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Our Focus Is On You
Life’s most precious asset is time. We give you time.
Wisdom is the reward of experience and should be shared.
By: Louai Bibi, Advisor Associate
So many Canadians are saving for their first home. Some of us might be on the brink of making that lifechanging purchase, others may still have some time ahead of them. Regardless of your timeline, we often ask ourselves questions like:
- Should I invest this money?
- What account suits my personal circumstance the best?
- What are the pros & cons of each account?
I’ll preface by saying that if you are considering accessing your money within a 48-month window, we advise against investing in the market. While markets generally trend upwards most of the time (you might not feel like it if you started investing in 2022), we don’t have a crystal ball and we’d rather play it safe & ensure your hard-earned savings stay intact if markets happen to experience short-term volatility.
In terms of what accounts are available for first-time homebuyers, you have four great options:
- A generic savings account
- A tax-free savings account (TFSA)
- A registered retirement savings account (RRSP)
- A first home savings account (FHSA)
Your savings account is a great place to store your money when we’re on the brink of purchasing your home (think 48-month timeline, as we discussed above). The TFSA, RRSP, & FHSA all generally entail investing your money in the market. So how do you differentiate which account makes the most sense for you?
Well, let’s start with understanding what benefit each account offers a first-time home buyer:
The TFSA offers tax-free growth when you invest, so if your money grows from $50,000 to $100,000, you get to withdraw $100,000 tax-free, with no penalties and/or restrictions. This is pretty great in my eyes, as the last thing a first-time home buyer should be concerned with is taxes when they are going through an exciting life change. If you later decide purchasing a home no longer makes sense for you or that you need to push out your timeframe, you can keep trucking along & growing your wealth tax-free.
While primarily, used for retirement savings, first-time home buyer’s have an advantage when saving within this account. It’s widely known as the home buyer’s plan (HBP), which allows you to withdraw up to $35,000 from your RRSP to put towards the purchase of your first home. Generally, when you withdraw from a RRSP, that amount is taxed as income. When a RRSP withdrawal is for your first home, you can withdraw this money tax-free. The catch is that after a couple years, you need to begin paying back 1/15th of the amount you withdrew from your RRSP over the next 15 years. By participating in the HBP, you’ve essentially loaned yourself those funds from your retirement savings & they slowly need to go back to your RRSP to later fund retirement. This isn’t a ground-breaking implication, but you earlier heard me mention that we don’t have a crystal ball. We don’t know what the future holds & many homeowners are feeling the stress of higher interest rates impact their monthly payments. While a 1/15th of up to $35,000 per year may not feel suffocating to you while reading this, it certainly can add stress to the lives of others who are adjusting to the associated costs of home ownership.
This just launched in 2023 & the majority of financial institutions can’t even open these quite yet, as they are still building out the infrastructure required to be able to handle contributions, withdrawals & CRA reporting. This account shares a few characteristics that the TFSA & RRSP offer. You can contribute up to $8,000 per year (to a lifetime maximum of $40,000) and use these funds towards your home purchase tax-free. By the time 15 years has passed or you turn 71 years old (whichever comes first), you have the option of withdrawing these funds as cash, at which point it becomes taxable to you, or you can transfer the balance to your RRSP on a tax-deferred basis. While you are waiting for the FHSA accounts to be accessible at all financial institutions, you can save in a TFSA and/or RRSP & later transfer this account to the FHSA, with no tax implications. Your contributions are tax-deductible just like your RRSP, which makes this unique from the TFSA.
Here are my favourite parts about this account:
- Remember how I mentioned needing to repay 1/15th of your RRSP HBP withdrawal every year? This concept does not exist when you withdraw from the FHSA for your first home. There is no repayment schedule & I think that will put a lot of minds at ease, especially when we go through times where money is tight.
- When our annual RRSP contribution room is calculated, its often based on a percentage of our earned income. The FHSA annual contribution limit is not linked to our earned income, but rather a set dollar amount prescribed by the government, which is currently $8,000/year. For those who may be newer to Canada and/or just starting their career & haven’t hit their salary potential quite yet, this may be a powerful tool to save!
When you should connect with us for help
You may want help establishing a savings target or building a roadmap to get from goal to reality. For others, our financial circumstances can be complex & may warrant a deeper conversation, like if you are a US citizen, or if you are just trying to understand where this piece of the puzzle fits in your overall wealth plan. Whether you are new a new or existing client, our door is always open to chat. Whether it is me, Mike, Shawn, or Corey, we’ll be happy to help you make an informed decision. Click HERE to book with us.
