Category: Advocis Forum

Saving for a home – Debate between HBP and TFSA heats up

It is an age-old debate in personal finance whether it is more cost-effective to rent or buy a home — then add in the emotional element.  Assuming the ultimate decision is to buy, attention then turns to assembling the downpayment.  

Looking past the bank of mom and dad, traditionally that meant building up a reserve in a non-registered account beginning years ahead of the intended purchase.  As such deposits are after-tax savings subject to annual taxation on earnings, that could make for a slow exercise.  

Since 1992, accumulation in a registered retirement savings plan has been available for this purpose through the Home Buyers’ Plan (the HBP).  And since 2009, the multi-purpose tax-free savings account has provided another avenue.

While RRSP and TFSA both offer tax-free accumulation, the pre-tax RRSP allows greater gross accumulation, which would seem to favour usage of the HBP.  On closer look however, the choice is neutral at best, and in my opinion instead leans toward employing the TFSA.  

The simplicity of TFSAs

The TFSA became available for deposits in 2009.  The initial $5,000 annual contribution limit increased through indexing to $5,500 in 2013, and earlier this year was moved up to $10,000 (though it will no longer be indexed).  Depending on the outcome of the current federal election, TFSA room may be further adjusted, but there is no suggestion that either the program itself or its tax functioning are at risk.

The TFSA is funded out of after-tax money, so less money is available to go into a TFSA compared to an RRSP deposit.  To illustrate, a person at a 35% marginal tax rate who had a dollar to put into an RRSP (assuming available room), would have only 65 cents to go into a TFSA.  This is a double-edged sword for the RRSP though, as all deposits and all growth will eventually be taxable.

On the other hand, TFSA withdrawals are not taxed.  Thus the amount available for a downpayment is simply the value of the TFSA at any given time.  Once a withdrawal is made, there is no service cost or repayment obligation, and the taxpayer is entitled to a dollar-for-dollar credit for re-contribution the year following withdrawal.

HBP accessing RRSPs

At its core (without getting into all the minutia), the HBP allows a first time home buyer to make a withdrawal from an RRSP without facing current taxation.  The original withdrawal limit of $20,000 per person (or as much as $40,000 for a couple) was increased to $25,000 in 2009, and there is now an election proposal to further increase it to $35,000.

The quid pro quo is that the withdrawn amount must be returned to the RRSP over the 15 years following the home purchase (or sooner if the person is able, and wishes to do so).  Those future replenishing payments are not deductible. 

For a renter anxious to enter into home ownership, the HBP opens the door to a larger pot of money to achieve a desired downpayment.  This could be particularly helpful in getting past the threshold below which an insurance premium would be payable for the mortgage to be covered by the Canadian Mortgage and Housing Corporation.  And obviously a larger downpayment means a smaller amount being financed.

This last point is critical, as larger annual interest charges eat into a household budget for years, and often decades.  But what is the trade-off cost of using the HBP for that downpayment?  

Just as mortgage payments are non-deductible, again so too HBP repayments.  Put another way using our 35% taxpayer once more, roughly $1.50 of the person’s pre-tax income would be required to fund each repayment dollar.  To derive a truer cost of financing, an aspiring  homeowner would be advised to budget based on the combined cost of mortgage and HBP.  

Still, whereas mortgage payments are mandatory (in a practical sense), couldn’t a person simply forego one or more HBP repayments if things get tight?  The answer is yes, but then the un-repaid amount is taken into taxable income – And remember, no cash comes available at that time, as it was spent years earlier to buy the home.  The tax payment itself is not deductible, costing our erstwhile 35% homeowner almost 75 cents of pre-tax income to pay the roughly 50 cents of tax.  And unlike TFSA room, spent RRSP room is non-recoverable.

It is also bears mentioning that likely our homeowner will have higher income in future.  While plainly positive on its own, as household costs ascend that could have an impact on the cost of HBP repayment or tax on un-paid instalments.  The net effect is ambiguous at best.

Transparency trumps 

Perhaps the picture offered here is a bit cynical.  Well-informed, well-disciplined purchasers may very well be able to navigate the HBP rules without harm, and possible to their advantage. Indeed, a couple planning a family could strategically manage the program so some future income is recognized by a low-bracket stay-at-home parent.  

Even so, the true cost of the HBP remains opaque and uncertain – an uncomfortable position to be in for the largest financial transaction of a person’s life.  For my money, the nod should go to the greater transparency and certainty of the TFSA, maybe with the HBP playing a minor supporting role.

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SIDEBAR/CALLOUT

According to Statistics Canada, 180,750 taxpayers did not pay their HBP instalment in 2012 (the last year for which data is available), collectively taking $812 million into income that year. 

Federal Budget 2015 — Seniors and savers are winners

Finance Minister Joe Oliver delivered his first Federal Budget on Tuesday, April 21, 2015.  Being that it is an election year, it was not surprising that there were plenty of proposals that would appeal to a variety of voters.  Of course, this is in addition to the announcements in the Fall 2014 Economic Statement (See sidebar).

