As some of you may have heard, in 2023 the government is set to launch the new tax-free First Home Savings Account (FHSA). Below is a summary of the information that has been released so far:
The FHSA is an account that allows qualifying individuals to earmark funds specifically for the purchase of their first home. This new registered plan would allow prospective first-time home buyers the ability to save up to $40,000 within this account. Contributions to the plan are tax-deductible like an RRSP and deductions can be carried forward indefinitely. Withdrawals to purchase a first home would be non-taxable like a TFSA.
The FHSAs annual contribution limit is $8,000, with the lifetime contribution limit being $40,000 per individual. Unused annual contributions or contributions under $8,000 may be carried forward, thus allowing one to contribute more than $8,000 in a subsequent year so long as they have carry-over room. Funds held within the FHSA can be invested much like a TFSA and RRSP which means a qualifying withdrawal may be more than $40,000 if the invested amounts have grown over time.
Note that contribution room and potential carry-forward amounts only start accumulating once the FHSA has been opened.
To open an FHSA, you must be a resident of Canada and at least 18 years of age. You must also fit the description of a first-time home buyer, meaning you must not have owned a home in which you have lived anytime during the calendar year before the account is opened or at any time in the preceding four calendar years.
Any savings not used to purchase a qualifying home can be transferred tax-free into an RRSP or RRIF without impacting an individual’s RRSP contribution room. Any withdrawals that do not qualify under the program will be taxed as regular income.
Contributions to an FHSA will receive a tax deduction, much like an RRSP. Like a TFSA, there are no attribution rules relating to contributions, which means that you can contribute to a spouse’s FHSA without seeing any income attributable back to yourself and taxed accordingly.
The FHSA also provides a great opportunity to save for any adult-age children who may not have the means to contribute themselves. While the child would receive the deduction, there is an opportunity to defer the deduction to future years where they may have higher income. This could also present an opportunity to increase the taxable portion of an RESP in the child’s name, as an FHSA deduction could potentially reduce or eliminate this additional taxable income.
In order to withdraw from the FHSA, you must be considered a first-time homebuyer or have a written agreement to buy or build a qualifying home before October 1st of the year after the year of withdrawal and intend to occupy the home as a principal residence.
Non-qualifying withdrawals are included in the individuals’ income. There would also be a withholding tax on any non-qualifying withdrawals, similar to how RRSP withdrawals are treated. These would not re-instate the accounts’ contribution limits.
FHSA and the RRSP Homebuyers Plan:
The RRSP Homebuyers plan (HBP) allows for $35,000 to be borrowed from an RRSP for the purchase of a qualifying home. After a 2-year period where no repayments are required, the balance must be paid back within 15 years. In comparison, withdrawals from a FHSA are non-taxable and do not need to be repaid.
According to the updated November 2022 legislation, individuals can use both the FHSA and the HBP. While it would depend on one’s individual circumstances, an ideal method, if the primary goal is to save for a down payment, would be to start contributing towards a FHSA and then use any leftover savings after that to contribute towards a RRSP.
Individuals can transfer funds on a tax-free basis at any time from one FHSA to another FHSA, as well as to an RRSP or RRIF. Transfers to an RRSP or RRIF would not reduce or be limited by an individual’s available RRSP contribution room. With these current guidelines, an individual who fits the description of an eligible first-time home buyer but who has no real intention in purchasing a home soon, could open a FHSA and then just transfer the funds to their RRSP tax free, potentially creating $40,000 of additional room.
While you can also transfer funds from a RRSP to a FHSA, it is not ideal as the contribution would not be deductible. An individual would also lose the RRSP contribution room from transferring out the funds. The suitability of this though would depend on a client’s individual circumstances. Transfers do not reinstate an individuals’ FHSA lifetime contribution limit.
Other FHSA Notes:
- If a FHSA is potentially ideal for your situation, it is recommended to open the FHSA as soon as available so as to begin the accumulation of contribution room.
- While FHSA’s are announced to be available by April 2023, most providers are not likely to have the ability to open accounts until summer 2023.
- Any financial institution that can open RRSPs and TFSAs can open FHSAs.
- An individual could hold multiple FHSAs, but the total contribution limits remain the same.
If you have any questions regarding the FHSA or would like to determine if the FHSA is right for you feel free to reach out to your TPC Financial Group advisor. If you are not working with a member of our team, feel free to request a meeting to discuss further.