At this point, we have a baseline understanding of how each account works for first-time home buyers to make an informed decision. I’ve shared a table below that compares the features of the accounts that we have covered in this blog (click HERE for image source). Each of our scenarios are unique, so we do have to assess the merits of using each account on a case-by-case basis. My objective for this blog is to create general understanding of each account, as well as how they may or may not work in your favor. Buying your first home is a significant achievement & you deserve to have the right professionals by your side. Whether you need our advice, or the advice of a mortgage/tax/legal professional, we’ll put you in touch with the right person.
How does the FHSA compare to the RRSP Home Buyers’ Plan and a TFSA?
|Contributions are tax deductible||Yes||Yes||No|
|Withdrawals for home purchase are non-taxable||Yes||Yes||Yes|
|Annual contribution amount is tied to income level||No||Yes||No|
|Account can hold savings or investments||Yes||Yes||Yes|
|Unused annual contributions carry forward to the next year||Yes||Yes||Yes|
|For first-time home buyers only||Yes||Yes||No|
|Total contribution amount limit||$40,000||$35,000||Cumulative|
|Can check contribution room remaining in CRA MyAccount||TBD||Yes||Yes|
By: Shawn Todd, CFP
Just before the New Year of 2023 – I was fortunate enough to go for a short adventure trip with my wife Michele, where we planned to do some extraordinary hiking in Arizona. The first thing I did when I packed for my trip on the days we hiked – was making sure that I had packed a GPS, a compass, enough water, and had a plan. It sounds simple, but you’d be surprised on how many people venture out with just their shoes. I saw many with no gear, or the wrong gear.
Some short stats:
- 57.8 million hikers every year in the US.
- There are 4 deaths per 100,000 hikers
- 70% of hikers who die are male
Looking at these stats – right away it becomes a very good message to me that not only should I be careful, but I should always be packing a compass. I’m male, I hike, I Iove my wife and family, and I’m planning a hiking trip.
When it comes to our personal lives, and our business lives, it’s very easy to overlook what you need to be packing in your ‘day to day’ backpack. It’s very easy to be comfortable with life ‘as it is right now’. The home & your after-hours routine, and your work & your normal ‘day at the office’ routine all flow one day to the next without any issues. Sometimes we neglect how each of these affects the other. How impactful our personal lives are with our work, and how significant a role our work plays in providing comfort in our personal lives.
The merging of our personal and business lives give way to four key themes on this Venn diagram above. These dual areas are:
Time – how much time can we spend with our loved ones, what kind of quality time is it? How much flexibility does our business provide us, how hard have we worked to have it be this way?
Security – Our business without questions provides the security for us to make decisions that affect our spouse, our children and ourselves. Where are the children going to post-secondary school? Do we need to have two incomes or just one in the home? What will happen if one of our family is sick and needs care? Does our life feel safe and secure?
Income – We all start off with a life wanting to not be only concerned about money. You may be more interested in your community, in charity, in just time with loved ones. The income that comes in now, and the income that may or may not come in – if you weren’t working – will impact most of the decisions we make with the other three areas – time, security, and our goals.
Goals – This is where it’s always interesting. Every single person has different goals, different needs, and different wants. Spending a great deal of time here, really helps with a good foundation to mapping out where we want to go in life [and mapping out what trails we want to explore on that hike]
Many times, when we meet new clients – and we ask – “would you like us to spend time doing financial planning for you personally, and also for you corporately?” they may feel initially positive about it, but also feel slightly tentative about planning twice. Why would I need to do this?
Some more short stats:
- 96 percent of small business [with 1-100 employees] survive for one full year
- 70 percent of small businesses [1-100 employees] survive for five full years
- There are over 1.3 million businesses in Canada with employees
- Small businesses provide over 70% of the total private labour market
- A healthy growth rate for a small business should be between 15%
- A business will double in 5 years at a 15% growth rate
- 350 people out of 100,000 [ages 45-49] will be diagnosed with Cancer [87 times the chance of dying hiking]
- 1,000 people out of 100,000 [ages 60 and older] will be diagnosed with Cancer [250 times the chance of dying hiking]
Spending time planning can’t take away all the risks of business failure, of financial stressors, or of getting a critical illness that impacts your business. It certainly can help make you aware of your blind spots. Having an opportunity to see the risks, whether they are in your investment portfolio, in providing enough retirement income, or possibly in your business structure – really help make you more aware of your current situation, and your future situation combined. You wouldn’t go on a hike without the proper gear, and I wouldn’t suggest you tackle life and business without the proper gear.