For this summary, we focus on the key items relevant for financial advisors and their clients.

Tax-free savings account

As expected, the government has followed-through on the 2011 election campaign promise to double annual TFSA contribution room.  As of Budget Day that figure was $5,500, so this could have meant an increase to as much as $11,000, but the chosen figure was an even $10,000. This applies for 2015 and subsequent calendar years, but there will no longer be any inflation indexing.

TFSA contribution room

                                                  2009-2012         2013-2014         2015-on

Annual dollar limit                      $5,000               $5,500             $10,000

Indexing ($500 increments)          Yes                    Yes                    No


Registered retirement income fund relief

Relief on RRIF minimum withdrawals has long-been requested by seniors’ advocates.  As shown in the table, mandatory minimums have now been adjusted downward for ages 71 to 100, by close to a 30% reduction at the younger end.  Those who may have already made the higher withdrawal this year under existing factors will be allowed to re-contribute the excess by no later than February 29, 2016.

There will be no change for ages 70 and under, which will continue to be determined by the formula 1/(90 – age).

RRIF minimum withdrawal factors (percentages)


RDSP legal representation

In 2012, the federal government introduced a temporary measure to allow a qualifying family member (i.e., a beneficiary’s parent, spouse or common-law partner) to become the plan holder of a Registered Disability Savings Plan for an adult who may lack the capacity to enter into a contract.  As some provinces and territories have yet to put necessary rules in place, the measure is being extended from its original horizon date of 2016 out to 2018.

Small business tax rate

In a surprising (at least among those with whom I spoke during the Budget Lockup) but welcome move, the small business tax deduction is being increased by 0.5% each year from 2016 to 2019.  Put another way, the resulting small business rate on the first $500,000 per year of qualifying active business income of a Canadian-controlled private corporation (CCPC) is going down from 11% to 9%.

In turn at the shareholder level, the gross-up and dividend tax credit for non-eligible dividends will both be adjusted.  As provincial tax calculations use the federally-defined gross-up, expect the provinces to address this by adjusting respective provincial dividend tax credits.

Table: Small Business Tax Rate Reduction and DTC Adjustment for Non-Eligible Dividends 

                                            2015        2016        2017        2018        2019

Small business rate              11%      10.5%        10%        9.5%          9%

Gross-up                              18%         17%        17%         16%        15%

DTC                                     11%      10.5%       10%         9.5%         9%


Increased LCGE for qualified farm or fishing property

The lifetime capital gains exemption for qualified farm or fishing property will increase.  For dispositions that occur on or after Budget Day, April 21, 2015, it will be the greater of $1 million and the annually-indexed LCGE applicable to small business corporation shares (currently $813,600 in 2015).

Donations involving private corporation shares or real estate

The Budget proposes to allow an exemption from capital gains tax where proceeds of disposition of  private corporation shares or real estate are donated to charity within 30 days after disposition.  The purchaser must be at arm’s length from both the donor and donee, among a number of stringent qualification criteria.  This measure will apply to donations made in respect of dispositions occurring after 2016.

Tax compliance and administration

Streamlining reporting for foreign assets

In 2013, the Canada Revenue Agency (CRA) introduced a revised Form T1135 for foreign investments with a cost base of at least $100,000.  Acknowledging that this has resulted in a disproportionate compliance burden for some taxpayers, a streamlined procedure and form is being developed for those with foreign investments of less than $250,000 cost base.  The new procedure and form will be made available for taxation years that begin after 2014.

Intra-CRA tax information sharing

The CRA collects debts owing to the federal and provincial governments under a number of non-tax programs. The CRA will be given authority to internally exchange confidential taxpayer information to manage collections efforts.  Amendments will be made to the Income Tax Act, provisions related to GST/HST, and excise duties on tobacco and alcohol.

International information exchange

Beginning in 2018, Canada will begin exchanging tax information with G-20 countries in respect of financial accounts.  Financial institutions will be expected to have procedures in place by July 1, 2017 to identify accounts held by residents of any country other than Canada and to report the required information to the CRA.

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SIDEBAR: Fall 2014 Economic Statement

These measures (mainly of interest to families with minor age children) were introduced before the release of the 2015 Budget, and are either claimable for 2014 tax filing, or payable retroactive to the beginning of 2015.

Family Tax Cut 

  • Tax credit worth up to $2,000 based on a notional transfer of up to $50,000 income between parents where a child under the age of 18 resides in the household

Universal Child Care Benefit (UCCB)

  • Increase of $60 to $160 monthly for children under six
  • New $60 monthly payment for children six through seventeen

Child Tax Credit (CTC)

  • Repealed, as it is effectively replaced by the UCCB additions

Child Care Expense Deduction dollar limits

  • Increased by $1,000 per child

Children’s Fitness Tax Credit (CFTC)

  • Doubled for 2014, from $500 to $1,000.

End of life matters – Supreme Court rules on physician-assisted death

Nothing is more important than life itself.

