Welcome back to the blog!
In addition to working with clients on investment and wealth management, I write a blog on tax tips and tidbits and share other articles that I think will be of interest.
In this edition, I’m going to write about the First Home Savings Account (FHSA), a new registered account announced earlier this year in the federal budget designed to help more Canadians enter the housing market.
Now at this point, there is only draft legislation available with the goal of having the infrastructure in place to be able to open and contribute to a FHSA in 2023.
Therefore, what follows is a guide and subject to change once final legislation is enacted.
So what is a FHSA and who can open one?
It is a new account that provides a prospective first-time home buyer the ability to save and invest $40,000 on a tax free basis to be used towards the purchase of a qualifying home in Canada.
The account is a bit of a hybrid between a registered retirement savings plan (RRSP) and a tax free savings account (TFSA), as similar to a RRSP, the contributions are tax deductible, and like a TFSA, the withdrawals you make to purchase a home are not taxable.
In order to be able to open a FHSA, a few requirements have to be met…
- Must be a resident of Canada;
- Have to be 18 years of age and not turning 72 or older in the year; and
- You must be a first time home buyer, meaning that you did not own a home that you lived in during the year the account is opened or in any of the 4 preceding calendar years.
How does a FHSA work?
Individuals will be able to contribute $8,000 annually and up to a cumulative lifetime limit of $40,000, however, the contribution room only begins to accumulate after opening an account. Therefore, if you’re a first time home buyer, consider opening a FHSA account in 2023 even if you don’t expect to have funds to be able to contribute until a later year.
The contribution to a FHSA can be claimed as a tax deduction against all sources of taxable income in the year of contribution or carried forward indefinitely to deduct in a later year. However, unlike a RRSP account, contributions made in the first 60 days of a calendar year cannot be deducted against prior year taxable income.
The funds that are contributed to a FHSA can be invested in a broad range of investments, including public traded securities, exchange traded funds, mutual funds, government and corporate bonds, and GICs. Essentially, the same investments that are permitted to be held in a TFSA will be able to be held in a FHSA.
Income as well as capital gains earned in a FHSA are not included in your annual income for tax purposes, and therefore, contributions can continue to grow and compound on a tax free basis while within the account.
Okay, I’ve opened a FHSA, found a home, now what?
It is important to note that you still must be considered a first-time home buyer at the time that you want to make a withdrawal. Further, you must have a written agreement to buy or build a qualifying home in Canada before October 1st of the year following the withdrawal with the intent to occupy the home as your principal residence within a year. If these conditions are met, the withdrawal can be made on a tax free basis either in a single lump sum or as a series of withdrawals.
In the event that you’ve opened a FHSA, there are a few timelines to be aware of as the account can only remain open for 15 years or until the end of the year in which you turn 71. Thereafter, the account must be closed and you cannot have another FHSA in your lifetime.
If you are unable to make a qualifying withdrawal within the stated timeframe, the funds can be transferred to a RRSP without reducing or being limited by your RRSP contribution room or withdrawn on a taxable basis.
Is there a catch?
Well, sort of, let me explain.
A first-time home buyer cannot make a withdrawal for the same home purchase from both a FHSA and a RRSP under the home buyer’s plan, which allows for a $35,000 tax free withdrawal, so you will have to choose the option that works best for you.
If you don’t have enough funds to make contributions to both accounts, consider a FHSA first as it is a bit more flexible in that you are able to transfer funds to a RRSP in the future as outlined above.
Conclusion
So although we have yet to see final legislation, the FHSA appears to be a great additional option to enable individuals to save tax-free to purchase their first home with some of the benefits of the RRSP and TFSA rolled into one account.
If you have questions or are interested in discussing your options further, I’d be happy to chat.
I can be reached at craig.dale@rbc.com or 604.981.6680.
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