Blog

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

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.

The RRSP

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.

The FHSA

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.

Conclusion

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? 

This is a timely conversation.  After a recent discussion with several young clients in the past couple of weeks, the topic of when not to use a Registered Retirement Savings Plan (RRSP) has been re-occurring.

At one recent example – a good client of ours brought her daughter in to sit with us, and produced a list of items she wished for us to talk about with her college aged daughter.  One of the items she wanted discussed was “investing in an RRSP”.  You can only imagine the surprised look on my client’s face when we reviewed that investing in an RRSP may not be the best idea at this time.

“You don’t want my daughter to save in an RRSP?” my client offered to me, “I always thought the best advice would be to start the RRSP right away?” she said.

This is such a very common conversation, and I can see why.  The belief that the RRSP is the best and only way to save is so ingrained in our belief structure, it almost feels wrong not to listen to it.

There are some times and situations when we should be looking at other alternatives to the RRSP.  This doesn’t mean that we shouldn’t be saving, it just means there may be a better place to save (often a Tax Free Savings Account (TFSA)) depending on the person’s situation in life.

Here are some situations that we should potentially not save in an RRSP:

• Low salary, and / or beginning a career: One of the easiest conditions to catch, is the person with a low salary, and / or beginning a career. If they are currently being paid a below average salary and in one of the lowest tax brackets, it may not be the best choice for them to be placing deposits into their RRSP.  Often the immediate disadvantage here will be the loss of the potential tax credit for that year (if depositing elsewhere).  The best move may be a deposit to a TFSA in that year, and then ultimately a transfer of the TFSA to an RRSP at a later time (and presumably in a year that they are earning more).  A transfer of the TFSA to an RRSP at age 30 (at an average salary) instead of age 20 (at a below average salary), may result in thousands of dollars more in the hands of the saver.  The RRSP works the best when the money is deposited at a higher income tax bracket, and removed in a lower income tax bracket.  If this isn’t going to be the case – you may wish to consider your strategy.
• Above average pension, and RRSP already starting to grow sizably: Again with the perception that the RRSP is the only way to save we often come across many people who in addition to their above average sized pension, continue to contribute to RRSPs with as much zeal as possible. RRSP savings may work well for these clients in earlier years – when they are just growing their accounts, but as the account sizes begin to take on six figures – they should start doing some planning on how and when they will get that registered money out.  The RRSP income will come out taxable, and care should be taken on how this will look in addition to their pension amounts.
• Next year you will be paid significantly more. If this is the case – then you may wish delaying your RRSP deposit until next year. By doing so, you will be entitled to a much larger tax break.
• You are a brand new business owner. New business owners may often experience some early successes, and start bringing in some sizeable savings deposits wanting to invest it in their RRSP. Some issues that they may not be predicting on their short to mid-term time horizon may be; the purchase of new equipment, hiring of new staff, low earning business years, and the need for immediate liquidity.  As RRSP income is taxable, it can be a discouraging experience to deposit $20,000 one year, to only receive $12,000 of it back in your hands when you need it the most.  It may be best for the budding owner to defer their RRSP deposit, and deposit their savings in a TFSA. TFSA income would be non-taxable.
• You are carrying high interest debt. In the event that one is carrying high interest debt on credit cards, or other high interest debt – they may wish to consider paying down these debts before investing. Often someone is particularly eager to save any new money in an RRSP when they opportunity presents itself, but the reality may be that the money may be best spent paying down the debt they hold.  If you are paying 18% high interest debt rates – it makes more sense to pay that back, than earn 6% in the RRSP.

These are all common situations, and I find that simply talking about these with clients, often helps unravel some of the questions that we have when utilizing RRSPs.  Through good discussion comes clarity.  RRSP investing is a terrific solution for many people.  The design, features and implementing of an RRSP is usually an attractive solution which allows many to receive a timely cheque in the mail in the spring.  Not understanding when you shouldn’t be investing in an RRSP sometimes isn’t as clear, and really needs to be discussed more often.