With the soaring costs of real estate, we often have clients financially helping family members to get into their first home.
The government has recognized the hardships for first-time homeowners and introduced the first home savings account (FHSA) to help. It is a new registered account that allows eligible Canadian-resident adults to save up to $8,000 per year, to a lifetime maximum of $40,000, on a tax-free basis toward their first home.
Like a registered retirement savings plan (RRSP), contributions are tax-deductible. But, like a tax-free savings account (TFSA), investment income and withdrawals are generally tax-free. Qualified investments include stocks, bonds, mutual funds and GICs. This unique combination of tax benefits makes the FHSA a powerful tool.
Who can open an FHSA?
The holder must be a Canadian resident, age of majority, and a first-time home buyer. While you cannot open an FHSA for your kids, you can gift them money to contribute to a FHSA. In this scenario, the adult child, not the parent, would get the tax deduction.
Participation room
FHSA participation room accumulates at $8,000 per calendar year, beginning the year the account is opened, and the full $8,000 can be contributed right away. Tax-deductible contributions and non-tax-deductible transfers from an RRSP both reduce the FHSA participation room. Note that transfers from a RRIF are not permitted. Participation room is also subject to a lifetime maximum of $40,000.
Generally, excess FHSA contributions are subject to a punitive tax of one per cent per month until corrected. Unused participation room is carried forward to future calendar years, subject to a maximum carry forward of $8,000. Lastly, unlike RRSPs, contributions to FHSAs within the first 60 calendar days of a year cannot be claimed as a deduction on the prior year's tax return.
Qualified withdrawals conditions
• You must qualify as a first-time homebuyer or did not live in a qualifying home as your principal residence in the last four years;
• You must have a written agreement to buy or build with completion date by Oct. 1 of the year following the date of withdrawal;
• You must occupy as your principal residence within one year after buying or building it.
Maximum participation period
FHSAs should be closed by Dec. 31 of the 15th anniversary of the account opening or the year the account holder turns age 71.
FHSA and homebuyer's plan (HBP)
The FHSA may seem like a duplication; however, participation in one doesn't disqualify someone from participating in the other. On a combined basis, a person who qualifies for both could make $75,000 of tax-deductible savings toward a first home, and a couple could make $150,000 in combined savings.
There are some key similarities and differences to understand:
• FHSA withdrawals can be tax-free and do not have to be repaid, HBP withdrawals would be taxable if not repaid on time;
• RRSP deduction room accumulates based on your earned income. FHSA participation room only begins accumulating once the account is open;
• FHSAs have a maximum participation period of 15 years from the time the account is opened. RRSP contributions can grow for more than 15 years, but once withdrawn under the HBP, must be repaid within 15 years.
Before helping a child or grandchild, we feel there could be some planning opportunities with this new account. As always, we encourage reviewing with a trusted investment professional.
Until next time, Invest Well, Live Well.
Written by Eric
The views expressed are those of Eric Davis, senior portfolio manager and senior investment advisor, and Keith Davis, associate investment advisor, TD Wealth Private Investment Advice, as of June 28, 2023, and are subject to change based on market and other conditions. Davis Wealth Management Team is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank. For more information: 250-314-5124 or keith.davis@td.com.
