New Tax-Advantaged Account for First-Time Homebuyers
By iA Private Wealth, March 15, 2023
It’s no secret the housing market in Canada has been overheating for years. With real estate prices remaining stubbornly high, many prospective first-time homebuyers are feeling squeezed out of the market.
While there are no instant fixes for the challenges created by insufficient affordable housing, the Canadian government introduced a measure in its 2022 Federal Budget that aims to help first-timers save money to purchase a home. The government is working with financial institutions on finalizing details of the Tax-Free First Home Savings Account (FHSA), with expectations for an April 2023 rollout.
What is the FHSA?
The FHSA is a registered account for Canadians 18 years of age or older who have never owned a home or haven’t owned one in the past four calendar years. While the account is a bit of a misnomer since you technically don’t need to be a first-time homebuyer, nonetheless the FHSA allows eligible Canadians to contribute up to a lifetime limit of $40,000.
The annual contribution limit is $8,000 and unused room can be carried forward to a future year. For example, if you contribute $3,000 in 2023 your limit for 2024 will be $13,000 instead of $8,000.
The FHSA provides two notable tax benefits:
Contributions are tax deductible – just like your RRSP contributions – so your taxable income for the year in which you contribute will decrease by the amount contributed to your FHSA.
Any withdrawals (including investment-related gains) from the FHSA are tax free, provided that you withdraw the money to help purchase a home.
Like most other registered accounts, you can hold a wide range of investments in your FHSA, from stocks and bonds to mutual funds, ETFs and more. Keep in mind, however, that your FHSA can only stay open for up to 15 years. If you invest in risky securities prone to dramatic price movements, you might not have enough time to recover from significant losses – especially if the securities decline sharply closer to the 15-year mark. The best course is to consult with an Investment Advisor for guidance on the investments that best suit your specific timeline and capacity for risk.
If you don’t use your FHSA to buy a home within 15 years, you must close the account. You can move the assets to an RRSP or RRIF tax free or simply withdraw the funds, but in the latter case the amount will be fully taxable as income.
FHSA, HBP, or Both?
The FHSA is not the only option the government has provided for first time home buyers. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP on a tax-free basis to purchase your first home. You’re given 15 years to repay that amount to your RRSP, based on a prescribed schedule that includes a minimum annual repayment (you’re permitted to repay a larger amount in a given year, or the entire amount any time before the 15-year period ends). If you don’t repay the full amount within 15 years, the outstanding balance is considered taxable income.
Whether you should choose the FHSA, the HBP, or both will depend on your personal circumstances. Many people start contributing to an RRSP before they’re ready to buy a home, so the HBP lets you tap into money you’ve already saved. If you don’t have much cash available, it’s not feasible to open an FHSA; but if you can contribute a meaningful amount, the FHSA might serve you better than the HBP since you have no obligation to repay any withdrawals. The FHSA is also useful if you’ve maxed out annual contributions to other registered accounts and want another tax-efficient way to save for a home.
Get in touch with one of our Investment Advisors today for personalized guidance that can help you achieve your dream of homeownership.
Take advantage of the TFSA
By iA Private Wealth, January 23, 2023
Looking for something positive about soaring inflation? Given the rising cost of many goods and services, the Canadian government has raised the 2023 contribution limit for the Tax-Free Savings Account (TFSA) to $6,500, an increase of $500 from 2022. That’s good news for people who can contribute the maximum amount this year, and it may even benefit those who can’t (more about that later).
How does the TFSA work?
In 2009, the TFSA was introduced as another tax-advantaged way for Canadians to save for the future, joining established programs like the Registered Retirement Savings Plan (RRSP).
While both savings vehicles are valuable, there’s a big difference between them. RRSP contributions are made with “pre-tax dollars” because you deduct the amount from your taxable income. Investment growth in the RRSP is tax deferred until you start withdrawing from the account. TFSA contributions are made with “after-tax” dollars with no deduction on your income tax return. However, investment growth isn’t taxed, nor are any withdrawals you make from your TFSA.
