What is the First Home Savings Account?
In April 2022, the Federal government introduced the “First Home Savings Account”, or FHSA. This new type of registered savings account officially launches in 2023 and will allow Canadians to save up to $40,000 towards their first home. The FHSA combines the features of the RRSP and TFSA, and can house different types of investments like cash, stocks, bonds, mutual funds, and ETF’s. Contributions made to the FHSA are tax-deductible, growth within the account is tax-free, and withdrawals are tax-free.
Why is the FHSA being offered?
The FHSA is aimed at easing the path of first-time home buyers, and should help more Canadians get into the housing market. This account could help prospective home-buyers save up a down payment on their first home in light of Canada’s exceedingly high real estate prices and competitive market. The average home price in Canada is $736,000, so an FHSA limit of $40,000 would ensure Canadians could tax-shelter their entire 5% down payment.
Who is the First Home Savings Account for?
The FHSA is for Canadian residents over 18 years old who have not owned a home in the previous four calendar years. Presumably, this would be ideal for young Canadians looking to buy their first home, and who can afford to save the equivalent of about $150 bi-weekly for 5 years.
Alternatively, the FHSA could also be beneficial for older folks who are renting but plan to buy a house when they retire. Withdrawals from the FHSA don’t count as income, so retirement benefits such as OAS and GIS wouldn’t be affected.
How does the FHSA work?
Account holders can contribute up to $8,000 a year to the FHSA, up to a lifetime maximum of $40,000. The contributions are tax deductible just like the RRSP. Unused annual contributions do not rollover to subsequent years. If the funds are not spent on a home within 15 years, the account must be closed but the money can be transferred to an RRSP or RRIF regardless of available room. Funds could also be withdrawn for a purpose other than to purchase a home, but that withdrawal would be taxable.
Tax Benefit of the FHSA
From a tax perspective, the FHSA is useful since you get a tax break on contributions and withdrawals. Contributions to the FHSA are tax-deductible, which means you can reduce your taxable income by the equivalent of your FHSA contribution. This is similar to how Registered Retirement Savings Plans work. FHSA withdrawals for a home purchase, including investment gains, are tax-free. This is similar to the Tax-Free Savings Account.
You can transfer funds from your RRSP to your FHSA to benefit from the tax-free withdrawal and no need for repayment like the first time Home Buyers Plan. You wouldn’t however receive the income deduction since you already received it when you made the initial RRSP contribution. Alternatively, you can transfer unused FHSA to your RRSP without having to worry about contribution limits.
What about the Home Buyers’ Plan?
There is already a program in place for first-time homebuyers, called the Home Buyers’ Plan (HBP). This allows first time buyers to withdraw up to $35,000 from their RRSP tax-free, and gives them 15 years to pay it back. This is a good option for those that already have savings in their RRSP, and that can afford the annual payments of 1/15th of the withdrawal amount. With the FHSA, there are no repayments required, which may make it the more desirable vehicle if you are just starting to save and your goal is home ownership within the next 15 years. It appears the federal government will only allow first time buyers to take advantage of one program, however, so the options will have to be weighed to determine if the FHSA or HBP is a better fit.
The FHSA will be a great tool for Canadians to utilize who are considering the purchase of their first home. Although it’s projected to not be available until 2023, we believe it will be a great investment vehicle to be utilized for those who have first time home ownership goals in the coming years. As always, it’s important to evaluate your individual circumstances and wait for the final details on the FHSA to determine if it’s right for you.
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