It is tragic then that a woman in a grievous and irremediable medical condition may contemplate bringing her life to an end.  That she must turn to family, friends and her doctor to assist in that undertaking, adds even more to her burden.

And with the dilemma that those surrounding people could face severe criminal sanctions, her plight verges on untenable.

Undeniably, these are issues of great public importance, sufficiently so for the Supreme Court of Canada (SCC) to agree to hear this case that began in British Columbia.  On February 6, 2015, the Court struck down the Criminal Code provisions that prohibit a physician’s assistance in terminating life.

The lives involved

In 2009, Gloria Taylor was diagnosed with amyotrophic lateral sclerosis (or ALS), which causes progressive muscle weakness.  Patients first lose the use of their limbs, then speaking and eating functions, and eventually their breathing.  It is the same condition suffered by Sue Rodriquez, who unsuccessfully challenged the law on physician-assisted death at the Supreme Court in 1993.

Ms. Taylor launched this challenge in British Columbia, succeeding at trial.  However, she succumbed to her condition in the intervening time before the matter reached the SCC.

In 2008, Kay Carter was diagnosed with spinal stenosis, a painful and progressive condition that compresses the spinal cord.  As she described to her family, she did not want to live out her life as an “ironing board” lying flat in bed.  In 2010, with the secret assistance of her daughter and son-in-law, she traveled to a clinic in Switzerland, where she administered to herself a prescribed dose of sodium pentobarbital.

After Ms. Carter’s death, her daughter and son-in-law joined Ms. Taylor in her court action to press for the legalization of physician-assisted death in Canada.

Supreme Court of Canada rules

Relying on the Rodriguez decision, the BC Court of Appeal overturned the trial judge, leading the plaintiffs to appeal to the SCC.  In addition to the Attorneys General of Canada and British Columbia as respondents, the case attracted over 24 intervenor parties.

Interestingly, the only judge remaining on the court since Rodriguez is current Chief Justice McLachlin, who was then in the minority.  In this current unanimous decision, the Court commented that the legislative landscape had changed since 1993.  Eight jurisdictions (including 3 US states) now permit some form of assisted dying, reflecting an evolution in public sentiment.  Concurrently, these can serve as models to inform Canadian policy, particularly when considering the key issue of safeguards.

All parties and intervenors agreed on the object of the prohibition, being to protect vulnerable persons from being induced to commit suicide at a time of weakness.

However, the Court concluded that these particular provisions infringed a person’s right to life, liberty and security of the person under the Charter.  She may feel compelled to take her life while she is physically capable of doing so, even though she expects to continue to enjoy life after those particular physical controls have left her.  In sum, “she can take her own life prematurely, often by violent or dangerous means, or she can suffer until she dies from natural causes.  The choice is cruel.”

Criminal Code sections 14 and 241(b) were ruled void, but the finding was suspended for 12 months from the date of judgment, allowing the government to consider its response.

A call to financial advisors

To be clear, this case is not an authorization of euthanasia of the ill or aged.  The Court emphasized that the impugned provisions offended the rights of a competent adult in a “grievous and irremediable medical condition” who is clearly capable of giving his or her own consent to a physician.

Beyond the patient and doctor, this does not expand the authority of someone currently acting under a power of attorney, nor does it mean that such decisions may now be delegated under a newly executed document.  It should however prompt a frank discussion with a lawyer about the importance and coordination of powers of attorney, advance health directives and do-not-resuscitate (DNR) orders.

Outside the core legal concerns, financial advisors – particularly insurance advisors – have a central role to play in bringing some critical information to the table.

The item that immediately comes to mind is the potential effect on life insurance.  A common contract term purports to void coverage if the insured dies by suicide shortly after a policy is issued.  A person should be aware of the potential lost proceeds that may have been assumed to be going to surviving family.  For certainty in the interpretation of such contract terms, a legal opinion would be most prudent.

Though a less common type of coverage, critical illness insurance could also be affected.  CI policies usually require that the insured survives for a certain period of time in order for the proceeds to pay out.  This may be as brief as 30 days, or as long as six months or more.  (If the person dies earlier, the claim may be limited to a return of premiums.)  Entitlement could depend on timing and nature of diagnosis, especially where a claim is premised upon impairment of activities of daily living, or ADLs.

It is important that these potential problems are brought to light, and in a timely manner, should it become apparent that a client faces a challenging medical situation.  Delicate though it may be to raise initially, handled properly this can open a dialogue not only with the client directly, but (with appropriate permission) among all the person’s key professional advisors – financial, legal, medical and spiritual.

And finally, general communication with family and friends is essential.  To the extent of a person’s comfort level — and with the assistance and guidance of experienced counsellors — this can lead to better understanding for all involved, needed support at critical times, and as comfortable and dignified a death as can be managed.

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Stricken sections of the Criminal Code:

14. No person is entitled to consent to have death inflicted on him, and such consent does not affect the criminal responsibility of any person by whom death may be inflicted on the person by whom consent is given.

241(b). Every one who … (b) aids or abets a person to commit suicide, whether suicide ensues or not, is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years.