What is an FHSA?
The First Home Savings Account is a brand new way for people to save to buy their first home. Starting April 1st, every Canadian who qualifies will be able to make tax deductible contributions to this account. If you OR someone you know (perhaps your children) looking to buy a home in the next 5-10 years, this is a great opportunity to save for your first home.
FHSA vs. Home Buyers’ Plan
The key difference between the FHSA and a Home Buyers’ Plan withdrawal from an RRSP is that you have to repay Home Buyer’s Plan withdrawals but you don’t recontribute funds to a First Home Savings Account. Knowing how expensive home ownership can be, that is a very attractive feature.
How does it work?
The annual contribution limit is $8,000 per year. The lifetime contribution limit is $40,000.
In the short-term, you can access $35,000 through the Home Buyer’s Plan but it will take 5 years before the full $40,000 FHSA contribution limit can be reached. Furthermore, the government will allow you to utilize both accounts; saving $75,000 in a tax-preferred manner for your downpayment.
You will not be able to carry back First Home Savings Account contributions and deduct them from the previous year’s taxable income. However, you will be able to carry the deduction forward to be claimed in a future year, if you anticipate being in a higher tax bracket in the coming years.
What are the Qualifications?
• Must be over the age 18 and under the age of 71
• Have not owned a home in the previous 4 years.
**This is the same criteria that was applied to the Home Buyer’s Plan.
Helpful Strategies:
1. Open an FHSA to stimulate contribution room. If you are unable to maximize your contribution for the current year, you will be able to catch up on one year’s instalment next year.
2. Prioritize FHSA contributions over RRSP contributions to avoid a lingering obligation to repay. You can also transfer funds from an existing RRSP to an FHSA on a tax-free basis; taking money that you would have withdrawn via the HBP (with the repayment required) and directing it to the FHSA (where repayments are not made). Please note, there will not be a second deduction for those transferred funds.
3. Opening an FHSA can help accumulate additional retirement savings. Unused FHSA funds can be moved to the RRSP without requiring that you have RRSP contribution room. But keep in mind that you won’t be able to participate in the FHSA again.
4. If you are a parent who wants to help your adult child to purchase a home, you can gift funds to the adult child and they can then contribute the funds to a FHSA. Your child will have to deduct the funds from their taxable income; but, if they don’t end up purchasing a home, any withdrawals will be taxable in their hands, not yours.
