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Robert McLister: Tax havens don't make housing more affordable, but those with the money would be foolish not to use them
Published on April 19, 2024 • Last updated 4 hours ago • 4 minutes reading time
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Home purchase incentive programs increase demand but do not make housing more affordable. Photo by Graeme Roy
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With housing unaffordability at an all-time high, our loyal leaders are committed to correcting their housing shortfalls and getting more young people into homes.
Part of Ottawa's big “aid” strategy is to promote tax-advantaged savings accounts and raise their contribution limits. This, of course, stimulates real estate demand given Canada's population and housing supply crisis. But save yourself that thought.
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First-time buyers now have three government piggy banks available where they can put cash for a down payment:
1. The 32-Year RRSP Home Buyer Plan – which allows you to deduct contributions from your income to defer taxes, then borrow from the account interest-free against your down payment (as long as you wait more than 90 days to withdraw). any contributions);
2. The 15-year-old Tax-Free Savings Account (TFSA) – which lets you save after-tax dollars, grow your money tax-free, and withdraw it without the IRS taking a bite;
3. The one-year First Home Savings Account (FHSA) – a combination of RRSP and TFSA. This allows you to deduct contributions from your income, add them together tax-free, and pay no taxes on withdrawals to purchase a home. You can even save the deduction for a year if you need it more urgently – when you make more money.
Provided you have the financial resources and room to contribute, these tax breaks can help you avoid making an excessive down payment.
“Looking at the FHSA alone, with a maximum annual contribution limit of $8,000 for 2023 and 2024, a potential first-time home buyer today could have up to $16,000 deposited into the account as a down payment,” says Eric Larocque, Chief Mortgage Operations Manager at Questrade Community Trust Company.
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“If you add in the $95,000 cumulative contribution margin for the TFSA, the potential available amount is $111,000 – and that’s before including investment gains from both accounts.”
And it doesn't stop there. RRSP, TFSA and FHSA savings limits continue to rise. If first-time adopters have enough contribution flexibility, down payment savers can invest even more in these tax-advantaged areas in 2024.
“Taking into account recent changes to the Home Buyer Plan, which now allows RRSP withdrawals of up to $60,000 (up from $35,000 previously), we arrive at a potential total of $171,000 in deposited funds needed for the down payment of a first-time home buyer payment,” adds Larocque.
That's quite a chunk — easily enough to cover the 20 percent down payment ($139,706) required to avoid mandatory (and expensive) default insurance on an average home. By the way, according to the Canadian Real Estate Association, Canada's average residence is now worth $698,530.
Here's the problem: The cost of living in Canada is extremely high and real disposable income is trending downward. So how is the average first-time buyer household making less than six figures supposed to amass such a stash?
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Based on national averages, it would take a young FTB couple over 15 years of age to save 10 percent of their pre-tax income per year (who does that?) to set aside $140,000. History shows what would happen to property values if you waited 15 years – they would fly away without you.
If you have no other resources and are betting that historical appreciation rates will continue – despite slower population growth, more buildings and possibly higher long-term interest rates – it is better to save less and buy sooner with a five percent insured mortgage.
So does Big Brother really expect your typical first-time buyer to max out all of these savings plans? No. But hey, throwing a buffet of options at you paints a pretty picture of government efforts, doesn't it?
Ottawa's dirty little secret is that these nifty programs stimulate demand and turn renters into buyers. So don't bet on them making the dream of owning a home cheaper for beginners or everyone else.
Use them anyway.
With wealthy homebuyers in mind, the government is placing limits on these tax breaks. One lucky bunch who can take advantage of all three down payment savings plans are the newcomers with wealthy parents.
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Such buyers can make a withdrawal from their parent's ATM (some call it a living inheritance), deposit the funds into all three savings vehicles mentioned above, and benefit from: significant income tax savings or deferrals (thanks to FHSA and RRSP deductions); tax-free/tax-advantaged growth of investments; and tax-free withdrawals if the money is used to purchase a qualifying home (although you must repay the RRSP HBP over 15 years, starting five years after your withdrawal).
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The more opportunities people have to save for a down payment, the more Ottawa is exacerbating the imbalance between purchasing demand and supply. And of course that drives up property values - which, while good for existing owners, is at odds with the government's affordability messaging.
But hey, these tax breaks are ripe for the picking. Home buyers with the means — especially those with financially strong parents — might as well use all three accounts.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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