The FHSA, or Tax-Free First Home Savings Account, is a new type of tax-preferred account that the Canadian government introduced in Budget 2022 to partially address the issue of housing affordability in Canada.
Available starting in 2023, the FHSA allows Canadians 18 and older who qualify as “first-time home buyers” to save $40,000 on a tax-free basis towards the down payment on a home. However, we’d argue that even if home-buying is not clearly in your future, you should consider an FHSA as long as you’re eligible.
First Home Savings Account fast facts
To qualify for the account, you must be a first-time home buyer. You are considered a first-time home buyer if, at the time you open the account, you and your spouse or common-law partner have not owned a principal residence in the year or in the four preceding years.
You may contribute up to $8,000 a year to a maximum of $40,0000. If you are buying a home with a spouse or common-law partner, you may each open a separate FHSA.
Contributions are deductible against current year income AND the contributions, and any investment returns, are tax-free upon withdrawal.
Unlike a TFSA, where your contribution room accumulates with each passing year that you are over 18, FHSA contribution room only accumulates once you open the account. If you miss a year of contribution, you may carry it forward, but the maximum carryforward amount is $8,000. Meaning, if you opened the account in 2023 but did not contribute that year nor in 2024 or 2025, in 2026 you would only be able to contribute a maximum of $16,000 — $8,000 carryforward and $8,000 for the 2026 contribution.
In contrast to RRSP contributions where contributions made in the first 60 days of a year can be carried back to deduct against the prior year income, contributions to an FHSA must be made in the calendar to be deductible against that year’s income.
Although named a “savings account”, an FHSA is actually an investment account and it can hold mutual funds, stocks, bonds and other publicly traded securities, similar to those allowable in a TFSA or RRSP.
You may take advantage of both the FHSA and the Home Buyer’s Plan of an RRSP, that allows you wo borrow, tax-free, $35,000 from your RRSP and use the funds to buy or build yourself a home and re-pau the amount to the RRSP account within 15 years. The funds withdrawn from the FHSA do not have to be repaid.
Tax planning opportunities of the FHSA
- Even if you are not certain about entering the housing market or are one of the fortunate beneficiaries of a large inheritance and will likely not need to save for a house down payment, an FHSA can still be an effective wealth-building tool. You can benefit from the tax deductions of contributing to the account and if you don’t end up needing the funds to purchase a home, you can transfer the funds to your RRSP without penalty. The transfer can be done on a tax-free basis and without using up or requiring RRSP contribution room thereby leveraging different savings tools and approaching wealth building in a comprehensive way.
- If grandparents and parents desire to gift in life, one option would be to help fund an FHSA account for their children or grandchildren. This can generate tax savings for both generations: by reducing non-registered assets held by the senior family member, it reduces the investment income subject to income tax in their hands; and it generates a tax deduction for the junior family member when making the contribution to the account. This tax refund can then be used to compound the impact of the gift by contributing it back to the FHSA to further add to the down-payment.
- The FHSA can allow each generation to have some skin in the game: prospective buyers directly and their families through gifts to facilitate further contributions to the account.
- Taking a multi-generational approach to wealth management by focusing on wrapping tax and financial planning around investment advice can potentially have a more significant financial and emotional impact for your family.
As chartered accountants turned investment advisors, we can help you look beyond the surface information and uncover wealth building opportunities that are beyond market returns.
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If you have questions about wealth management strategies, you can reach me at Joelle.Hall@RichardsonWealth.com
This article is supplied by Joelle Hall of Hall O’Brien Wealth Counsel, Wealth Advisor, Portfolio Manager, and Investment Advisor with Richardson Wealth.
Hall O’Brien Wealth Counsel specialize in tax-efficient portfolios and planning. We speak your language, so you feel confident in the plan we implement together.
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