A government-assisted rent 2 own option?
Frequently, government involvement in one’s economic activities is less than an exciting prospect. That’s certainly true when it comes to meddling in home ownership.
Witness the First-time homebuyer’s matching grant the feds introduced a few years ago. It’s not the panacea they’d hoped. Rarely would I advise anyone to take advantage of it, and it seems that’s the broader sentiment, as well. It’s not been a great success.
But a new program is in effect, as of April 1stof this year. And this one gets high marks—at least from this vantage point (“promontory”).
The new program is called the First Home Savings Account (FHSA). It’s something like a combination of an RRSP and a TFSA, both of which Canadians have become quite familiar with, and which have been remarkably successful.
As a refresher, the RRSP lets you invest money one year, get a tax deduction for the amount contributed that year, and pay taxes only when you take it out years later (likely in retirement, when, it is assumed, your taxes will be lower.)
The TFSA, on the other hand, allows you to put funds on which you have already paid taxes into an account, but then pay no further taxes when you withdraw the funds. That means that all the subsequent growth in the account is tax free.
So, both are tax-planning strategies; in each case, you pay the taxes once, either at the beginning or at the end.
The FHSA combines the two. You don’t pay taxes at either end.
But it is a very restricted product.
First, you must be a first-time homeowner and the tax-free funds can be used only for the purchase of that first home. And you must intend to live in the home yourself; this is not for investors.
Second, the fund can be open for a maximum of 15 years, or until you reach age 71, whichever comes first.
Third, you are limited to a maximum contribution of $8000 in any one year, and a maximum $40,000 over the lifespan of the fund. But any unused portion of that $8000 maximum can be carried forward to succeeding years. So, to reach the $40,000 limit will take a minimum of 5 years. Thus, it might be advisable to open an account sooner than later, to start creating room for contribution (provided you anticipate using it within fifteen years.) Of course, you don’t have to max it out before using it.
Fourth, when you withdraw the funds for a home purchase, you must have a written agreement to purchase a home by October 1 of the year following withdrawal (or you’ll be forced to pay taxes on the withdrawal.)
So, what happens if you open an FHSA and then are unable to purchase a property within fifteen years? There are three options: simply withdraw the funds, transfer them into an RRSP, or transfer them into an RRIF. In each case they are taxable on withdrawal, as per the rules of those programs.
So, here’s the big question: Can this work hand-in-hand with a rent 2 own?
I’ve been thinking about that. Because of the fourth point above, I think it can. It won’t be automatic but, on a case-by-case basis, we may be able to make it work. It could be built into the savings component of the rent-2-own program.
When you factor in the tax savings associated with that over the term of the contract, it means a lowering of the total costs of the rent 2 own program.
If you are considering the rent 2 own option, this extra help from our federal government may be the difference in making it affordable for you.
Contact us to see whether the government assistance can help you get into that scenario.
