Recently the federal government released more details about the new Tax-Free First Home Savings Account (FHSA), which will be introduced in 2023.
Prospective first-time homebuyers can save up to $8,000 per year to this account. Investors can carry forward any unused contribution room up to the lifetime allowable $40,000 contribution limit. For example, if you contribute $5,000 in 2023, you will be eligible to contribute $11,000 in 2024.
The FHSA has some similarities to both TFSA & RRSP accounts. Like an RRSP, contributions to an FHSA are tax-deductible. While similar to a TFSA, a withdrawal for your first home purchase will be tax-free.
Withdrawals on any capital growth within the FHSA are also tax-free. If your $40,000 lifetime contribution grows to $50,000, you can withdraw that amount tax-free to buy your first home.
Deductions don’t have to be claimed in the tax year a contribution is made but can be carried forward to future years. So, if you expect a higher income in the coming years, you can maximize your tax savings by waiting until then to use the deduction.
Unlike an RRSP, you can’t contribute to a spousal account and claim the deduction for yourself. However, you can gift your spouse the money for them to contribute without triggering any spousal attribution rules applying.
For parents looking to help their kids out with a down payment, the FHSA is an excellent tax-efficient way. You can gift your adult children money without any attribution rules applying, and they can use it to fund an FHSA.
To open an FHSA, you must be a resident of Canada and at least 18 years of age. You must also not have owned a principal residence in the year you opened the account or at any time in the preceding four years.
The FHSA can remain open for 15 years, or until you turn 71, at which time you can transfer it tax-free to your RRSP/RRIF or withdraw it (withdrawals will be taxed).
This opens up an interesting loophole for people who never intend to buy a home. You can contribute to the FHSA, claim the deductions along the way, and take advantage of the tax-deferred growth. After 15 years, you can transfer whatever you’ve saved in your FHSA to your RRSP. This essentially creates more RRSP contribution room than would otherwise be allowable.
In addition to the FHSA, the Home Buyer’s Plan (HBP) continues to exist as an option. The main difference is that the HBP allows you to withdraw up to $35,000 from your RRSP tax-free to purchase a home. Unlike the FHSA, anything you withdraw under the Home Buyers Plan must be repaid over a 15-year period.
While they both will continue to exist as options, you cannot use both of them.
Within the FHSA, you can own the same investments you would hold in a TFSA or RRSP. This can include GICs, stocks, mutual funds, and ETFs. You can pick the best investments for you based on your time horizon and risk tolerance.
If your time horizon is long enough, investing in something more growth-oriented would be best. That will help you best take advantage of the tax-free growth offered by the FHSA. If that’s not the case, and you think you will buy a home in the short-term then keep it invested in a cash-like investment, so you won't be adversely affected by any market volatility right at the moment you need the money.
If you have any questions about how the FHSA can help you or your family, let’s chat.
*The views and opinions expressed in this article may not necessarily reflect those of ICP Securities Corporation.