It’s imperative for First-Time Home Buyers to be aware of how a First Home Savings Account (FHSA) can help them save money. Contributing to the FHSA presents a massive tax-saving opportunity for Canadian residents to pay for their first home using tax-free income. To open an account, you must have reached the age of majority in your respective province, be no more than 71 years of age, be a resident of Canada and qualify as a First-Time Home Buyer: meaning that you or your spouse/common law partner did not own a qualifying home that you lived in as your principal residence in the year the account is opened or in any of the four preceding calendar years. The FHSA is targeted towards young audiences, and even those who may not be thinking about owning a home currently will want to consider opening an account because contributions can be made for up to 15 years. Dealing with your personal finances may not be of concern for many young Canadians, but those that are informed and begin saving early will reap significant rewards later in life.
Claiming Contributions for Tax-Benefits
As the account holder of an FHSA, you can decide when to claim contributions you've made to your account as a tax deduction. Amounts contributed to your FHSA that you decide not to claim as a deduction on your income tax return, can be carried forward to a future year.
Example: If you open an account in November of 2023, and contribute the maximum of $8,000 in the same month, you will have $8,000 available to claim as a deduction when filing your 2023 income tax return. You have the option to claim this amount for 2023, or leave it unclaimed for a subsequent year. If you decide to contribute an additional $5,000 to your FHSA in 2024, then the maximum deduction available on your 2024 income tax return will be $13,000 [$8,000 + $5,000]. This allows you to use your FHSA contributions as a tax deduction for a future year, which can be advantageous if you expect to be in a higher tax-bracket in the future. If not, then contributions can be claimed on your income tax return for that year. (Note: Unlike an RRSP, contributions made in the first 60 days of a calendar year cannot be deducted from the previous year’s income).
Transfers from Your RRSP to FHSA
You can make direct transfers from your RRSP account to an FHSA, without having any tax consequences. However, these transfers will not restore your RRSP contribution room, and must be within your contribution limits for the FHSA. The preferred method for benefiting most from the tax advantages of an FHSA is to contribute to the account directly. This way you can make full use of tax-free withdrawals from your FHSA, and tax deferral from your RRSP. Individual situations can vary, and in some scenarios, it may be beneficial to transfer money from your RRSP to your FHSA. Whether you directly contribute or transfer from your RRSP, withdrawals can be made tax-free from the FHSA.
FHSA and Homebuyer’s Plan (HBP)
Before the FHSA was introduced, first-time home buyers could make use of the Homebuyer’s Plan (HBP) to provide tax benefits for a home purchase. Under the HBP, you could make a tax-free withdrawal from your RRSP up to $35,000 for a qualifying home, but unlike the FHSA, this amount had to be paid back into your RRSP within 15 years. Luckily for first-time home buyers, both accounts can be used in conjunction, which means that if you utilized the maximum withdrawal allowed under the HBP from your RRSP, combined with the lifetime maximum contribution room for an FHSA, you could put $75,000 towards a down payment.
Gifting Cash to Family for Contributions
If you find yourself in this scenario, where you are looking for ways to support a family member in purchasing their first home, gifting cash to them for the purpose of contributing to an FHSA is the best method. For the individual who is gifting the money, they will NOT be able to claim the FHSA contribution on behalf of the account holder. This also applies for spouses or common-law partners attempting to participate directly in their partner’s account. While this limits any tax benefits for the person gifting the money, the account holder will benefit from tax-free growth of money in the account used for a home.
Withdrawing the Money
As stated in my initial post on the FHSA, withdrawals are only tax-free if they meet the qualifying conditions. You must have a written agreement to buy or build a home before October 1 of the year after you make the withdrawal, and intentions to live in the home as a principal residence within one year after buying it. The home must be in Canada, and you can choose to make one lump-sum withdrawal or multiple withdrawals taken throughout the course of the year. With this in mind, the account must be closed by the end of the year after your first withdrawal, and if you make a withdrawal without meeting these conditions, then that amount will be included in your taxable income.
When can you open an account?
iA Private Wealth expects to have the account available in Q4 of this year, with more details in the coming months. Anyone interested in taking advantage of the contribution room available for 2023 will need to open an account before the end of the calendar year. With that said, there is no need to stress about opening an account immediately, as contribution room will carry forward to the next calendar year if it remains unused in the current year. If an account is opened in 2023, but remains empty until 2024, then you will have a total of $16,000 [$8,000 + $8,000] in contribution room available for the 2024 calendar year.
To read my previous post on the FHSA, please scroll to the bottom of the page where you will find my recent posts.
Source: Government of Canada, (May 2023). First Home Savings Account (FHSA). https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html
RBC Inspired Investor, (February 2023). FHSA: 9 Questions Answered About the New First Home Savings Account. https://www6.royalbank.com/en/di/hubs/investing-academy/article/fhsa-first-home-savings-account/l41e013p
iA Private Wealth Inc. is a member of the Canadian Investor Protection Funds and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
This information has been prepared by Mike Holyk who is a Senior Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.