viewpoint Archives - Equiton

Benefits of a First Home Savings Account (FHSA)

Jacob Ilton — Fri, 05 Jan 2024 19:40:26 +0000

The First Home Savings Account (FHSA) is a new registered investment plan with a medium- to long-term investment horizon designed to help Canadians purchase a first home. Owing to its tax advantages and relative flexibility, the FHSA must be recognized as a powerful wealth-building vehicle whether a qualified investor plans to purchase a home or not.

1. Eligibility and opening an FHSA

To be eligible, an applicant must be a Canadian resident between 18 and 71 years of age who has neither owned a home nor principally resided in a home owned by their spouse/common-law partner in the preceding four calendar years. Opening an FHSA does not constitute an obligation to eventually purchase a home.

2. Powerful tax advantages

The FHSA combines the tax benefits of the popular Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) registered account types. Contributions to an FHSA may be deducted from a holder’s taxable income and benefits in the year the contribution was made or a future year. Meanwhile, qualified withdrawals are completely tax-free. Eligible high earners whose strategy might already include minimizing taxes through RRSP contributions could find the added deduction availability advantageous. Investors should consult with a tax professional about their financial and tax needs before making investment decisions.

3. Types of investments

Investments eligible to be held in a TFSA are similarly eligible for an FHSA. This includes cash, mutual funds, exchange-traded funds (ETFs), publicly traded stocks, bonds, guaranteed income certificates (GICs), options, and some alternative investments. Although real property cannot be held in an FHSA, eligible real-estate investment trusts (REITs) enable prospective homeowners to begin participating in private real-estate upside prior to owning a home and/or to implement a tax-free hedge against rising home prices. It is Equiton’s view that investors may favour lower-volatility assets with stable growth to comparably riskier equities due to the emotional dimension of amassing home savings.

4. Contribution rules

FHSA contribution room is not geared to income level. Instead, investors may contribute $8,000 per year, up to a lifetime limit of $40,000. Contribution room only starts accumulating the year an investor opens an account, a potential advantage of opening one as soon as possible. The contribution deadline falls on December 31 annually and any unused FHSA contributions can be carried over from one year to the next.

It is important to know that annual and lifetime contribution limits are pooled for investors holding multiple FHSAs. Should an investor over-contribute, the excess is taxed at a rate of 1% monthly until the excess is eliminated. Amounts exceeding the lifetime limit of $40,000 cannot be deducted on an income tax and benefit return that year. Investors can transfer funds from an existing RRSP to an FHSA. Such transfers will not be tax deductible and won’t restore used contribution room.

5. Qualified withdrawals and closing an FHSA

FHSAs have a maximum 15-year participation period during which the account holder must purchase a home or transfer their investment.

To make a qualified withdrawal or withdrawals, the investor must acquire a qualifying home no more than 30 days before the withdrawal date and/or obtain a written agreement to purchase or build a qualifying home before October 1 the year after their first withdrawal. FHSA proceeds may be combined with a tax-free withdrawal from an investor’s RRSP under the Homebuyers’ Plan (HBP). Ultimately, the FHSA must be closed by the end of the same calendar year.

If an investor does not purchase a home or holds unwithdrawn funds following the purchase of a home, they may direct their investments toward retirement on a tax-free basis via an RRSP or RRIF before their participation period expires. Note that transfers to an RRSP inherit the tax rules of the new account type and do not impact unused RRSP contribution room. This enables investors who have fully funded their retirement plan to effectively exceed their maximum contribution limit by the amount of the transfer.

If the FHSA account is not closed or transferred within the participation limit, the funds must be withdrawn on a taxable basis.

A wealth-building vehicle

Investors seeking to finance a home face uncertainty including high interest rates, entrenched home affordability issues, and stubborn inflation. Home savings must also compete with retirement savings and living expenses. A growing majority of Canadians have given up on owning a home. Created with such challenges in mind, the FHSA represents an exciting opportunity to generate long-term wealth.

