We are thrilled to embark on a new chapter for our blogs. We have partnered with The Women of Assante, to bring you insightful content from many of the talented women who work at CI Assante Wealth Management. This partnership will enable Untangle Momey to bring you blogs on a wider array of topics, and deeper insights, from a variety of viewpoints. If you are interested in a particular topic, please let us know.
Today, we are featuring a guest blog post written by: Jacqueline Ozdemir, MBA, CFA, Financial Advisor
Assante Capital Management Ltd.
The cost of owning a home in Ontario continues to rise. While the housing market may have slowed down a bit in 2023 due to climbing interest rates, affordability still remains an issue.
Young adults especially are struggling as years of savings are becoming more inadequate towards their first home goals. As well, wages have simply not increased at the same rate as house prices and monthly mortgage costs.
(Where Ontario’s Housing Market is Headed in 2023 -- CBC News, 2023)
To address this, the 2022 Canadian Federal Budget proposed a new Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home. Please note this is entirely different from the RRSP Home Buyers plan.
What is the FHSA?
The FHSA is a new type of account that allows individuals to save money in a tax-efficient manner for their first home purchase.
The FHSA combines some of the best features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) -- If you aren’t super familiar with these types of accounts, don’t worry, I will elaborate below.
Contributions are tax deductible
If you put $1,000 into an FHSA account, you can deduct $1,000 off your tax return for the same year your contribution was made. For example, if you make $50,000 a year and contribute $1,000 to your FHSA – that $1,000 is removed from the $50,000 for the purpose of tax reporting – ultimately saving you some money on taxes you may owe or providing you a larger refund. Not bad right?
Those savings from owing less tax, or getting a refund can then be spent on paying bills, or put towards more savings. What’s really neat is you don’t even have to deduct that $1,000 on your current year tax return – you can save it for a future tax year.
Think of it like a gift card at your favorite store. You can use it later to save on taxes when it may be more advantageous to do so. The timing of deductions is beyond the scope of this article, but know that option is available to you.
FHSA Income is Tax Free
Income earned in an FHSA would not be subject to tax, like a RRSP and TFSA. In other words, if you put money into an FHSA, and invest in stocks, bonds, GICs, ETFs or mutual funds for example, if those investments make money, you don’t pay tax on any of those gains or interest.
Withdrawals are Conditionally Tax Free
Withdrawals for the purpose of buying a first-time home are tax-free, similar to a TFSA where all withdrawals would be tax-free. This means that when you take money out for the purpose of buying a first-time home, you do NOT pay any tax on that withdrawal. If you invest $10,000 in an FHSA and that $10,000 grows to $15,000 – you can take the entire $15,000 out without paying any tax which is pretty great.
Now, this only applies if you are taking money out to buy a first-time home. If you put money into this type of account and find yourself short on cash and need some funds to pay your bills, make a car payment, or anything else other than a first-time home purchase – any withdrawals you make will be taxed and they will be taxed as income.
Using our example above, if you make $50,000 a year and take $1,000 out of your FHSA account for a reason other than buying a first-time home, from CRA’s perspective, it will look like you made $51,000 that year and will pay tax accordingly which could result in a bit more tax owing than normal.
Eligibility
This money is set aside for a qualifying first-time home purchase, so you may be wondering: What is considered a qualifying first home purchase? How can you know if you are eligible to open this account? The eligibility requirements and definition of a first-time home may surprise you….
To be eligible for this account:
You must be a resident of Canada and between the ages of 18 and 70.
Must NOT have lived in a home that you (or a spouse or common law partner) owned either
At any time in the current calendar year before the account is opened, or;
During the preceding 4 calendar years
Therefore, it is possible to have previously owned a primary home, yet still qualify to open a FHSA account.
What is considered a qualifying first-time home? A qualifying home is a home located in Canada and includes:
Single-family homes
Semi-detached homes
Townhouses
Mobile homes
Condominium units
Apartments in duplexes, triplexes, fourplexes, or apartment buildings
A share in a co-operative housing corporation that entitles you to own, and gives you an equity interest in, a housing unit
Contribution Limit
So far you may be thinking, this all sounds great and wondering if you should put aside all the money you have been saving into an FHSA account.
However, similar to an RRSP or TFSA, the FHSA also has a limit on how much you can contribute.
There is an annual contribution limit of $8,000 (subject to any carryforward amounts) and a lifetime limit of $40,000. The full $8,000 limit is available for 2023, the year the FHSA first became available. Contribution room begins to accumulate once an FHSA is opened.
Unused contribution room carries forward but subject to $8,000 annual limit. In other words, if you open an account in 2023 and put in $1,000, then in 2024 you can put in $8,000 (which represents the 2024 contribution room) plus $7,000 which is the room you didn’t use in 2023.