Here's another great feature of TFSAs: since income earned in the account is tax-free, it won’t affect eligibility for income-tested benefits like Old Age Security, Employment Insurance, the Canada Child Benefit and credits related to HST/GST.
If you’re a Canadian aged 18 or older with a valid Social Insurance Number, you can open a TFSA at a qualifying financial institution and start contributing. The federal government sets the annual contribution limit based on several factors, including the rate of inflation. If you don’t contribute the maximum amount in a given year, you may accumulate contribution room for future years.
That’s why, as mentioned above, you can benefit even if you don’t contribute the maximum in 2023. TFSA contribution room is currently $88,000 (i.e., the amount available if no contributions were made from 2009 to 2023). Let’s say you managed to contribute $63,000 to your TFSA over the years. If you have the money available this year, you can contribute $25,000 ($88,000 – $63,000) to reach the limit, or chip away at your contribution room in the years to come.
Just be sure you don’t exceed the contribution limit in any given year, because over-contributions face a penalty of 1% per month. For instance, if you contributed $8,500 in 2023, that’s $2,000 above the limit. You’ll be penalized $20 per month for every month the over-contribution remains in your account. Paying this tax defeats the purpose of a tax-free account, so keep track of your contribution amounts each year.
Also note you can withdraw from your TFSA without tax consequences, and may recontribute the withdrawn funds to preserve your total allowable contribution amount. The only stipulation is that you cannot recontribute in the same calendar year of the withdrawal.
What’s the purpose of a TFSA?
Ideally, you’d allow your contributions to grow in value over time, and then make use of your savings when you need cash flow in retirement. However, there are also shorter-term uses for a TFSA. You could use your account as a tax-efficient way to save for a vacation, auto purchase, down payment for a home or another financial goal. When you need the funds you can withdraw them tax-free and still have the option to recontribute the withdrawn amount in future years.
How should you invest in a TFSA?
There’s no right answer since it depends on your unique circumstances, such as time horizon, risk tolerance and financial objectives. Like the RRSP, many different investments can go into a TFSA, from stocks and bonds to mutual funds, ETFs and more. Work with your Investment Advisor to create a suitable approach to TFSAs that can meet your short-term and long-term needs. For all the reasons listed above, the TFSA is a powerful tax-free investment account, so consider making the most of it for your portfolio.
We can help incorporate a sound TFSA strategy into your overall wealth plan, so contact us today.
RRSPs: Not Just for Retirement
By iA Private Wealth, January 20, 2023
When you think about putting away money for retirement, the tax-efficient Registered Retirement Savings Plan (RRSP) probably comes to mind – and with good reason.
RRSP contributions garner an immediate tax break because you can deduct the contribution amount from your taxable income. Using spousal RRSPs, couples with significant differences in taxable income can split their income and lower the overall tax burden.
Any growth in RRSP value (e.g., from dividends, interest and capital gains) will remain tax sheltered until you withdraw from the plan. For many people, withdrawals begin when the RRSP converts to a Registered Retirement Income Fund. Since that usually takes place in retirement when they’re likely in a lower income tax bracket, the tax impact of these withdrawals is reduced.
Other RRSP uses
While the RRSP is ideal for enhancing retirement savings, other strategies for this plan may be viable, depending on your circumstances. Let’s consider four different uses for an RRSP.
Fund a home purchase. Under the Home Buyers’ Plan (HBP), you’re currently allowed to withdraw up to $35,000 from your RRSP to help buy or build your home. If you’re looking to increase your down payment – perhaps to avoid having your mortgage designated as “high ratio” – borrowing from your RRSP can help. Any down payment less than 20% of the purchase price results in a high-ratio mortgage. To protect the lender from default (since high-ratio mortgages are typically riskier), you’ll need mortgage loan insurance. The premiums for this coverage are added to your mortgage payments.
Even if you’re not breaching the high-ratio threshold, increasing your down payment helps reduce your mortgage and saves on interest charges. Spouses and common-law partners can also withdraw up to $35,000 in RRSP funds under the HBP. Be sure to replace the borrowed RRSP money according to the specified schedule (currently over a 15-year period). Adhere to this schedule to avoid any tax consequences.
