Insights
Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published by the Private Client Team at KJ Harrison Investors
Key Points
- After you open an account, the 15-year time limit starts, consider your goals and whether you will be in a position to buy a home within 15 years.
- Take advantage of the power of compound growth by contributing to the FHSA early.
- The FHSA is only one of several accounts that you can use to save towards the purchase of a first home – you can combine the savings from your FHSA with the funds in a TFSA and the RRSP Home Buyers’ Plan to maximize your down payment.
Since 1992, the best option for tax-advantaged savings for a first-time home purchase has been the RRSP Home Buyers’ Plan, which allows you to use money from your RRSP towards the purchase of a first home. That money then needs to be repaid to your RRSP over a 15-year period.
There is soon to be a new king of the tax-advantaged ring in town, however. The recent Budget included the announcement of the Tax-Free First Home Savings Account (FHSA), which will hopefully become available in 2023; currently, the banks are awaiting guidance from the government on certain specifications regarding this new account type.
This new account allows for:
- $8,000 per year in tax-deductible contributions, as with RRSP contributions.
Investment growth in the account is tax-free, just like an RRSP or TFSA. - Withdrawals from the account to purchase a new home are tax-free, as is the case with a TFSA.
- Unlike the RRSP Home Buyers’ Plan, where there is a requirement to repay, FHSA withdrawals carry no requirement to repay.
There is also an unusual amount of flexibility when it comes to funding an FHSA. Like RRSPs and TFSAs, you may hold multiple FHSAs, but your combined annual and lifetime contributions cannot exceed the respective limits (i.e. if you have two FHSAs, you can contribute $6,000 to one and $2,000 to the other, but the combined contributions cannot exceed $8,000 per year). You can also use money in an RRSP to make contributions to your FHSA, and you are not required to repay the money to the RRSP. Note, however, that you won’t get to double dip on the tax deduction, as you would have already received the tax deduction when you contributed to the RRSP. It won’t be possible to then claim a deduction for monies transferred from your RRSP to your FHSA.
The level of tax advantage and flexibility is unparalleled by any other account type currently available to first-time homebuyers in Canada.
Specifications
There are several items to keep in mind when looking at this new account. Some of these include:
- You must be at least 18 years old to open an account. The Budget proposal makes no mention of an upper age limit.
- There is a lifetime contribution limit of $40,000. This is greater than the $35,000 that each individual is allowed to pull from their RRSP as part of the Home Buyers’ Plan.
- Contribution room starts to accumulate from the year you open the FHSA.
- Like an RRSP or TFSA, you can carry forward any unused contribution room (up to a maximum of $8k cumulative carry forward) from past years.
- Withdrawals for purposes other than the purchase of a home are taxable (meaning that the amount of the withdrawal is added to your taxable income in the year of withdrawal).
- Once you make a withdrawal, you must close the account within a year, and you cannot open another one.
- Parents or grandparents cannot contribute directly to their adult child’s FHSA. They can gift the money to their adult children, who can then use it to contribute to their FHSA, creating a tax deduction for the adult child’s contributions.
- Funds in an FHSA must be used within 15 years of opening the account.
- Unused savings must be shifted to an RRSP or an RRIF (a non-taxable event) or withdrawn on a taxable basis.
- Another advantage of this account is that you do not need the RRSP/RRIF contribution room to make a transfer from your FHSA.
- You must be able to show that you have not owned a home now four years prior to opening the account.
- You are only able to make withdrawals for one property in your lifetime.
- If you are looking to maximize your down payment, you can combine your FHSA, RRSP and TFSA funds to make a greater dent in your first home purchase.
Conclusions
Make no mistake, the new Tax-Free First Home Savings Account is the best new way for individuals to save up for the purchase of their first home. It has the combined benefits of a TFSA and an RRSP. While it isn’t going to do anything to stop the skyrocketing trajectory of housing prices, it is at least going to eliminate the burden of tax for individuals attempting to save up for their first house.
We expect to make FHSAs available to all eligible KJ Harrison clients sometime in the third quarter of 2023. Your Portfolio Manager will be happy to assist in setting one up for you once they are available, and as always, if you have any questions about homebuying, financing a house, saving for a down payment, or any other finance-related questions, please never hesitate to reach out.
