Eukonomist: Increased Bank of Mom and Dad firepower

Financial Planners

The Yukon housing market appears to be an ever-increasing arms race between various buyer groups. Local first-time homebuyers, newcomers, rental investors and others battle for a limited supply of units.

Even if rental management forces some rental investors out of the market, competition remains fierce. The Yukon Territory’s population will approach 49,000 by 2027, according to the latest projections from the Yukon Treasury Department. We just passed 40,000 in 2018. The population is growing at almost twice the rate of the country, aided by rising transfer payments and a healthy mining sector.

The result was a record high price tag. Despite global turmoil in 2022, the only Canadian jurisdiction where transactions continued to grow was Yukon, according to Finance’s outlook, with a “weighted average of single-family homes, duplexes and trailers in 2022. All prices have reached record highs.”

The recent federal budget included a new program that will give a substantial new firepower to those who wish to enter this market: the First Home Savings Account (FHSA).

FHSA officially launched on April 1st, and the occasion is no joke. The FHSA combines Euconor’s favorite features of a Registered Retirement Savings Plan (RRSP) and a Tax Free Savings Account (TFSA). Those who don’t yet own a home can donate $8,000 annually and up to $40,000 in their lifetime. They can deduct the contributions from their taxable income, and the money invested is tax-free until it is withdrawn to buy a home.

If you’re thinking of buying a home (or even if you’re not, more on that later), you should definitely open an FHSA if you have the money.

FHSA is especially good news for high earners and the rich. Not everyone can set aside $8,000 a year for his five years to maximize profits. But if you’re in your 20s making big bucks mining or starting a career in a high-paying profession, FHSA is a great idea.

However, in reality, there aren’t that many people in their 20s with six digits in the Yukon.

Enter Mom and Dad’s bank. FHSA is also a great idea for wealthy parents planning to support their children.

A report last year by the Ontario Real Estate Association found that about 40% of Ontario homebuyers between the ages of 18 and 38 received gifts or loans from their parents. A survey found that 71% of these parents gave an average gift of $71,000. 61% also provided family loans, averaging $41,000.

Here’s how Bank of Mom and Dad can get additional help to better support our children.

As soon as your child turns 19 (or 18 in some states) as soon as you think you have enough money to give your child a significant amount, have the FHSA opened. You donate up to $8,000 each year for her five years, and the child contributes this to the FHSA. It’s your child who gets the income tax deduction, not you. If they are trading or studying in college, they defer using the tax credit until they have a full-time job.

If they’re smart, they’ll also take advantage of this tax break to set aside additional funds for their down payment for the first few years of their career.

After your gift of up to $40,000, the child will invest in a safe investment if possible, and the money will be tax-free until you are ready to purchase a home.

If your child is in their 20s or 30s, you can start now. Kids don’t have to compound for years to grow to $40,000.

If you were planning to give them $40,000 anyway, you’re still giving them $40,000. And the government is boosting your gift with tax incentives.

But what if your kids aren’t sure if they’ll buy a home? Maybe they’ll join the trend toward lifelong renting, or live off-grid somewhere?

no problem. FHSA should close after 15 years. If your child hasn’t bought a home yet, you can roll the money into her RRSP without complicating taxes. Essentially, the FHSA provides your child with additional bonus RRSP contribution “headroom” if the child does not purchase a home.

If your child ultimately decides to purchase a home in Alaska or some other foreign location, the same RRSP transfer options apply.

Depending on your child’s final tax and return on investment, the government contribution to the down payment could exceed $10,000. Or they may even double or triple if they belong to high tax rates and act early enough to make the investment tax-protected for many years.

If their life partner has access to an in-laws bank, they can double it.

Economists tend to haggle over such programs. They prefer a simple tax code with no deductions or loopholes giving you a rococo style tax code that will make your accountant very happy. If there is a special program, they recommend either his RRSP-style deduction or TFSA-style tax shelter. not both.

Some Kill Joy analysts have wondered whether it makes sense to give buyers more firepower at a time when housing supplies are still tight. Pushing it up just makes the price higher at the expense of something that doesn’t have that kind of firepower.

But a quick Google search reveals that whimsical economic blogs are already buried online by financial planners’ roused comments and financial institutions’ RHSA ads.

What if you’re one of those Uconers desperate to buy a home, but don’t have a six-figure job or an account in your mom and dad’s bank? That means you have to compete with buyers whose offers are promoted by a fully supplemented FHSA.

But for those with the money, FHSA is the new must.

Keith Halliday is a Yukon economist, author of the Yukon youth adventure novel Aurore, and co-host of the Klondike Gold Rush History podcast. He won the 2022 Canadian Community Newspaper Award for Outstanding Columnist.

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