The New Registered Account for Future Homeowners | Strategic Planning with The First Home Savings Account (FHSA)

If home ownership is a future goal, you may be interested in the new federal savings account which has recently launched - and soon to be available at all major financial institutions across Canada. The First Home Savings Account (FHSA) provides first-time home buyers with the ability to save and invest $40,000 on a tax-deductible and tax-free basis, combining the benefits of both a Registered Savings Plan and a Tax-Free Savings Account.

This article includes:

1. FHSA Overview: What is the First Home Savings Account?
2. FHSA Contribution Rules
3. FHSA Withdrawal Rules
4. Strategic Planning Tips to Consider

FHSA Overview: What is the First Home Savings Account?

• A new registered account with the combined benefits of an RRSP and TFSA account for prospective first-time home buyers.
• Tax deductions are received for contributions, and you can get both the RRSP and FHSA tax deductions in the same year.
• Opportunity for the next generation, to help a child save for their first home.
• A person must be a Canadian resident, and at least 18 years old to open an account.
• Cannot have owned a home in the current year or the four years prior to be considered a first-time buyer and eligible for the FHSA.
• Withdrawals are tax-free, if it is for a downpayment on your first home.
• An FHSA can only be open for 15 years or until the account holder turns 71.
• You can add beneficiaries and elect a spouse as the successor holder like a TFSA, which allows for estate planning.

FHSA Contribution Rules

• The contribution limit is $8,000 per year.
• Up to $8,000 of unused contribution room can be carried forward for future years once an account is opened.
• The maximum contribution in any one year is $16,000, including $8,000 carry-forward room if available from a prior year.
• Lifetime contribution limit is $40,000 maximum.
• Contributions can be deducted in the current year or carried forward indefinitely, like an RRSP.

FHSA Withdrawal Rules

• Withdrawals are tax-free if for a first-time home buyer to purchase a home.
• Funds can be withdrawn at any time but will then be taxed on the gains and income if used for another purpose.
• The account can only be open for a maximum of 15 years - you will be starting a clock once the account is opened.
• After 15 years or when you turn 71, the funds can be withdrawn and are taxable or they can be transferred to an RRSP or RIF to avoid the tax consequence.
• Withdrawals from both the FHSA and RRSP Home Buyers’ Plan are permitted, giving an individual $75,000 ($40,000 from the FHSA and $35,000 from the HBP) worth of tax-deductible contributions available for a downpayment. Couples can double up if each spouse qualifies as a first-time homebuyer, for a total of $150,000 worth of contributions plus any investment gains for a downpayment.

The below chart does a great job comparing an FHSA to a Home Buyers’ Plan withdrawal but remember you can take advantage of both!

Source: Richardson Wealth, April 2023

Strategic Planning Tips to Consider

1. No holding period for FHSA withdrawals: There’s no holding period before contributions can be used to buy a home. For example, if you open an FHSA account today, you can contribute $8,000 and get the tax deduction. From there, you can immediately withdraw the full amount tax-free for a downpayment on a home. There is no reason not to do this if you are in a position to do so!

2. You are not limited to only an FHSA account: You can also maximize your RRSP and TFSA contributions in addition to the $8,000 annually for the FHSA.

3. You can create more RRSP room through an FHSA account: Once you max out the FHSA with $40,000 of contributions after five years, you can transfer the full amount to an RRSP account which will NOT reduce your available RRSP contribution room (indirectly providing you with the additional RRSP assets).

4. The FHSA’s full annual contribution room of $8,000 will be available if the account is opened by December 31^st, 2023. However, FHSA carry-forward room only starts accumulating when you OPEN the account, so it may make sense to open one by year-end if you plan to buy your first home in the future. But remember, you can only have the account for 15 years, and the clock starts once the account is opened.

5. In theory, an individual could use the FHSA for the tax deductions/tax-free growth, never purchase a home and transfer the full amount to an RRSP after 15 years – so don’t worry if you open the account and don’t end up buying a home!

6. If you don’t have money to contribute to an FHSA account, you can consider withdrawing from a TFSA to make the contribution to get the tax deduction. The withdrawal gets added back to your TFSA room in the next calendar year.

7. You have an option to transfer money from an RRSP to contribute to an FHSA account, but in most situations, it will not make sense to do so as you will not get a tax deduction or increase your RRSP contribution room.

Please reach out if you have any questions about this new account, I am happy to help clarify the information and tips provided.

And don’t forget, if you are eligible but not ready to contribute this year, open the FHSA account so you get the carry-forward room!

Thanks for reading!

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