What is the First Tax-Free Housing Savings Account?

FHSA won’t make housing more affordable, but it’s a great account for savers

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The federal government has announced a tax-free First Home Savings Account (FHSA) to help more Canadians enter the housing market.

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It would be an exaggeration to say that this account will make housing more affordable, but there is no denying the tax benefits it provides.

How FHSA Works

Since the FHSA has not yet been implemented, details are subject to change. That said, the government has already outlined how the account works.

  • Will be available in 2023
  • Must be 18 to open an account
  • Must be a Canadian resident
  • You must not have owned a home in the previous four calendar years when you open your FHSA
  • Annual contribution limit of $8,000
  • Lifetime contribution limit of $40,000
  • Unused contributions each year are not carried forward
  • Accounts must be closed after 15 years

At first glance, the features and benefits of the account are excellent. However, this assumes that you have the funds available to fulfill it. Few people will have an extra $8,000 to put aside for the purchase of a home.

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FHSA tax benefits

FHSA contributions are tax deductible. So if you were to contribute $2,000 a year, your taxable income would decrease by the same amount. This is similar to how contributions to a Registered Retirement Savings Plan (RRSP) work. All withdrawals, which include investment gains, are tax-free. This is similar to your Tax-Free Savings Account (TFSA), but withdrawals can only be used to purchase a home.

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From a tax point of view, this account is useful since you benefit from a tax advantage on contributions and withdrawals.

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Reducing your taxable income is never a bad idea, but if you’re in a low tax bracket, the tax savings are minimal.

Gains or profits made from your FHSA dues are also tax-exempt, but may have limited use. That’s because most people who save for a down payment see it as a short-term goal. As a general rule, if you’re saving for the short term, you’ll only want to invest in low-risk products, such as a high-interest savings account, guaranteed investment certificates, and bonds. These products have limited growth potential.

You can take a chance and invest in riskier products such as individual stocks, but it might not be worth it. Your investments could increase by 20% by the time you’re ready to buy a home. However, your stocks also have a 20% chance of falling. Most people saving for a down payment don’t want to risk their funds, so tax-free capital gains will have minimal impact.

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The FHSA is better than the Home Buyers Plan

What makes the FHSA announcement surprising is that a similar program already existed in the Home Buyers’ Plan (HBP). In case you are unfamiliar, the HBP works like this:

  • First-time home buyers can withdraw up to $35,000 from their RRSP
  • Withdrawals are tax-free, but must be repaid over 15 years
  • Any missed repayments are considered income and RRSP contribution room is permanently lost.

The HBP is quite a popular program because it allows people to withdraw funds from their RRSP when they are ready to buy a house. The refund policy is fair since you only have to refund 1/15 of what you used from the second year you withdrew the funds.

So, if you withdraw $15,000 from your RRSP under the HBP in 2021, you will need to start repaying $1,000 per year starting in 2023. While this amount is reasonable, it has been reported that more than 40% of users have not made a refund.

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With FHSA, refunds are not an issue since you do not need to repay any withdrawals made. If your goal is to buy a home, FHSA is probably the best account to park your down payment.

That said, the HBP is still useful since many people will naturally start saving for their retirement as soon as they can. If you have the funds available in your RRSP and want to buy a house, then using the HBP is not a bad idea.

You can have an RRSP and an FHSA set up at the same time. You can also transfer funds from your RRSP to FHSA, but you are still bound by FHSA contribution limits. You also would not get the deduction for contribution income since you had already received it when you made the initial RRSP contribution.

Keep in mind that you can only use RAP or FHSA, not both, when buying a home. When you’re ready to buy a home, you can decide which option is right for you.

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One thing to note. Once you open an FHSA, you have 15 years to use it. If you haven’t used it by then, you can transfer it to your RRSP or Registered Retirement Income Fund (RRIF). It doesn’t matter how much RRSP contribution room you have, because FHSA transfers aren’t taken into account.

Who benefits the most?

The FHSA can be beneficial for all savers, since it is another account that gives you tax relief.

However, those who can afford to maximize their savings accounts will benefit the most, so high-income earners are likely to benefit the most from FHSA. They could max out their RRSP, TFSA, and FHSA, then use the HBP when they’re ready to buy.

Of course, they will have to repay the funds, but they will probably have no problem doing so. They could then transfer the unused FHSA to their RRSP without having to worry about contribution limits. The FHSA would have essentially given them an additional tax break of $40,000. Capital gains realized to date would also be transferred tax-free.

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Those who rent but plan to buy in retirement could also use the FHSA to their advantage. You can transfer up to $40,000 from your RRSP to your FHSA, then withdraw the funds when you need them. The withdrawal would not be considered income and therefore would not affect retirement benefits such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS). In addition, there is no need to repay the funds.

The new account won’t make housing more affordable and therefore probably won’t help more people get into the market, but it is an additional tool that people have access to that can help them reduce their overall tax burden.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.



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