Fund your education. The Lifelong Learning Plan (LLP) currently allows you to withdraw up to $10,000 from your RRSP in a calendar year to help cover expenses related to full-time training or other learning pursuits at a qualifying educational institution. If you continue meeting the LLP conditions, you may withdraw RRSP funds in subsequent years, up until the fourth calendar year following your initial LLP withdrawal, and up to a combined total of $20,000.
Repaying these funds to your RRSP takes place over a 10-year period, typically with 10% of the withdrawn amount repaid each year. The repayment schedule begins in the fifth year after your first LLP withdrawal. Each spouse/partner may withdraw up to the maximum LLP amount, either for individual use or to help fund one spouse’s/partner’s education.
Support children with a disability. The Registered Disability Savings Plan (RDSP) is designed to enhance the long-term financial future of people who qualify for the disability tax credit. An effective way of achieving this goal is to transfer an RRSP via your will to an RDSP as a tax-free rollover of assets. In addition to helping your child or grandchild with a disability who was financially dependent on you at the time of your death, this strategy may lead to substantial savings in estate taxes. Note that RDSP rollovers cannot exceed the beneficiary’s lifetime contribution limit (currently $200,000). This rollover will reduce the beneficiary’s contribution limit, dollar for dollar, but won’t impede eligibility regarding income-tested disability benefits for which they qualify.
Gain creditor protection. Much like insurance policies, assets held in an RRSP are protected from creditors in the event of bankruptcy (note that this does not apply to contributions or transfers made within 12 months of declaring bankruptcy). In several Canadian provinces, your RRSP is also protected from creditors even if you don’t declare bankruptcy. Additionally, RRSP assets invested in eligible products like GICs and term deposits qualify for coverage under the Canada Deposit Insurance Corporation (CDIC), where the maximum protection is currently $100,000 per qualifying deposit category, per CDIC member institution.
We can build your personalized wealth plan that includes RRSPs, so contact us today.
What’s a Recession and How Can You Get Through One?
By iA Private Wealth, December 28, 2022
There’s been a lot of talk lately about an economic recession. Technically, a recession is a significant and prolonged economic decline. It’s generally defined as two consecutive quarters of negative economic growth, as measured by a country’s gross domestic product. When a recession occurs, you’ll likely feel its impact on your finances – there will be fewer jobs, lower wages and more businesses tend to fail.
How did we get to a point where a recession in 2023 is now more likely than not? In a bid to rescue the economy from the damage done by the pandemic, central banks turned to ultra-low interest rates and governments used a variety of fiscal stimulus measures to kick-start growth. While this strategy encouraged spending, it also led to rising inflation as the cost of goods and services soared. In response, central banks worked to contain inflation by raising interest rates aggressively, hoping to dampen consumer and business demand. As the economy turns sluggish and debt levels increase amid sharply higher borrowing costs, a recession may ensue.
What’s the impact of a recession?
Many people fear recessions, given the expected economic weakness and instability. If economic growth slows and debt piles up, businesses may pause expansion plans and lay off a portion of their workforce. High unemployment curbs spending as many individuals and families manage their finances more cautiously.
In the early stages of a recession, we encounter rising prices on goods and services as inflationary pressures mount, causing higher interest rates and decreased purchasing power. Trying to make money stretch and maintain their quality of life without accumulating too much debt, people often forego discretionary expenses like travel and dining out, which slows the economy in general and negatively impacts businesses in those industries.
While the economy typically expands over time, recessions are a normal part of the economic cycle. According to the U.S. National Bureau of Economic Research, the average recession since World War II has only lasted about 10 months, but it can be a challenging time for consumers and investors.
How to manage in a recession
Keeping a close eye on debt is important in recessionary times. If interest rates are high (and rising), you could face larger payments on your credit cards, mortgage, loans and other debts. Try to reduce the amount you owe and watch your spending to avoid incurring excessive interest charges. Cooking at home, walking or taking public transit instead of driving, and cutting back on costly entertainment are some ways to lower your bills.
