says that a $510,000 house better get you $5,100 per month in rent – or it’s not a good buy.
  • Using John’s or Preet’s calculators we see that renting is substantially ahead given these parameters.
  • My modified Ben Felix 7% rule tells us that if we can rent for under $3,000  – then it’s a pretty good deal to rent.  If we stick to his original 5% rule, we need to rent for less than $2,125 to be a good deal.
  • Bryce’s preferred rule of 150 means that the $1,500 rental average, would dictate a mortgage payment of $1,000 as a good measuring stick for if they should buy or not.  A $1,000 mortgage would correlate to a purchase price of roughly $230,000.

Home Prices in Halifax

Ok, enough of these “big city places”. We all know that house prices are way cheaper on the East Coast, so let’s run the numbers for Canada’s semi-hidden gem of a city.

The average rent in Halifax is about $1,600 per month and the average cost of property is $465,000.

If we adjust upward to $1,800 in allowing for comparable properties (I checked, you can rent a solid single-family unit for 1,800 in Halifax – even better in Dartmouth, Nova Scotia) then we get the following analysis.

  • Our 1% rule of thumb says that a $465,000 house better get you $4,650 per month in rent – or it’s not a good buy.
  • Using John’s or Preet’s calculators we see that renting is substantially ahead given these parameters.
  • My modified Ben Felix 7% rule tells us that if we can rent for under $2,700  – then it’s a pretty good deal to rent.  If we stick to his original 5% rule, we need to rent for less than $1,937 to be a good deal.
  • Bryce’s preferred rule of 150 means that the $1,800 rental average, would dictate a mortgage payment of $1,200 as a good measuring stick for if they should buy or not.  A $1,200 mortgage would correlate to a purchase price of roughly $280,000.

…that’s why I’m not afraid to be a renter the rest of my life and why I’m not worried about “hopping off” the property ladder.

If you’re still not convinced, here are a few more stats for you.

  • Canada’s current price-to-rent levels are 574% higher than they were in 1970.
  • Since 1970, Canada’s price-to-rent level has risen at roughly 21x as quickly as the USA’s.
  • Canada’s current price-to-rent levels are substantially higher now than the USA’s was before their 2008/09 housing crash.

3.) Opportunity Cost of Being Rooted Into Place

I grew up in a single house – owned by a homeowner. (My parents were unique in that my dad built his own house on a very cheap piece of rural land and never took out a mortgage. Feel free to try and copy that strategy in 2021.)

It was really nice. I get that there can be some very pleasant reasons to own the house/condo that you live in.

But let’s be honest about the big picture here – there are some large trade offs involved.

Buying a home makes you much less likely to move in order to accept a promotion or career opportunity. That’s impossible to quantify, but it’s a really significant consideration. One of the quickest ways to climb in any industry (or even make an advantageous jump to a new industry) is to be willing to move to where the opportunity is. The cost to your career of feeling as if you are anchored to the house you worked so hard to get into could be massive!

4.) Our Brains Work Differently When We Think About Renting a Place to Live vs “Buying a Forever Home” – Lifestyle Inflation is Almost Inevitable.

Funny things begin to happen as we approach the leap from renter to homeowner.  Suddenly, cost-benefit calculations we were doing about third bedrooms or fancy kitchens fly out the window… only the best will do for our “forever home” after all.

Weird mantras like, “We’ll grow into it,” begin to creep into our heads and suddenly we’re looking at fancy countertops, upgrading bathrooms, etc. Continue Reading…