Since the announcement of its creation by the federal government in 2022, the new tax-free savings account for the purchase of a first property (TFSAPP) has caused a lot of ink to flow. In the meantime, arguably more words have been written about it than accounts have been opened since it officially came into effect on 1er last April. And for good reason: the majority of financial institutions still do not currently offer it. In fact, you’re probably more excited about taking advantage of this tax-efficient account than the banks are about having to deal with the onboarding.
It is obvious that adding a new product to coordinate with the tax authorities is a complex operation for financial institutions, investment companies and insurers. Above all, it requires investment. And although it represents an additional tool to optimize your personal situation, the TFSA will not solve all the problems related to home ownership, far from it.
In clear terms, for the majority of new subscribers to this account, there will not really be any additional savings to make because of the sums invested by financial institutions to add this product to their service offer! Those for whom home ownership is already difficult won’t miraculously be able to save more to get there. In many cases, at least in the short term, the amounts contributed to the TFSA will mainly consist of a transfer of assets, for example by directing sums previously invested in the RRSP or even a gift from wealthier parents from their non- registered or TFSA.
The recent surge in property prices comes with a larger down payment requirement. Although, in theory, the possibility of using the RAP withdrawal and the TFSAPP increases the down payment available, the real problem lies elsewhere. Buying a house requires personal savings to constitute the down payment required for the purchase. According to Statistics Canada, the net savings of the first three quintiles of Canadian households fell by 12% between the third quarter of 2020 and the end of 2022. What’s more, younger households, those affected by homeownership , have increased their debt to finance their consumption.
Undeniable advantages for the CELIAPP
It is obvious that for the taxpayer who is ready to make some consumer sacrifices to save, the CELIAPP will quickly become a must. It will especially benefit the most disciplined and the luckiest, since the attribution rules will not apply to its contribution. Thus, the parents will be able to give the required capital to their adult children, just like the spouses in the case of couples with an income gap.
You probably already know that a maximum amount of $8,000 can be invested in it. It will allow a tax deduction to be used now or in the future, to reduce taxable income. As with RRSPs and TFSAs, the return on investments held in this type of account will be tax-free. Since it will be possible to make up one year at a time the years without contributions since the opening of the account, it is advisable to open the CELIAPP by December 31 even if you are not sure of being able to contribute this year. You will be able to withdraw funds from both your RRSP and TFSA to purchase your qualifying property.
In the worst case, a TFSA account that has never been used to purchase a home may, fifteen years after its opening, be transferred tax-free to the RRSP, without affecting the contribution room. . The smartest will therefore understand that it is an essential tax tool, not requiring that the project of becoming an owner be sincere or even achievable.
Key questions to ask
Becoming the owner of a main residence does not always pay off. Let me explain before causing widespread panic in the cottages! As I often say, despite the fact that the house represents an important retirement asset, the financial analysis of the project is often overlooked. The eagerness to go to the notary causes people to make decisions that are too guided by emotion. If it is important to have the house appraised to find any hidden defects, it is also necessary to assess the financial feasibility not only of acquiring it, but of its maintenance and the work to be paid in the short term, medium and long term.
Consequently, all first-time buyers, even the privileged ones benefiting from a parental gift to garnish their contributions to the CELIAPP, should rigorously put their budget to the test. Are you willing to sacrifice discretionary spending (often very pleasant) to meet the fixed and mandatory expenses arising from your investment? Once these new expenses have been added to your budget, are you still able to free up savings for your retirement and your short and medium term projects? If the answer to these questions is no, you must assume that the purchase of your home is based on a desire for comfort and not on a strategic investment.
I have no solution to solve the problem of the real estate monster that has caught up with Quebec recently. Pending much more fundamental changes in habit for savers, the new CELIAPP accounts should only generate in the financial industry a movement of assets from wealthier parents to their children.
Financial planner, Sandy Lachapelle is president of the independent firm Lachapelle intelligent finances.