In addition to paying down debt, don’t neglect your emergency savings fund. You never know when a large, unexpected expense may arise, such as home or vehicle repairs. Plus, you want to build a cushion in case you lose your job or work fewer hours. Generally, it’s a good idea to put away three to six months of living expenses, but whatever you can save will help.
Investing in recessionary times
Since the economy slows in a recession, stock markets often decline to reflect diminished prospects for business growth. It’s tempting to sell during a severe market downturn, but that’s usually an unsound strategy. Your Investment Advisor has worked with you to build a customized long-term plan to meet your financial objectives. Reacting rashly to short-term market declines may keep you from reaching your goals by locking in your losses and eroding your wealth.
Remember that recessions come and go, and the overall market’s long-term trend is upwards. With help from your advisor, you can stay focused on your financial goals and ignore short-term market challenges. Depending on your circumstances, risk tolerance and time horizon, your advisor may even recommend investing more during a market downturn when prices are lower, so you can be better positioned to benefit when the economy rebounds. It’s also generally wise to hold a well-diversified portfolio across asset classes, industries and geographies, which may help reduce portfolio risk while enhancing long-term returns. A skilled Investment Advisor can guide you through the economic cycle – including recessionary periods.
To learn more about how we can help you stay on track to achieve your financial goals, contact us today.
Put Your 2023 Wealth Plan Into Action
By iA Private Wealth, December 05, 2022
As we begin a new year, some people make resolutions like dropping a bad habit or exercising more often. Other common resolutions pertain to financial well-being, such as earning more money, watching credit card debt or investing regularly.
Whether or not you choose to make formal resolutions, it’s always valuable to improve your financial health. A great way to put (and keep) yourself on the right track is with a comprehensive wealth plan. A customized plan helps you navigate financial challenges so you can better prepare for the future.
Elements of a wealth plan
Working with an Investment Advisor is a good way to address all aspects of your financial circumstances in your wealth plan. Here are some key elements an advisor will cover:
Set financial goals. Your short- and long-term goals will help drive the direction and composition of your wealth plan. Short-term goals might include buying a vehicle or taking a vacation. Long-term goals could be purchasing a home or putting kids through school. Whatever your goals, try to be detailed about the timeframe and how much it’ll cost to achieve them. An advisor can help you define and prioritize your objectives.
Evaluate your financial situation. The ability to meet your goals depends largely on your finances. Start with a “balance sheet” that lists your assets and liabilities. Assets may include real estate, money held in bank accounts and registered accounts (e.g., RRSPs, TFSAs, pension plans, RRIFs), as well as money in non-registered investment accounts. Liabilities might include debt associated with credit cards and lines of credit, a mortgage, student loans and other obligations. A balance sheet is a snapshot of your net worth and helps your advisor develop or modify your wealth plan to manage your debts.
Create a budget. With your net worth sorted out, the next step is to create a budget that will help you spend wisely. A budget considers your regular expenses, including building an emergency fund for unexpected expenses and saving for retirement. It also lists your regular sources of income to see if the cash flow can meet your expenses. If your budget shows you may encounter a shortfall, an advisor will help identify ways to cover your costs (e.g., eliminate certain discretionary expenses, save more money, earn a higher investment return, find tax efficiencies).
Develop a retirement plan. For most people, their biggest long-term goal is retirement. Issues to consider include where you’ll live, life expectancy based on health and family history, desired lifestyle, projected cash flow and expenses, etc. Your advisor will evaluate these factors and construct a personalized retirement plan. Also, you may want an estate plan that reflects how you wish to distribute your assets. An estate plan encompasses a will, powers of attorney, trust designations and philanthropic pursuits such as charitable donations or setting up a scholarship/foundation that will help establish your legacy.
Benefit from professional advice
As you can see, a wealth plan has many components that will impact your financial future. You’ve also seen how an advisor plays a crucial role in creating and maintaining your plan. As circumstances change (e.g., marriage, children, job, home/business ownership), an advisor can revise your plan accordingly and ensure the investment component of your plan remains sufficient to fund life’s needs.
To help grow your wealth in 2023, contact an iA Private Wealth Investment Advisor today.