As of April 1, 2023 financial institutions have had the ability to start offering a new program called the First Home Savings Account (FHSA). This is a tax-free incentive. But, is this program right for you, is the question?
Before we get into this too far, I want to remind you that I AM not qualified to advise on investments (beyond real estate, that is)! Nor do I have the knowledge or education to do so. I am simply here giving my opinion on the product and how I see uses for it. But this is not investment advice and you should ALWAYS consult with your accountant, financial planner and lawyer before making any investment decisions.
Now that we have that out of the way, let's look a bit more closely at the program! This new program is aimed to encourage first-time home buyers to save up a downpayment by incentivizing them with tax savings. With this program, prospective first-time home buyers will be allowed to save up to $40,000 on a tax-free basis, similar to a Registered Retirement Savings plan (RRSP). As in, the contributions you make to this account will be tax deductible. When Buyers make withdrawals from this account to purchase their first home, that withdrawal is non-taxable, similar to that of a TFSA.
It’s a great program, that offers both tax shelter for Buyers without truly any downfall when those funds are accessed.
- There is an $8000 annual contribution limit
- A $40,000 lifetime contribution limit.
- Purchasing with a partner? Those limits are actually doubled! So, $8,000 per person which doubles their lifetime contribution limit to $80,000.
You are allowed to still invest these funds in a variety of investment accounts such as mutual funds, publicly-traded securities, bonds, GICs, etc. and benefit from the returns.
To open an FHSA, you must be:
- A resident of Canada
- Over 18 years old and under 71
- Be a first-time home buyer (have not owned a home in the four years prior to the year the account is opened)
- You must use the funds within 15 years of opening the account toward your home purchase. If you don’t, it can be incorporated back into your taxable income. However, there are options to transfer it into an RRSP or RRIF, if this is the case.
Another Key Consideration
You can combine the funds from your FHSA and the Home Buyers Plan (HBP) together. Just as a refresher, The Home Buyers Plan is a Canadian Government initiative enabling homeowners to access a maximum of $35,000 from their RRSPs to assist in financing their first home purchase. Keep in mind you DO have to pay these funds back within 15 years to not have a tax consequence – so if you take out the $35,000, your annual loan repayment would be $2,333 ($35,000/15).
So, in combining funds from the Home Buyers Plan (HBP) and FHSA together, this allows you to contribute up to $35,000 from your HBP and $40,000 from your FHSA. This gives you a grand total of $75,000 toward purchasing your home as an individual, and $150,000 as a couple (both programs allow for this).
The FHSA program combined with the HBP program are two great ways to propel yourself toward home ownership while reducing your taxes.
There is no tax on growth of the funds you’ve invested and there is no tax when cashed in to buy the house. My thoughts are if you can do it, DO IT! We are highly taxed in Canada and should take advantage of every possible program available to us.
I have personally not seen a lot of clients using this plan - yet. It is still in its infancy, so that could be why. But also, saving for a downpayment has been a bit more tough in the 2023 economy.
The program is ripe for those that are GOOD at saving
BUT paying rent while trying to save $8000 per year will be tough for many trying to break into the real estate market. There was some early speculation that parents would fund these plans for their children, but keep in mind that the parent will not get the taxable benefit from doing so.
My goal is to train my children to be good savers, now. To start putting funds aside to invest in many of these accounts when they do turn 18. This way, they are ripe to open RRSP, TFSA, and FHSA accounts and take advantage of programs applicable to them, then. We’ve started at home with 20% of their allowance being set aside for these savings and hopefully, the lessons they learn now will be engrained in them when they become adults to continue those savings.
Another though for my fellow parents as it is a story I have ALWAYS loved. I had a client that was incredibly fiscally responsible. Her parents forced her to save, similar to this. When she turned 18, they allowed her to continue to live at home, but there was a catch: she had to start paying rent. It wouldn’t have been market rent, a lesser amount (let’s say $300 per month), but they said it was to get her used to living in the real world and start paying her way. She paid that rent to her parents, while saving up for her first home downpayment. When the time came to buy her first home, it turns out her parents had started a savings account, with her name on it, and ALL of the funds she had paid in rent were gifted back to her to create an even larger downpayment. She had no knowledge this had been their intent all along, but what a gift (not just financially)! To teach fiscal responsibility and financial independence, was likely the greatest gift of all. I cried, a lot, with her when we found out this is what they had done.
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