New tax-free home savings account, foreign buyer ban to tackle housing affordability

New tax-free home savings account, foreign buyer ban to tackle housing affordability
Housing affordability is a key focus for the Liberals in their 2022 federal budget, with promises of a ban on some foreign buyers for two years and billions of dollars to help first-time home buyers get into the market.

The federal government outlined its plans to tackle sky-high housing costs in Thursday's budget — including a temporary ban on foreign buyers, a crackdown on speculators, a pledge to double the pace of new home construction and a new tax-sheltered way for Canadians to save up to buy a home.

The government is moving ahead with something it floated on the campaign trail last year: a Tax-Free First Home Savings Account. The budget offered some rudimentary details:

Starting next year, Canadians will be entitled to contribute up to $8,000 per year to the accounts, which allow them to save and invest funds to buy a home in the most tax-advantageous way. Currently, Canadians can use anything from a savings account to an RRSP or TFSA to save for their first home — but all come with a certain amount of tax restrictions.

RRSPs provide a tax rebate when people contribute, but any money withdrawn under the existing Home Buyer's plan must be replenished later without the tax break. Conversely, Canadians who use their TFSAs to save for a home can grow those funds in a tax-sheltered way, but they don't get the tax break when they make the investment.

The new program adopts the most appealing parts of those two programs by giving savers a tax rebate for contributing and also allowing those savings to grow without being taxed on the gain. It's "tax-free in, tax-free out," as the budget puts it.

The program has a maximum lifetime contribution limit of $40,000, and the government estimates the Tax-Free First Home Savings Account program will cost it about $725 million in tax revenue. Finance Minister Chrystia Freeland said the government sees that as money well spent.

"We will make it easier for our young people to get those first keys of their own," she said of the government's various housing initiatives, which she described as "perhaps the most ambitious plan that Canada has ever had."

First-time buyers say they need help

The new account may be great news for savers, but it won't do much to improve affordability for those who don't have the money to spare.

"I think it's going to be huge," said Jamie Golombek, head of the tax and estate planning team at CIBC. "But if you don't have the money, this plan does nothing for you."

Paul Kershaw, an associate professor at the University of British Columbia and head of the think-tank Generation Squeezed, says the program risks driving home prices up even higher by making it easier for those who can already save to buy in.

"The more that we facilitate that acceleration of accumulating the next down payment, the more we're likely to be bidding up home prices," he said in an interview. "While the budget is acknowledging there's a crisis, it's failing to recognize that our country is really addicted now to high and rising home values."

Other initiatives

The budget once again targets some old housing boogeymen that have been blamed for high prices before: flippers, speculators, blind bidding and foreign buyers.

The government is proposing a two-year ban on purchases of residential real estate by people and companies who aren't citizens or permanent residents. Refugees, some international students and people with work permits would be exempt from the policy. Notably, the ban wouldn't include recreational property, such as cottages, cabins and other vacation homes.

It's a populist policy sure to resonate with many, but previous versions of such plans have not had much of an impact. A Statistics Canada report found that less than five per cent of homes in Toronto and Vancouver were owned by non-residents.

John Pasalis, founder and president of Toronto-based real estate firm Realosophy says the move may not do much, but it is still a step in the right direction toward ensuring that people buying homes are mostly doing so to live in them, not simply as financial investments.

"I don't think foreign buyers in and of themselves are the dominant buyers in the market," he said in an interview. "They're not the cause of rising home prices or rapidly rising home prices, but it's still a good policy to put forward."

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