Canadian homeowners today are facing a unique set of new challenges this year. Whether it is the rising costs of living felt at the pump and the grocery store, or the sharp hikes in interest rates affecting their mortgage payments to name a few. For prospective first-time homebuyers, these challenges can be daunting when coupled with a competitive housing supply exacerbating the situation. In response to this, the Federal Government has announced their plan to help bridge the gap for first-time homebuyers by implementing the First Home Savings Account (FHSA) in April 2023.
What is a First Home Savings Account?
The First Home Savings Account is a registered account that combines the benefits of an RRSP & TFSA. All contributions are tax deductible like an RRSP and can grow and be withdrawn tax-free like a TFSA. Eligible investments are the same as a TFSA or RRSP, allowing investors to hold Mutual Funds, ETFs, Stocks or Bonds. This sounds like the perfect shiny new investment vehicle for prospective savers…. right? If used correctly, it can certainly be a fantastic tool. Here are three rules to live by when opening a FHSA:
Rule #1: Determine Your Own Eligibility
Perhaps the most important consideration is to determine your eligibility for this account. To qualify, one must check the following boxes:
- be at least 18 years old and no older than 72.
- be a Canadian Resident (not just a Canadian Citizen)
- You or your spouse cannot have owned a home that you reside in during the current calendar year, or previous 4 calendar years.
- You can only use the First-Home Savings Account once in your lifetime.
- A FHSA is eligible for 15 years, after which the account is de-registered. However, you can move your assets into your RRSP anytime on a tax-neutral basis without compromising any RRSP contribution room.
Understanding the rules is crucial during the FHSA Application process because there are no guard rails in place to ensure you as an applicant are eligible. In other words, the onus is on you to determine your own eligibility. If the CRA determines your account is ineligible, it will be immediately de-registered and all accrued gains in the account will be fully taxed. A common error is for an investor to open and fund a FHSA because the home they reside in is solely owned in their spouse’s name. The CRA would still deem them ineligible in this case.
Rule #2: Respect your contribution limits
Similar to your eligibility, you are also responsible for ensuring you stay onside with your annual contributions. Like any registered account, there are predetermined limits set on how much you can invest. Investors can contribute up to $8,000 every calendar year and receive a tax deduction that they can use in the current calendar year, or any year going forward. However, investors can only contribute a maximum of $40,000 over the lifetime of the account. For every month an investor over contributes, they will be subject to a 1% tax on the amount.
Rule #3: Adhere to Withdrawal Rules
The final consideration is to ensure you withdraw from the First Home Savings Account properly. To do so, you must show proof of a valid purchase agreement on your home. Importantly, you must also withdraw from your FHSA within 30 days of acquiring your home. If you fail to do so, all tax benefits will be lost, and withdrawals will be fully taxed. The First Home Savings Account is only eligible to be a registered account for 15 years, so investors must either purchase a home within this time frame or move their FHSA assets into their RRSP on a tax neutral basis without affecting RRSP contribution room. The good news is that the FHSA is eligible to be used on the same home purchase with the Home Buyers Plan through your RRSP. The Home Buyer’s Plan allows for a tax-free withdrawal of $35,000 to be repaid interest-free over 15 years.
How to use an FHSA effectively
The FHSA is undoubtedly an exciting new tool for young adults building towards a down payment, or equally for parents looking to kickstart their child’s pathway to future home ownership. By working with our team, we can ensure a smooth process to navigate the rules of the FHSA and ultimately maximize the benefits.