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Five Trends Driving Multi-Residential Apartment Demand

Jacob Ilton — Fri, 05 Jan 2024 19:40:11 +0000

Private Canadian multi-residential apartments could represent a timely addition to client portfolios. In times of high interest rates and inflation, investors can turn to the asset class for its ability to achieve consistently higher total returns than Canadian bonds and equities, while offering significant insulation from the speculative pricing and volatility of public markets. It is in this current economic environment, coupled with home affordability challenges, that Canadian multi-residential apartments’ track record of providing investors with strong relative upside growth potential shines through.

Demand Drivers Creating Opportunity for Multi-Residential Apartments

1. Surging population growth

Population growth across Canada will surge in the coming years, stoking further demand for multi-residential housing. The federal government has reiterated its plan to welcome 500,000 immigrants annually by 2025. Meanwhile, Canada’s share of international students and temporary foreign workers is also booming. Growth is not expected to affect all regions equally, as newcomers tend to settle in heavily populated major metros.

Sources: Ontario.ca, Alberta.ca, StatCan (Edmonton), StatCan (Calgary)

2. Housing supply and affordability issues

Canada is facing a housing shortage tied directly to its longstanding inability to create new housing supply in line with population growth. The entrenched supply-demand disparity among single-family homes has worsened with decades-high interest rates exacerbating upward pressure on home prices, limiting renters’ ability to transition to homeownership. A parallel surge in demand for rental accommodation is expected to outstrip supply by 120,000 units by 2026, quadrupling the demand for rental accommodation seen in 2023. Tight market conditions across Canada have pushed the average asking rent to a record $2,149 in September 2023. Through it all, rental apartments remain a comparably affordable and desirable alternative to ownership for residents seeking a lifestyle in areas where single-family homes may be out of reach.

3. Popularity of rental living

Homeownership in Canada is on the decline since hitting its peak in 2011. For many renters, economic headwinds have rendered the idea of homeownership impractical, but the fact is more Canadians report renting by choice. A recent national survey of approximately 20,000 renters found that 46% had a preference for rental living. When making the increasingly popular choice to rent, those who adhere to the popular rental lifestyle cite affordability, building services, a sense of community and eco-friendliness as important considerations. Rental property holders who recognize this and provide excellent amenities and value-for-dollar could see positive impacts on resident well-being, as well as their portfolio balance sheets.

4. A new generation of financially stable renters

In Canada, growth in rentership is highest among the baby boomer generation comprised of people aged 56 to 75. Baby boomers numbered more than 9 million in 2021 and made up the largest portion of the country’s homeowners. As this generation ages, many seek to tap into home equity to help fund retirement or shed upkeep-intensive single-family homes for a simpler lifestyle. Baby boomer renters are typically financially stable and prioritize amenities like communal areas, landscaping and security; conveniences like tenant apps and walkability; and a strong rent-versus-own proposition driven by today’s high-interest, high-inflation environment.

5. Favourable government policy

With attention focused on housing supply Canada-wide, political will at all levels of government is being directed at the creation of new housing units and the development of multi-residential apartments in particular. For example, the federal government recently removed the Goods and Services Tax on the construction of purpose-built rental housing. Soon after, the Ontario provincial government removed its portion of the Harmonized Sales Tax (HST) on purpose-built rental housing construction started between Sept. 14, 2023 and Dec. 31, 2030, and completed by the end of 2035. As such initiatives gather momentum, stock of modern, high-quality rentals can provide an attractive alternative to condo apartments for prospective and downsizing homeowners alike.

Tapping into investment opportunities in multi-residential apartments

Amid these tailwinds, Canadian multi-residential apartments can provide investors with not only stable income but also the potential for strong capital appreciation as the demand for rental units continues to significantly outpace supply. The Equiton Residential Income Fund Trust (Apartment Fund) offers investors the opportunity to benefit from these substantial demand drivers by investing in a growing, highly selective portfolio of Canadian multi-residential properties and developments. With an eye to the future, Equiton’s experienced leadership team continues to seek out opportunities as new trends emerge.

IMPORTANT INFORMATION: This communication is for information purposes only and is not, and under no circumstances is to be construed as, an invitation to make an investment in Equiton Residential Income Fund Trust (the “Fund”) or with Equiton Capital Inc. Recipients of this document who are considering investing in the Fund are reminded that any such purchase must not be made on the basis of the information contained in this document but are referred to the Confidential Offering Memorandum which may be obtained upon request.

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