Your principal residence is an investment in addition to being a place to live. Success is often associated with that sense of home ownership pride where you have a safe home for your family and where memories are created.
Most Canadians have committed more to their home than any other investment during their lifetime.
Prior to the introduction of the Tax Free Savings Account (TFSA) in 2009, there was really only one mechanism Canadians had to amass significant wealth on a tax free basis – owning your principal residence. The one benefit to real estate over the TFSA is that you’re not limited to the annual contribution limit. Owning a principal residence and TFSA enables Canadians to maximize tax free wealth accumulation during their lifetime.
It is our belief that tax free is certainly better than tax deferral. Because of the strong tax characteristics of the TFSA, we consider this a long term “investment” account that should be maximized each year. Having a properly invested TFSA and owning real estate both protect you against inflation. If inflation occurs, typically home prices rise from a replacement value perspective.
If TFSAs are invested in appropriate common shares then these also are typically inflation protected.
One aspect of both the TFSA and real estate that we like is that it creates forced savings resulting in greater net worth. Years of forced savings, through mortgage payments, results in debt being eliminated.
I always tell my clients that growing wealthy slowly is okay. Paying down a mortgage over 20 years is one of those examples. Although the annual limit for the TFSA may have initially seemed small, it all adds up and eventually begins to snowball over the years if contributions have been maximized.
Both the TFSA and your principal residence provide some flexibility if you want to make a change or need some liquidity. For example, if in a given year you need $20,000 out of your TFSA then you can simply withdraw the funds without tax or penalty. The added bonus is that the government will let you put that same withdrawal amount back into your TFSA, provided you wait until the next year (assuming you had already maximized your TFSA contributions) or future years. This replenishment feature does not exist with RRSP accounts. If individuals take money out of an RRSP it is fully taxed in that year of withdrawal and the room does not get replenished.
Individuals can also sell their principal residence and replace it with another principal residence within reason. Our second column in our real estate series will deal with the new rules which were announced on October 3, 2016.
Estate planning is done for various different reasons, one of which is to reduce taxes during your lifetime. No two assets are better than your principal residence and TFSA when it comes to zero income taxes on the price appreciation. Individuals can name a beneficiary on the TFSA to avoid probate even upon death. With respect to one’s principal residence, couples typically avoid probate on the first passing if the home is registered in joint tenancy. If an individual passes away with a principal residence registered solely in their name, then probate fees will apply. Probate fees in B.C. are 1.4 percent of that portion of an estate in excess of $50,000 in value. For a million dollar home this can be approximately $14,000.
In the majority of cases we are able to help our clients through the establishment of an estate plan that also assists them in avoiding this $14,000 probate fee. Our sixth column in our real estate series will go into real estate and estate planning in greater depth.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138. greenardgroup.com
This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.