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The New First Home Savings Account (FHSA)

By: Louai Bibi, Advisor Associate

We are pleased to announce that we will be able to offer our clients the new First Home Savings Accounts (FHSA) at Ecivda Financial Planning Boutique as of June 12, 2023!  If you are in the market for your first home, or if you know someone that is in the market for their first home, this is an exciting new opportunity!

Outlined Below:  What is the FHSA & how does it work, who is eligible to open one, the benefits & planning opportunities around this new account, what happens if you no longer wish to buy a home, and how to get in touch if you’d like to review considering this account for yourself.

What is the FHSA and how does it work?

This exciting new account came about as part of the 2023 federal budget to help Canadians build more tax-free savings to fund their home purchase goals. The FHSA characteristics are a blend of the TFSA, RRSP, and RESP rules; so it is easy to get confused. I have compared the FHSA to the RRSP & TFSA in a past blog, which I encourage visiting if you’d like to look at specific differences and similarities of each account.

The basic premise is:

  • You can contribute $8,000 per year, up to a lifetime limit of $40,000. Contributions are tax-deductible!
  • Since the FHSA came into effect on April 1st of 2023, you can only deduct contributions made between April 1st and December 31st of 2023 for the 2023 tax year. Contributing in the first 60 days of the following year does not count towards your 2023 taxes like RRSP contributions do.
  • You can carry forward the tax deduction indefinitely to a year where your taxable income is higher.
  • These contribution limits are separate from those of the TFSA and RRSP.
  • You can hold a variety of investments in the FHSA, or you can simply choose to keep the funds in savings plan within the account.
  • If you are withdrawing from this account to purchase a home, you can do so tax-free. Otherwise, you would pay taxes on the withdrawal at your respective tax rate.
  • You can carry forward unused contribution room to future years. So, if you open a FHSA in 2023 and don’t fund it, in 2024 you can contribute $16,000. You can only carry forward room if you have already opened your FHSA.

Who is eligible to open a FHSA?

Most of us read ‘first home savings account’ and immediately assume that this account won’t be relevant to them if they have owed a home in the past. This is not necessarily the case! The definition of first-time home buyer is unique here and I’ll address this further below.

You are eligible to open a FHSA if you satisfy the following conditions:

  • Canadian resident for tax purposes.
  • Between the age of 18 and 71 years old.
  • Have not owned a home in the current year or last four years prior to opening a FHSA.
  • Have not lived with a spouse or common-law partner who owned a home in the current year or last four years prior to opening a FHSA.

Disclaimer: this account may not be appropriate for US taxpayers. Please consult with your advisory team to ensure the FHSA is an appropriate fit if this applies to you.

What are the benefits and planning opportunities of the FHSA?

I’ve addressed the features and eligibility of the FHSA and you may be wondering how this account may benefit you. Here are a few benefits that you may find compelling:

  • You get to deduct your contributions against your taxable income. If you had $50,000 in taxable income in 2023 and contributed $8,000, you will be taxed as though you made $42,000 instead.
  • As great as the tax deduction can be now, you may wish you took advantage of it when your income was higher. You can absolutely do so!
  • While there is a lifetime contribution limit, there is no limit on how much you can withdraw and it is tax-free if it is for a qualifying home purchase! Your account could have doubled in value and you won’t owe a cent in taxes.
  • Many of us may be familiar with the Home Buyer’s Plan feature of the RRSP (RRSP HBP) that let’s us borrow up to $35,000 from our RRSPs tax-free as a loan. If you have existing savings in a RRSP that you may want to use for your home purchase but also want to save regularly in a FHSA, why not take advantage of both programs?
  • Better yet, if you are buying a home with your spouse or common-law partner, how great would it be if you each leveraged the RRSP HBP and the FHSA? That is a lot of tax-free money to put towards your home!
  • There are more advanced tax applications of the FHSA that can be assessed on a case-by-case basis, regardless of what life stage you are in. I’ll save these for another blog, but there are some unique and beneficial ways to merge your first-home savings goals with your ongoing tax planning.

What if I change my mind about buying a home?

if buying a home is no longer a part of your current financial plan, this is no problem at all. You can transfer the funds in your FHSA into your RRSP without needing to withdraw and pay taxes.

