Weekend Reading – The New Tax-Free First Home Savings Account (FHSA)
Welcome to a new and important edition, especially those saving for a home, highlighting the new Tax-Free First Home Savings Account (FHSA).
More on that theme in a bit.
First up, some recent reading material!
A reminder when it comes to long-term portfolio returns, owning a few high-yield stocks is hardly a bad move. Don’t take my word for it. An expert recently mentioned this in this edition:
“If you read my recent exploration of the poor returns generated by stocks with extremely high yields, you might be surprised at the 13.7-per-cent average annual return of the high-yield portfolio.”
I also moved up a revised post on my site from 2012, not a typo, about how I feel about the RRSP-generated tax refund when it comes to the RRSP vs. TFSA debate.
Consider this tax season…
Finally, in a very popular recent Weekend Reading edition, I highlight how much spending $1.7 million really is – given many Canadians feel they need $1.7 million to retire.
Just don’t skip breakfast on your financial journey, that’s important to your overall health despite what the WSJ says! Geez…
Weekend Reading – Do you really need $1.7 million to retire?
Back to my theme for this week, 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…
The New Tax-Free First Home Savings Account (FHSA) Facts:
- Think of the FHSA like 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 eligiable 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:
- 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.
- 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.
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.
Ideally, from a taxpayer and much more practical perspective, I wish our government would have done one or two very simple things:
- Increase annual TFSA contribution limits so that no boutique FHSA is required, and/or
- Alter the RRSP Home Buyers’ Plan such that if younger folks really, really wanted to borrow money from their future-self, they could, by increasing that borrowing limit slightly and also without any HBP payback responsibilities in the 15-year period.
Two very simple changes that don’t complicate our tax system and the support other saving and behavioural approaches. Meh, tax simplicity is not going to happen in my lifetime…
Guess what? Dividends matter.
In previous and other Weekend Reading editions, I’ve highlighted “dividends matter” despite some folks (i.e., some not all advisors) in the financial community saying otherwise. I get what they are saying to a point, dividends unto themselves are not magical nor essential to drive total returns. Sure.
But the reality is, and thankfully indexing giant Vanguard is now saying this – that dividends do really matter. As in A LOT.
In a recent article and I quote:
“The bedrock of long-term returns
Dividends can play a crucial role in driving long-term equity returns. This is even the case in stock markets which have traditionally been considered growth-led, such as the US. The chart below highlights the importance of dividends when compounded over long time horizons for the S&P 500 index – and the contribution of dividends may surprise some investors.
Contribution to long-term total returns in the US equity market
I’m not sure that is too surprising since whether you decide to own some individual paying stocks, that pay dividends, or you index invest in all stocks that pay some dividends, lots of dividends or no dividends at all – of course as part of total returns dividends do matter.
And they matter to me like many investors for the purposes of optionality.
From My Dividends page:
- Reason #4 – companies know investors like optionality. You see, in a perfect world, all businesses would allocate capital in a way to perfectly maximize the return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder (by increasing returns over time AND by continually reducing the company’s tax burden). But you should know by now we don’t live in a perfect world. This means shareholders have over time demanded a dividend – for the purposes of “optionality”. Shareholders like optionality – and dividends provide that optionality – to give investors the choice to increase or decrease their exposure to the business. Reinvested dividends therefore, take advantage of that optionality, to increase exposure. Dividends taken as cash, do not….meaning you can spend your money as you please…
And from RBC, on the returns:
Congrats to Cheesy Finance, outstanding work.
CNQ just provided shareholders like me/us a 6% raise. Raises matter. On top of that, more to come from CNQ in 2023 if you own some…
Canadian Natural Resources Limited
Quick Take 4Q—Accelerates 100% Payout Plan and Canada's 2023 budget preview 🤣🤣$cnq #com #oott #stocks #investing #retirement #passiveincome #divtwit #dividends #oilandgas #crude #oilsands #canada #alberta #cdnpoli pic.twitter.com/CkiCLEAASg
— Burnsco (@garquake) March 2, 2023
On real estate…
Maria and her family continue to invest in real estate. Check out her 2023 real estate investing strategy below:
On investing fees…they matter too!
From my friend, Mark Noble:
Before I moved to ETFs I had this issue in my first portfolio I built. I took the time to break down the math, and it was almost exactly due to the compounding of fees which were on average 100 to 150bps more than an equivalent exposure index strategy. Fees matter.
— Mark Noble (@Swordless) March 3, 2023
I interviewed Mark here on low-cost Horizons ETFs as strong considerations for your tax-efficient portfolio.
Dividend Growth Investor was also on the same wavelength, related to money management fees.
“The more fees you pay each year, the less money you have to compound for you. Unless you are paying for an exceptional investment manager, it is simply not worth it.”
As a follow-up to “RRSP season”…
Now that you’ve contributed to your RRSP, and should you wish to avoid any individual stock selection based on your investing temperament and objectives, Cashflows & Portfolios highlighted some the Best ETFs for Your RRSP this week.
A reminder…that free site Cashflows & Portfolios is pretty much dedicated to helping you manage your cashflow and portfolio wisely including any drawdown plans.
After visiting the site, hit me up on our Contact page to find out more about our services.
I use professional financial software to deliver customized, personal reports to help you answer just some of the following:
- Do you have enough to retire?
- When can you retire?
- How much can you spend?
- Should you take CPP at age 65 or 70?
- How do you minimize the OAS clawback?
- Which account (and when) should you withdraw from for the highest tax efficiency and estate value?
- And more and more!
The best part: because I’m not in the business of providing any direct financial advice, the cost of these services is well below what any financial advisor would charge! BIG time. 🙂
Again, learn more at Cashflows & Portfolios about our low-cost income projections for you.
