Certainty today and tomorrow

Introducing the New First Home Savings Account(FHSA)

Beginning April 1st, 2023 Canadians will have access to a new registered plan that aims to help Canadians save for their first home. The FHSA offers a great new way for first-time homebuyers to save for the down payment. Let’s take a look at the FHSA in more detail.

Before we dive into the features of the FHSA, it’s important to lay out what makes someone an eligible first-time homebuyer. To be eligible to open an FHSA you must be:

• A Canadian Resident
• Age 18-71
• Have not owned a qualifying home that was used as a principal residence in the current calendar year and the previous 4 calendar years

If you are not an eligible first-time homebuyer, the FHSA still may be applicable to a loved one and a great avenue for wealth transfer.

As the name of the account implies, the FHSA can be used for the purchase of a “first-home.” However, you may still qualify as a first time homeowner if you met the criteria in the third bullet point we mentioned in the previous section due to the reset that occurs after ~4-years. The main features of the FHSA are:

• Tax Deductibility like a RRSP
• Tax-Free withdrawals provided the funds are used for a down payment
• Funds can be invested and grow tax-free like a TFSA

One thing to note is that the first 60-days rule does not apply like the RRSP. Any contributions made to an FHSA are deductible in the year the contribution is made, unlike a RRSP that allows for a tax deduction for the previous tax year if the contribution is made within the first 60-days.

Contributions create a tax-deduction for the account holder, but they also function similarly to a Tax-Free Savings Account (TFSA). First-time homebuyers can contribute a flat amount each year to a cumulative maximum of $40,000. Since this is the first year the account is available the maximum contribution for 2023 is $8,000. These contributions are also similar to the TFSA as all eligible first-time homebuyers are allotted a flat $8,000 per year as soon as they open the FHSA. Below is an example of the FHSA contribution structure:

2023: $8,000

2024: $8,000

2025: $8,000

2026: $8,000

2027: $8,000

Total: $40,000

The most important thing to note is the fact that an FHSA needs to be opened to begin accumulating this room. So even though you might not have the money to make a full $8,000 contribution, it is a great idea to open an FHSA so you can begin to accumulate contribution room. To elaborate on this further here is an example.

If I’m an eligible first-time homebuyer with $2,000 that I would like to save for a down payment. If I were to put this $2,000 into my FHSA in 2023, my contribution room in 2024 would be $14,000. Although I didn’t use the full contribution room in 2023, my remaining room carries forward indefinitely.

If you are just getting started on saving for your first-home, it’s a wise strategy to open an FHSA right away to begin accumulating contribution room.

Investing inside of your FHSA allows for the same qualified investment rules that exist for a RRSP or a TFSA. You can invest your funds into:

• Cash Deposits and GIC’s with Canadian banks, trust companies, and credit unions
• High Interest Savings Funds
• Foreign Currencies
• Publicly Traded Shares/Stocks in Canada
• Publicly Traded Shares/Stocks on a foreign stock exchange
• Labour Sponsored Venture Capital Corporation shares
• Exchange Traded Funds (ETFs)
• Bonds, Debentures, or Promissory Notes
• Mutual Funds
• Warrants, rights or options that, if exercised, will result in the acquisition of a qualified investment

However, due to the nature of the FHSA you will want to consider your time-horizon and comfort with risk. Depending on your personal financial circumstances, it might be wiser to invest in lower risk investment options to help mitigate potential market downturns. Due to the nature of GICs, you might want to avoid them just in case you find the right home before the GIC reaches maturity.

Withdrawals differ greatly from the RRSP because they are completely tax-free. But they also differ from TFSA withdrawals because the funds need to be used to purchase your first home. There are a few rules for withdrawing your funds. You can withdraw your funds at any time, provided:

• The home being purchased is located in Canada
• You are a resident in Canada when the withdrawal occurs all the way to the point of acquisition
• You must occupy the home within one year of buying or building the home
• You must have a written agreement to buy or build a qualifying home before Oct 1^st of the year after the withdrawal is made.

If these qualifications are met, you can access all of the funds tax-free.

A couple more notes about withdrawals. Your withdrawal must be made within 15-years of opening an FHSA. If you do not make a withdrawal in those 15-years, you are able to transfer these funds to your RRSP without impacting your RRSP contribution room.

The most obvious strategy is to begin investing into the FHSA if you are first-time home buyer so you can start accumulating the FHSA contribution room. However, some additional strategies may be implemented, depending on your situation.

Strategy 1: If you are 18 years of age, it is a great idea to open a FHSA and make a small contribution. Your contribution room will begin to accumulate, so when you graduate from post-secondary or begin to earn a bigger income when you are older, you can start making larger contributions that will give you a tax-deduction against a larger income.

Strategy 2: If you are a parent or a grandparent that plans to gift money to your children for a down payment, you can work with them to open an FHSA so they can receive a tax deduction on the money you have gifted them. What you choose to do with the tax deduction is entirely up to you and your family.

Strategy 3: If you have never intended to own a home, you are still able to open an FHSA. After the 15-year hold period is up, you can roll these funds over to your RRSP to give yourself an extra bump in your retirement savings.

The FHSA is a great option if you are starting to save for a home. It offers parents/grandparents a tax efficient way to gift money to your loved ones, with some restrictions that stop them from accessing the funds freely without facing penalties, and it can also complement the RRSP Home-Buyers Plan (HBP) so you are able to gain added savings through tax deductions.

 

 

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.