February 1, 2023 - Immigrants Financial Council

Bank of Canada increases policy interest rate by 25 basis points

The central bank announced another 25 basis-point increase on Wednesday at 10 am ET, taking the current interest rate from 4.25% to 4.5%.
Since the Consumer Price Index fell to 6.3% in December, some experts had predicted a rate hold. Canadians are hoping this will be the last rate hike for a while, and only rate holds will follow for the rest of the year.
The Bank of Canada continues to say that these growing interest rates are a result of, and a remedy for, inflation. Some are skeptical, saying the Bank should allow enough time to let previous interest rate hikes help curb inflation. Others welcome these rate hikes.
According to Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $626,318 home with a five-year variable rate of 5.3% amortized over 25 years (total mortgage amount of $581,160) has a monthly mortgage payment of $3,480.
With the 25-basis point rate increase today, this homeowner’s variable mortgage rate will increase to 5.55% and their monthly payment will increase to $3,564.
This will result in the homeowner paying $84 more per month — or $1,008 per year — on their mortgage payments.
In this case, the home price of $626,318 is based on December 2022 averages calculated by the Canadian Real Estate Association (CREA).
Have rising interest rates impacted your decisions or aspirations about buying a home in Canada? Let us know in the comments.

The Registered Retirement Savings Plan (RRSP) season

Financial Literacy / By Andre Felix Bakehe

Not only is it important to understand what your RRSP contribution limits are, but it’s also helpful to understand when RRSP season is. The deadline to contribute to your RRSPs is March 1st of each year. Any money contributed to an RRSP before March 1 counts as though they were made during the previous tax year Essentially, any money you contribute in January and February can help you reduce your tax liability for the previous year.
However, you’re allowed to contribute to your RRSPs throughout the year. So you might even consider RRSP season to be all year long. But, there are certain exceptions to this rule, such as being self-employed or part of an employer RRSP Matching Program at work. In these cases, you’ll want to understand what your situation is so you don’t get slapped with penalties for over-contributing.
RRSPs are special types of investment accounts that can help you save for retirement. The main advantage of an RRSP compared to other investment accounts is the tax benefits.
The deadline to file your taxes is April 30 of every year. By the end of April, you’ll need to have filed all your taxes and pay any money you owe. If you’re lucky, you might get a little something back from the CRA.
Every year, you’ll have the opportunity to contribute a portion of your income to your RRSPs. But it’s important to understand what your limit is before you contribute. Generally speaking, you can contribute a maximum of 18% of your income from last year. So, if you earned an income of $70,000, you’d be eligible to contribute $12,600 (18% of $70,000).
If you use RRSPs wisely, they can lower your annual tax bill. The money you contribute will be sheltered from taxes. In addition, that money will be able to grow tax-free until you withdraw it at retirement. Plus, there are tax deductions to take advantage of when you file your taxes.
If you’re in a high tax rate bracket, the amount of taxes you pay every year is likely high. But regularly contributing to your RRSPs can lower the amount of taxes you pay. They may even allow you to get a refund on taxes you’ve already paid. Plus, you’d be building a retirement income stream.

The New Tax-Free First Home Savings Account (FHSA)

Financial Literacy / By Andre Felix Bakehe

According to the current proposal, Canadians who are at least 18 will be able to save up to $40,000 for their first home starting in April 2023 thanks to the new Tax-Free First Home Savings Account. You may deposit up to $8,000 annually into the account if you are eligible, but (there’s always a but, right?) you must use the money within 15 years of the FHSA’s initial opening or before you reach 71 (whichever comes first), or the account will have to be closed.
Since you never have to pay taxes on the money you save in this new account, it’s a fantastic way to save for your home-buying objectives. It is the best feature of both a Tax-Free Savings Account (TFSA), which offers tax benefits, and a Registered Retirement Savings Plan (RRSP).

Who then has access to the new account? For this investment vehicle, you must meet three requirements.
• To qualify, you must reside in Canada.
• At least 18 years of age is required (or the age of majority in your province or territory)
• Home ownership is not permitted at any time during the account’s first calendar year or the preceding four years.
Are you curious how this new account compares to the TFSA and RRSP? The best of both worlds can be found in Canada’s Tax-Free First Home Savings Account.

The maximum contribution of $40,000 ($8,000 annually) will compound and grow tax-free, just like your TFSA. However, you don’t have the same freedom to decide how you’ll utilise your funds as you have with a TFSA. Your first home purchase must be the only purpose of the tax-free first home savings account. Any withdrawals that are not connected to house purchases will not qualify as eligible withdrawals and will be subject to tax.
Right now, you can withdraw up to $35,000 of your RRSP towards a new home (called the Home Buyer’s Plan) tax free. The catch is that with the RRSP, you have to pay that money back within 15 years. With the Tax-Free First Home Savings Account, you won’t need to replace those funds.

1 February 2023