Even if you have your semi-retirement or retirement projections figured out, you might always learn just a bit more by visiting my standing Retirement page with dozens of free case studies and free tools to use.
I’ll be at the Ottawa 67s game this weekend cheering on my hometown team again.
Have a great weekend!
Stumbled on this site because I was Googling for FHSA. Good stuff and you’ll be happy to hear you rank well search-wise!
I will say that even though Vanguard and banks are reputable, they are motivated to market the positive attributes of certain ETFs or stocks so that people sign up to their products. I wouldn’t take their articles at face value.
Both Vanguard and the RBC piece use the “re-invested dividends is responsible for total return” example. I’ve seen this used a lot, but to me, the main takeaway is that even if you invest in something like the S&P which gives out a very small dividend, re-investing all of it will have a HUGE impact on your return in the long run. It’s not an argument for why dividend stocks are better.
If you track any stock that’s done well and just look at the re-invested dividends portion over time, that portion is just going to grow a ridiculous amount.
Thanks very much, glad you found me! 🙂
Yes, there is bias in everything isn’t there: Vanguard, RBC, etc. all want more assets under management.
Are you going to use the FHSA?
I’ll see if I have enough income for that!
Shhhhhh…. Ben Felix might hear you about the whole dividend thing and write another article….
Totally agree with you about simplifying / merging the accounts. ( But when does taxation ever get “less” complicated or less obfuscated?) However I believe this new savings account is constructed to be a program that sounds good politically announced in a press conference, but realistically in 2023 with the combination of inflation, high house pricing, and rising interest rates will be seldom utilized and have little real value in the way of a break for the target group intended.
LOL on the Ben Felix comment!
On the topic of FHSA though, I couldn’t disagree more. Yes, the degree of impact the FHSA will have is not as substantial perhaps as many would like. But, I don’t see how anyone who has the capacity to save $8,000 a year, and knows they plan on buying a house won’t take advantage of this plan. There’s so many win-wins here. Does it make a house affordable? No. But does the tax break and the tax-free growth making it easier – Yes, absolutely. I think it will be well utilized, assuming it’s marketed correctly. My daughter (22) has her $8,000 all lined up and ready to go. She is eager to get this started, and the only challenge for her is that she will likely not wait five years to buy – but that’s a different matter.
I believe this is firmly a supply issue, James, but I didn’t include that in my post – since the post was about the account and not about more systemic RE issues. The FHSA is an incentive to save, it does not change the RE market prices whatsoever. Just my opinion!
I had a top comment on an old YT video of his where he stated all DI’s are stupid… I took offense to that, and mentioned it before here on another of Mark’s posts somewhere in the past. But i have taken flak about choosing dividend investments since i starting investing. Even the old I series TD monthly dividend mutual fund I started with had a 20 year average return of 8% after fees. That is not a horrible return for a simple one stop mutual fund. People have to be comfortable in how they invest and that does not always equate to total returns as the ultimate goal.
As for the FHSA, I was thinking from a perspective that many young couples might have trouble to organically put away that much in 2023 and every year unless their parents lend it to them for example. I would also probably be very careful what i would select in that first time purchase situation, with a 5 year or less window in that account as well. You could be in a 10 or 20 % market downturn just when you need the DP. That is a whole other discussion I guess…
Well said Paul. Most folks should be thrilled with averaging 8% over time, given XIU as a proxy for the CDN stock market might be 7-8% for the last 30 years.
I know folks that are happy with 5% yield from their portfolio, and not much more with close to 0% capital appreciation since they’ve already exceeded their financial goals with a whopping $3M invested. I know others that strive and are looking for total U.S. market returns since they believe that is their best chance at the highest returns and keep zero cash.
Who is making the right decision? The best decision? Is one investor too risky or is the other investor not risky enough?
Yes, as for the FHSA, another good tool but young couples on their own are going to need more help than to max out the FHSA. They might get their wish with interest rates being sustained for another year since I don’t think we’ve seen any meaningful RE correction, yet. It could be coming. Some folks really bought in over their heads thinking money was going to stay cheap. It could get interesting later this year.
Ben is much smarter than I am on five factor investing, and many other concepts. I just know what works for me, has been working for me, and what will hopefully work for me going forward without paying any money management fees in the process. Besides, even if you dislike dividend investing you can more readily fire your financial advisor given the simplicity of one-ticket funds. 🙂
Overall, no major concerns with FHSA rules which should keep many Canadian banks in business for years to come with all the regulatory work to be filed and maintained.
Thanks for reading Paul!
Thanks for the mention Mark. I think the FHSA is a great tool (although like you mentioned yet another complication to our tax system) and with some planning could be extremely advantageous. It will be interesting to see how it plays out in the future and what some specific case studies if its use are.
Unfortunately I don’t think it makes that great of an impact on the housing affordability crisis.
I would agree. I think this is more of a reasonable supply issue vs. FHSA but that’s just me! 🙂
Hope all is well with you!
On the one or two simple things, I lean away from the idea of additional TFSA contribution room. What I would want to avoid is taxpayers saving a lot of TFSA savings and then use it from 65-71 while collecting GIS. Adding more contribution room would make this a more frequently used strategy I think. However, I don’t mind if, in the future, TFSA withdrawals are included in the income test for GIS. if that happens, then yeah, I’m all for increased TFSA room.
Fair, James…but as you know, I do believe the TFSA is a gift to every adult Canadian!
The fact that some Canadian retirees, have no other income/very low income to report, from ages 65-71 to collect GIS would be very rare but I can see the loophole for sure! The government should really just merge combine elements of OAS and GIS to be honest and be done with all these unique programs and streamline our tax system. Far better and more efficiencies.