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Dale Jackson

Personal Finance Columnist, Payback Time


If election campaigns are all about telling voters what they really want to hear, first-time homebuyers should love to hear about the First Home Savings Account (FHSA).

The FHSA is part of the Liberal strategy to help first-time homebuyers save for a down payment in the midst of a runaway housing market. If they are under 40 years old they would be allowed to set aside up to $40,000 toward the purchase of a home with no tax on contributions or withdrawals. 

It’s the best tax perks of a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA) rolled into one -- but falls short as a practical investment vehicle.

How the FHSA is like an RRSP

Canadians love RRSPs because they can deduct contributions from their taxable income. If you contribute $10,000 - as a rough example - and 40 per cent of your income would have been taxed without it, your tax bill would be lowered by $4,000 (40 per cent of $10,000).  

The same perk would apply to FHSA contributions. If the Liberals are re-elected, and they actually implement the FHSA, clever Canadians could turbo-boost their savings by contributing the tax refund that comes with the FHSA contribution as well - and receive a refund on that. 

If funds held in the account weren’t used for a home purchase by the age of 40, they would convert to normal RRSP savings.

How the FHSA is like a TFSA

One thing Canadians do not like about RRSPs is the cold, hard fact that all those contributions and any gains they generate tax-free over time are fully taxed when they are withdrawn.

TFSA withdrawals (contributions and gains), on the other hand, are never taxed. 

The big drawback for TFSAs is the inability to deduct contributions from income like an RRSP, but FHSAs would allow both.

The FHSA as an investment vehicle

Tax perks aside, it’s important to keep in mind that RRSPs, TFSAs, and FHSAs (if they ever see the light of day) are investment accounts and are only as effective as the investments inside them. 

Assuming FHSAs would permit the same wide range of investments as RRSPs and TFSAs, there’s a stark difference when it comes to executing an investment strategy.

Investments are normally held in an RRSP for decades and withdrawn over a long period of time in retirement. That allows investors to diversify to hedge risk and get exposure to opportunities, sell strong performers when the cash is needed, and wait out weak performers.

TFSAs can also be used for long-term retirement savings; but even if they are used for shorter time horizons, investors have the flexibility to delay selling when investments are down.

FHSAs, on the other hand, would likely have a hard deadline to liquidate investments when the opportunity to buy a home arises, or when the account holder turns 40. If FHSA savings are rolled into an RRSP, the tax-free status on withdrawals is gone. 

It seems the FHSA is predicated on the assumption that equity markets will always go up - even for the short term. Account holders who dream of owning a home, not wanting to put their downpayment savings at risk, would need to put their cash in something safe. Guaranteed Investment Certificates (GICs) are safe but returns are way below two per cent. 

One comparable registered investment vehicle is the registered education savings plan (RESP), which has a fairly fixed time horizon: shortly after the beneficiary graduates from high school.

Most mutual fund companies offer Target Education funds or portfolios suited for RESPs for five- or 10-year horizons. Specialty investment products, however, usually come with a hefty price-tag in terms of annual fees, which eat into returns.