If, however, you open an account in 2023 and put in $1,000 and then don’t contribute again until 2025 – you could only put in $8,000 for 2025 plus another $8,000 for the 2024 room you didn’t use - $16,000 total for the 2025 calendar year. You could not put any more into the account in 2025. You will have to wait until 2026 at which time you could put in $8,000 which is your 2026 room plus the $7,000 of room you didn’t use in 2023.
You can hold more than one FHSA, but total contributions to all FHSAs should not exceed the annual and lifetime FHSA limit.
Holders are responsible for ensuring they do not exceed their contribution limits. Unless there is a very compelling reason to open multiple FHSA accounts, you may be better off just opening one at one institution. This will streamline record keeping and also the withdrawal process.
As well, you only start to accumulate contribution room once the account has been opened. If you open this account in 2025, you will start with $8,000 of contribution room. You will not have accumulated contribution room for 2023 and 2024. This differs from a TFSA where you begin to accumulate contribution room after the age of 18, regardless of whether or not you even opened a TFSA account.
Once the money is in the FHSA, what should you do with it
This is a big question and really comes down to factors like:
Time Horizon -- How long before you need the money to buy a house?
Ability to Tolerate Risk -- Can you afford to lose money on your investment if it doesn’t do well?
As everyone’s situation is different, there is no one size fits all investment strategy for a FHSA. However, keep in mind there is a large variety of things you can invest in once you have money in a FHSA. This includes:
Mutual and segregated funds
Publicly traded securities like stocks
Exchange Traded Funds (ETFs)
Government and corporate bonds
Guaranteed investment certificates (GICs)
Money Market Funds
In other words, you are not just limited to GICs and Money Market Funds in a FHSA.
How To Withdraw Money from a FHSA
If you have opened a FHSA account, put money into the account, and purchased a First Home, you will need to withdraw the funds at some point.
Withdrawals to purchase a first home are non-taxable provided the following:
You have a written agreement to purchase or build a qualifying home
You are still considered to be a first home buyer
You did not acquire the home more than 30 days before making the withdrawal
You are a Canadian Resident
You intend to occupy the home as your primary residence with in at least one year of taking possession of it.
Remember: Once a non-taxable withdrawal is made to purchase a home, the FHSA must be closed within a year of first withdrawal and holder is not eligible to open another FHSA.
What happens if you set up a FHSA account, contribute to it, but never buy a home?
This is a common question and luckily, there are other options for this money if you ultimately do not purchase a home.
From the date of opening, you have 15 years to keep the account open. After this time period you have two options:
Take the money out and pay income tax on all the funds. This has potential to be quite punitive.
You can roll the funds into your RRSP on a tax deferred basis. In other words, the money just goes into your RRSP and will ultimately be used as part of your retirement savings. Tax deferred refers to the fact that the money will move from the FHSA to your RRSP and you won’t pay any taxes at this time.
Other Key Elements
Recall the mention of the Home Buyers Plan. This is an entirely different program that utilizes your RRSP to help with buying a first home purchase. Under the Home Buyers Plan- you can use up to $35,000 of an existing RRSP to buy a first home.
Normally withdrawals from a RRSP are taxable, but under the Home Buyers Plan this withdrawal is not taxable. However, if you take money from your RRSP to buy a home, you do need to pay it back to your RRSP after 15 years. This can be tricky at times because not only do you now have house expenses that you may not have had before, but you also need to start paying back your RRSP at amounts dictated by CRA, or else incur additional taxes.
Under the FHSA program, once you take money out, you are under no obligation to pay it back. Still, the Home Buyers Plan and FHSA can be used together when purchasing a first home and you are not limited to just using one of these programs. However, depending on your financial situation and cashflow you may find that using the FHSA account only is best for you.
How Can You Use the FHSA Account to Help Your Adult Children?
One thing we are seeing more and more is parents helping their children with down payments for a home. Depending on your financial situation the amount you are able to provide will differ, but the FHSA can be used to help enhance this gift.
The money you gift can be placed in a FHSA under your child’s name (provided they are at least 18 or age of majority in their province).
If they earn an income, the contribution they make will provide them some tax relief as mentioned earlier, either immediately or a later date of their choosing.
The money can be invested and no tax is paid on any investment gains.
The funds can be used at a later date to help with the purchase of a first home.
The primary advantages are that using this strategy, your child will have received a tax deduction and not have paid tax on any gains on their investments. This is incredibly beneficial when we compare it to the alternative which may have been you investing the funds under your name, not receiving any tax deduction and having to pay taxes on investment gains.
Conclusion
It has been a while since the Government of Canada has introduced any sort of new investment account. The FHSA combines all the best features of account types that already exist – allowing you and your loved ones to get closer to the goal of home ownership.
Jacqueline Ozdemir is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at (905) 272-2750 or visit www.fergusonfinancialplanning.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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