The FHSA and reasons why younger Canadians should really opt in to opening this account with any intention to buy their first home over time …
The New Tax-Free First Home Savings Account (FHSA) Facts:
- Think of the FHSA as a hybrid of the Registered Retirement Savings Plan (RRSP) / Home Buyers’ Plan and Tax-Free Savings Account (TFSA): FHSA contributions are tax-deductible like the RRSP and qualifying withdrawals out of the account are not taxed just like the TFSA.
- To be eligible to open and contribute to your FHSA you must be:
- A Canadian resident + 18 years or older + *a first-time home buyer. (Meaning, existing homeowners AND folks that owned a home in the *last four preceding years of trying to open the FHSA won’t qualify to open this account).
*An individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home (or what would be a qualifying home if located in Canada) that either (i) they owned or (ii) their spouse or common-law partner owned (if they have a spouse or common-law partner at the time the account is opened).
- The FHSA can hold stocks and bonds and ETFs just like the TFSA and RRSP.
FHSA Contributions and Tax Deductions:
- Individuals would be able to claim an income tax deduction for FHSA contributions made in a particular taxation year; contributions currently capped at $8,000 per year up to a $40,000 lifetime contribution limit. So, a solid 5-years of striving to max-out the account for tax-free withdrawals.
- Like the TFSA, your unused FHSA contribution room can be carried forward to the following year but only up to a maximum of $8,000.
FHSA Holding Period and Withdrawals:
The account can stay open for 15 years OR until the end of the year you turn 71 (not very likely???) OR until the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.
FHSA worst-case? What if you open an account and you don’t purchase a home??
Any savings not used to purchase a qualifying home could be transferred to an RRSP or RRIF (Registered Retirement Income Fund) on a non-taxable transfer basis, subject to applicable rules. Of course, funds transferred to an RRSP or RRIF will be taxed upon withdrawal.
All that and more, is highlighted in this comparison graphic below via @AaronHectorCFP and more details from Cut The Crap Investing with even more Q&A.
My FHSA Thesis
Overall, pretty great stuff with the FHSA and a major opportunity for younger investors who are really trying to find ways to sock away more money for their very first home.
Ideally, from a taxpayer and much more practical perspective, I wish our government would have done one or two very simple things:
- Increase annual TFSA contribution limits so that no boutique FHSA is required, and/or
- Alter the RRSP Home Buyers’ Plan such that if younger folks really, really wanted to borrow money from their future-self, they could, by increasing that borrowing limit slightly and also without any HBP payback responsibilities in the 15-year period.
Two very simple changes that don’t complicate our tax system and the support other saving and behavioural approaches. Meh, tax simplicity is not going to happen in my lifetime…
Mark Seed is a passionate DIY investor who lives in Ottawa. He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on March 4, 2023 and is republished on the Hub with his permission.