Experts suggest homebuyers plan a savings strategy before deciding on a plan, whether it’s an RRSP, TFSA, RAP or the new FHSA (Getty Images /The Good Brigade)
Canadians looking to buy a home can take advantage of a new way to save, while benefiting from tax relief, thanks to the new First Home Savings Account (FHSA). The introduction is due in 2023 – which means the parameters are subject to change depending on legislation – here’s what you need to know so far.
FHSAs will be available to Canadian residents age 18 or older who have not owned a home in the year the account was opened or the previous four calendar years.
The tax-deductible annual contribution limit is $8,000 up to a lifetime contribution maximum of $40,000. Unused contribution room – unlike other savings vehicles such as the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plans (RRSPs)— does not carry over and the plan must be closed after 15 years.
Funds withdrawn to make a qualifying home purchase are not subject to tax. Funds not used for the purchase of a home can be transferred to an RRSP or Registered Retirement Income Fund (RRIF), without penalty and with tax deferral, without impact on the taxpayer’s contribution rights. Withdrawals for other purposes will be taxable.
On the other hand, funds currently held in an RRSP can be transferred to an FHSA, but will be subject to FHSA contribution limits. Although the taxpayer is not eligible for an additional tax deduction, a transfer will allow for a tax-free withdrawal. That, notes Bruce Ball, FCPA, vice president of tax at CPA Canada, could provide a lot of flexibility.
“You can transfer funds from an RRSP to an FHSA and vice versa, so there’s a lot of flexibility,” he says. “For example, if you have $8,000 for next year’s contribution and RRSP contribution room that you couldn’t otherwise use, you can put it into an RRSP now if you have contribution room to get a tax deduction and transfer it tax-free when FHSA becomes available assuming FHSA rules are enacted as announced.
The primary benefits of the FHSA are tax-related for contributions and withdrawals, Ball says, with features paralleling RRSPs and TFSAs.
As with RRSPs, contributions are tax deductible, which means that if you contribute $8,000 per year, your taxable income will decrease by the same amount. And, like the TFSA, withdrawals, including capital gains or earned income, are also tax-free if used to purchase a qualifying home.
At this point, some may be wondering what the difference is between the FHSA and the current Home Buyers’ Plan (HBP).
While the HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP tax-free, the full amount must be repaid within 15 years, from the second year following the year you first withdrew funds from your RRSP(s). Missed HBP payments are counted as income and RRSP contribution room is permanently lost. In addition, amounts refunded to an RRSP will eventually be subject to tax as the funds are withdrawn from the plan. Thus, an FHSA offers more tax advantages since contributions are deductible and withdrawals are not taxed if the conditions are met.
Notably, the HBP and FHSA can’t be used at the same time, so it’s important to establish which account would be best for you, says CPA Stan Swartz, principal at Infomoney Solutions Inc.
“You have to be extremely careful when using these programs, whether it’s an RRSP combined with a HBP, a TFSA, or now an FHSA,” says Swartz. “This is where planning comes in, analyzing which plan is best for you.”
“For example,” adds Ball, “if you plan to buy a home in 2023, you may only be able to contribute $8,000 to an FHSA, while a withdrawal of up to $35,000 can be made in the PCR framework. So cash flow is a consideration.
Some FHSA-specific details should be weighed by potential homebuyers when deciding which savings vehicle is right for them, and further consideration will be needed later when the final rules are announced.
Once an individual made a tax-free withdrawal to purchase a home, they would be required to close their FHSA within one year of the first withdrawal and would not be eligible to open another FHSA.
Finally, multiple FHSA accounts can be opened by one person individually, but the combined contributions to each plan in total cannot exceed the annual ($8,000) or lifetime ($40,000) limits. This means that contribution limits are per person, not per account.
“There’s a lot of thought to be done before using this program,” says Swartz. “A lot will depend on what changes we see to its rules and regulations between now and the federal government’s implementation.”