This article is based on the stated goals of the Canadian Government as of the time of writing. The First Home Buyer’s Savings Account will not debut until April at the earliest, with some sources telling us that it may not be useable until June. However, we’ve created this article to help people better prepare to use the account.
The rapid rise in the cost of housing has left many families behind.
Numbers from Statistics Canada and the Canadian Real Estate Association show the average national home price is more than seven times the average household income.
That’s a drastic increase from over just ten years ago, when home prices were about five times the average household income.
This increase, combined with the recent rise in interest rates, has made the dream of owning a house much more difficult.
To bring the dream back within reach, the government is stepping in with the creation of the First Home Savings Account (FHSA).
What’s the First Home Savings Account?
In 2022, the federal government proposed the FHSA to help Canadians save towards putting a down payment on their first home. This registered account would allow account holders to invest their money in a tax-sheltered account, increasing their ability to save.
- Contribution caps
- The lifetime of the account
- Purpose of withdrawals
To help you determine if the FHSA is right for you, we’re going to cover the benefits of the account, along with the stipulations around who can use it and how.
The details of the FHSA
A FHSA combines the best parts of a Registered Retirement Savings Plan (RRSP) with the benefits of a Tax-Free Savings Plan (TFSA) to create a powerful investment vehicle for first-time home buyers.
Like RRSP contributions, FHSA contributions are tax-deductible, allowing you to save money on your end-of-year tax bill. But it doesn’t stop there. Like a TFSA, the FHSA shelters any investment income from taxes, so you don’t pay taxes on the gains you make inside the account.
And, when you make a qualifying withdrawal, you still don’t need to pay any tax.
What is a qualifying withdrawal?
To make a qualifying withdrawal, you need to be a first-time home buyer and a resident of Canada. To make the withdrawal, you’ll need to have a written agreement to buy or build a home within Canada before October 1 of the year following the withdrawal.
Finally, you must intend to live in the home you are buying and use it as your principal place of residence within a year of purchasing or building it.
Stipulations on contributions
All the benefits of a FHSA make it a very attractive investment vehicle. But, to reign in unintended uses, the government has placed a variety of stipulations on contributions.
- Can only be open for 15 years, or until you are 71, whichever comes first
- Must be closed a year after a qualifying withdrawal is made
- Allows contributions of $8,000/year up to the $40,000 lifetime limit
- Allows up to $8,000 of unused contribution room to be carried forward year to year
Who is the FHSA available to?
For the most part, the FHSA is available to almost any Canadian who wants to buy their first home. The three main stipulations for the primary account holder are:
- They must be a Canadian resident
- They must be 18 years old or older
- They must be a first-time home buyer
However, that final stipulation isn’t quite what it seems.
What is a first-time home buyer?
For the purposes of this plan, you are considered a first-time home buyer if you haven’t owned a home within the last four calendar years. That means if you’ve been renting for four years, or otherwise been out of the market, you can use the FHSA to save towards getting back into the housing market.
What if you don’t purchase a home with your FHSA?
No matter your intentions, life has a habit of changing your plans, which might mean you don’t want to use your FHSA to purchase a home.
If that’s the case, you have two options:
- You can remove the money – You can simply withdraw the money from your account. However, if you do this, you will pay all the back taxes, including the original income tax and the tax on the accrued interest.
- Move the money into an RRSP or RRIF – This allows you to maintain your savings without paying taxes on them. However, when you withdraw them from the RRSP you will have to pay income tax on the initial investment and on the accrued interest. The good news is the transfers will not impact your RRSP contribution room.
Leveraging the new FHSA
The new FHSA is great news for people looking to get into, or back into, the housing market. By sidestepping taxes, you can increase your investment earnings and get into your own home much faster.
That’s why we recommend that anyone thinking about buying a home (even if you won’t be looking for up to 10 years) open a FHSA when they become available later this year.