Rapidly rising home prices and higher interest rates have made it increasingly difficult for Canadians to save for a down payment on their first home. Effective April 1, 2023, the government of Canada officially approved the First Home Savings Account (FHSA) to help alleviate some of these difficulties, and financial institutions are working towards making the FHSA available to Canadians this summer.
Currently, many people are saving for a down payment through the Home-Buyer’s Plan (HBP), which allows Canadians to withdraw up to $35,000 from their RRSP, as well as TFSAs, high-interest savings accounts, and chequing accounts. The FHSA combines some of the benefits and features offered by RRSPs and TFSAs, plus has advantages they don’t offer.
What is the FHSA?
The FHSA is a savings account which offers a contribution room of $8,000 per year, and a lifetime maximum of $40,000. Opening an account is offered only to Canadian residents, 18 years of age and older, who are first-time home buyers. The FHSA can remain open for up to 15 years. For full rules and eligibility requirements visit https://www.canada.ca.
HBP vs FHSA
Much like an RRSP, contributions made to an FHSA are tax-deductible. The deduction can be taken in the year the contribution was made or it can be carried forward and used in a future year. This carry-forward is especially valuable to young investors, such as students, whose income (and income tax rate) is expected to rise. For an individual in Ontario making $75,000 a year, the deduction on an $8000 contribution would result in tax savings of roughly $2372 using 2022 tax rates. Therefore, it would cost this individual $5628 in after-tax income to set aside $8000 for their down payment. The tax deductibility of FHSA contributions is a key feature of the FHSA.
If you borrow money from your RRSP using the HBP, starting in the second year after the withdrawal you must begin to repay at least 1/15th per year of the amount you withdrew. The funds borrowed from your RRSP must be fully repaid within 15 years. The HBP also features an 89-day holding period on RRSP contributions, whereas the FHSA has no holding period, making your funds more quickly accessible. The most important difference between the HBP and the FHSA is that withdrawals from the FHSA are not required to be paid back.
TFSA vs FHSA
Similar to a TFSA, money taken from your FHSA is withdrawn tax-free. Also similarly, the funds within the FHSA are eligible for tax-exempt growth depending on how the money is invested. The main differences between TFSAs and FHSAs are (1) tax-free withdrawals from the FHSA must be for the purpose of buying a home whereas there are no restrictions on what TFSA funds are used for, and (2) contributions to a TFSA are not tax-deductible whereas with the FHSA they are.
How to best use the FHSA
If you have already started saving for a down payment using the RRSP HBP or other accounts, do not worry. You will be able to use both the RRSP HBP and the FHSA in conjunction. Since the contribution room within the FHSA is set at $8,000 each year, plus any carry forward amounts you have, it’s best to take advantage of both programs. It’s important to know that if your goals change or you decide to no longer purchase a home, the funds in your FHSA can be transferred to an RRSP.
Inside your FHSA, you will have the option to invest the amount of money you deposit into the account. All contributions will grow on a tax-free basis provided you do not go over your contribution limit.
As with any investment decision, please speak with your Protect Financial Advisor on the best investment selection for your FHSA.
Which account should you use?
The best course of action is to utilize all three of these accounts. Your down payment saving strategy should begin with placing funds in an FHSA first, ensuring you have at least $35,000 in your RRSP so you can access the HBP program, and investing any additional funds in a TFSA (subject to your TFSA contribution limit). If you are currently in a lower income bracket it’s best to still focus on the FHSA first, possibly your TFSA second, and utilizing the HBP/RRSP last. Note that you can transfer money from your RRSP to FHSA tax-free as long as you do not exceed your contribution limits.
Key Point: Even if you don’t plan on making a contribution in 2023, if you plan to buy a home sometime in the future, you should open an account this year. By opening an account, even if you make no contributions in 2023, you will earn the contribution room and your contribution limit for 2024 will be $16,000.
Special message for Parents and Grandparents
As mentioned, the FHSA can only be opened by first-time home buyers. But if you have children 18+ who will be purchasing a home in the future, you can give them $8000 per year for five years to contribute to their FHSA. They will get a tax-deduction that they can use to reduce their 2023 taxes or carry it forward until their income is higher. If they invest the tax savings into their RRSP or TFSA their savings for a down payment will grow even faster!
This new account type is a great way for parents and grandparents to help the next generation save for buying their first home.
We believe that the FHSA is an excellent new tool to help Canadians achieve their dreams of home ownership. But like any saving or investment account, it is best to discuss your specific situation with your PROTECT Financial Advisor before deciding how to proceed. The FHSA is set to launch soon, so please contact us today to discuss your options.