Photo By: Tierra Mallorca from Unsplash
For a long time, adulthood and home ownership went hand-in-hand. However, given the current real estate market, this has become increasingly challenging – especially for young people.
One of the Liberal Party’s major platform points during Canada’s most recent federal election was the introduction of a tax-free First Home Savings Account (FHSA). This account would allow Canadians under 40 to save up to $40,000 towards a down payment and withdraw the funds tax-free when they chose to buy a home.
The FHSA would combine features of the existing Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) to help aspiring homeowners build their down payment faster. The RRSP allows users to contribute pre-tax dollars which are eventually taxed upon withdrawal. Alternately, the TFSA allows users to contribute taxed income, which they can then withdraw at any time with no tax consequences.
What makes the proposed FHSA unique is that neither contributions nor withdrawals will be taxed, creating a $40,000 tax shelter for anyone saving for home ownership. It is important to note however that if the funds held in the account are not used by the age of 40, they would roll over into a normal RRSP.
The main difference between the FHSA and other government investment programs is that the FHSA has a much shorter timeline than the RRSP or TFSA. This can greatly impact investment strategy because a 10-to-20-year investment timeline does not allow for the same flexibility that a retirement savings account would. It is important to consider the risks involved with investing. Most people saving to buy a home would want to adopt a risk-averse strategy, even if that means lower returns. However, even in that case there is still potential for an economic downturn which could have negative effects on the market. While this is still a manageable degree of risk for long-term savings, it can be off-putting for someone looking to liquidate within the decade.
This plan has been criticized by key players in the real estate industry because it ignores the core issue in their minds: supply. While offering home purchase incentives is important, it ignores the need for new development, especially in metropolitan cities like Toronto and Vancouver. While the Liberal campaign briefly touched on this, it focused much more heavily on foreign buyers and their next big thing: the FHSA.
With the Liberal Party securing another minority government, it is unclear whether this program will see the light of day. It is expected that news regarding implementation will be released in the coming months.