Take the time to review your own strategy and plan. If you’re unsure on areas, or need guidance, consider having a finanical plan completed, or updated. Keeping both your personal and corporate worlds safe is key. If you need to pack a compass to stay on track, I’d certainly recommend doing so.
Just my thoughts for the day,
Shawn Todd, CFP
By: Corey Butler, Wealth Advisor
2022 is in our rear-view mirror and 2023 is now staring us in the face with a sea of uncertainty. Inflation, supply chain, Covid, China, Ukraine war, stagflation, interest rates… it never ends. This is where you come to the realization that you can only control your own day to day decisions and life. The world has, and will always have, issues. As far back as we can look, there is always civil unrest, famine, war, and natural disasters. So why do we react with such negative assumptions when we know history always repeats itself? Markets go up and markets go down. Buyers and sellers get to make their decision on what something is worth and whether there is upside or downside.
If we look at real estate which is under pressure as of late with massive interest rate increases by both the Bank of Canada and Federal Reserve. Market values have certainly retreated as of late, offering a lower entry point for buyers, but with interest rates at current levels, we essentially end up in the same place with monthly payments vs 2021 pricing. The exposed variable rate debt has gotten much more expensive but when compared to the 5-year fixed rate, the variable is still cheaper option. We need to accept that these rates are going to stay much higher than what we experienced throughout the pandemic. Historical Prime Rate Average has been 5-6%. If you look out over the next 20-25 years at a modest 5% growth rate on real estate, you still have more than doubled the home value. It is an incredible asset class.
There are so many conflicting outlooks across all sectors which result in complete paralysis in making decisions or taking a stance. A well-diversified investment portfolio is truly the key to your success during turbulent times. “The trend is your friend until it’s not, and trying to catch a falling knife hurts a lot.” These are wise words bestowed on me from mentors that I have had the pleasure to work beside.
An Investment Policy Statement “IPS” is one of the best ways to keep yourself on the straight and narrow to not get tactical during turbulent times. An IPS becomes your compass to help you find the North Star. It should be reviewed annually with your wealth advisor to ensure risk, goals, and behaviour are on track. If you currently have not created an IPS roadmap, please feel free to reach out and we can grab a coffee to discuss.
By: Brian Adams CLU, C.H.F.C.
Every employer wants to fairly compensate their employees well. At the same time, they do not want to give away the farm as the expression goes.
When you pay an employee with salary, there are a lot of additional costs that comes along with that in the form of, such things as, EI, CPP, WSIB, and payroll tax. This means “that raise” ends up costing you more than what you originally intended.
There are also additional costs that are passed on to the employee as well, such as EI, CPP, and income tax. The tax factor becomes greater for the employee, meaning he/she does not get the intended benefit you wanted them to receive. So, imagine what they think of your raise now?
Also, keep in mind that CPP and EI costs are going up for 2023 for both parties. Here is an excerpt from the CTV news release published on Dec 30, 2022:
CTV News – Published Dec. 30, 2022
Higher Payroll Deductions
Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums are increasing in 2023, meaning less take-home pay for Canadian workers.
The employee and employer CPP contribution rates will increase to 5.95 per cent in 2023 from 5.70 per cent in 2022, the Canada Revenue Agency announced in November. Click HERE to read more on this.
That means the maximum employee contribution to the CPP plan for 2023 will be $3,754.45, up from $3,499.80 in 2022.
In a separate notice, the federal government said that changes to employment insurance rates will result in workers paying a maximum annual EI premium of $1,002.45 in 2023, compared to $952.74 in 2022. Click HERE to read more on this.
Well, there is a way to offer your employee more whereby it is a win/win situation for both parties:
When you, as an employer, contribute that same amount of money to either a group or pension plan, the employee gets the full benefit you intended and there are no other costs to you (other than the 8% Ontario sales tax on the premium). And even better news… your whole contribution to the benefit package is a write off for the business!
Book an appointment with us to discuss setting up an employee benefits plan for your business!
What can we do for your business?
From helping you better understand how a strong employee benefits program can help your business grow, to assisting you protect a key employee, through to designing a customized owner compensation strategy, we can assist in strengthening your position in the marketplace.
How’s your relationship with your financial planner or advisor?
You’re here as you are looking for a team who can help with your specialized needs and understand your goals. It’s taken a lifetime to accumulate your wealth, and it’s important to get this right. To have the right fit.