Beyond this, you need to close your FHSA by no later of December 31 of the year in which the earliest of the following events occur:

  • 15th anniversary of opening your first FHSA.
  • You turn 71 years old.
  • The year following your first qualifying withdrawal from your FHSA.

How do I get in touch if I’d like to learn more?

The FHSA is an exciting opportunity for eligible Canadians and we are exciting to be able to offer it to our clients. We would love to review the merits of implementing the FHSA into your financial plan but believe it is also important to consider the existing options available to first-time home buyers as well how each account fits our individual circumstances.

If you are saving for your home purchase goal, please get in touch with any member of our advisory team to coordinate opening/funding your FHSA. We will be happy to help you tailor your FHSA contributions & investment portfolio to your goals!

You are welcome to book yourself into any of our calendars here.

Lumber Pricing and how it may Affect your Investment

Lumber is an essential building material that dictates the price of housing in a way. The price of lumber has been on the increase for a few years now and it was later accompanied by shortage supply at the beginning of global lockdown engendered by the global pandemic in 2020. The effect of the price increase has been felt in the real estate sector as the prices of construction and homes have been on the increase. On the supply end, the gradual return to normal economic activities has seen an increase in the production of lumber flood the market. However, it is still yet to meet the already increased demand since the global lockdown.

 

How Does Lumber Pricing Work?

Lumber pricing works the way any other market commodity works. The forces of demand and supply dictate the price of lumber. The demand for lumber has witnessed an astronomic increase in the last six months which has inevitably driven up the prices almost at 170%. The lockdown forced people to work from home which afforded them time to take care of their home. Most people started to take on DIY projects of remodeling and home expansion which inevitably drove up the demand for lumber. During the lockdown, it was reported that home renovations increased by 40% in Canada during the lockdown up until late 2020. While there seems to be no problem with the demand side, the supply end has witnessed a bit of up and down, especially with the covid-19 pandemic. Health precaution imposed by the government meant that most of the sawmills had to close down or cut on production which caused a bit of unbalance between demand and supply. This also has had its fair share on the price increase of lumber.

 

What Does The High Lumber Pricing Hold For Your Real Estate Investment?

There have been a lot of questions and uncertainty on the implications of the increased lumber prices in the real estate sector. For house owners who either want to increase the taste of their home by remodeling or home expansion, the short supply and increase in the high price of lumber may put pay or delay your project. The Natural Resource Canada conducted a survey in which it was revealed that a square foot of lumber that cost $11 in March 2020 now goes for $35 in March 2021. When you consider the cost of transportation and the cost of labour if it is not a DIY project, then you may want to hold off on the remodeling. In research by the Canadian Home Builders’ Association, a renovation could cost you an additional $30,000 due to the high prices of lumber. For potential home buyers, it is not good news also. If a homeowner spends a considerable amount due to high lumber prices to renovate and remodel the property in order to increase the real estate value, it is only natural to want to recoup the money from the value placed on the property. This means that the value placed on properties will further increase. The high prices of lumber have made investing in real estate a tricky business.

 

How To Cushion The Investment On Your Home?

The situation of the real estate market may require that you engage the services of a professional financial advisor that will guide you on how to go about your real estate investment. For homeowners who want to take on a project of home expansion or renovation, you can get a home equity line of credit to help you achieve the desired result. You do not have to worry about the interest rate as a home equity line of credit offers a lower rate compared to other types of loan. It is calculated by subtracting your current mortgage liability from the market value of your home. You can also secure a second mortgage and use your home as collateral to access funds for your home renovation and expansion.  This is also available to potential home buyers as you can use the home equity line of credit of your existing property to finance the purchase of another property.

 

Conclusion

Experts are keenly watching the lumber market to make an accurate prediction on the future price of lumber. The full resumption of sawmills is a promising sign that supply will be able to level the high demand and mitigate the effect of the high prices of lumber. While prices may not drop drastically anytime soon, stakeholders are drawing encouragement from the fact that we are in a period where lumber dealers reduce their buying to take stock of their lumber purchase in the first quarter of the year.  Feel free to reach out if you would like to discuss outlook and portfolio construction to ensure that your wealth is being maximized.  #ThinkForward

 

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