FHSA : All you need to know

Between the boxes, the cleaning and the painting, you hope that this moving season will be your last, because you will soon become a homeowner?

With property prices hitting new highs since the beginning of the pandemic in 2020 and interest rates on the rise, that dream may seem difficult, if not impossible, to achieve. In order to help more Canadians get into the housing market, the federal government introduced, in its most recent budget, the upcoming release of a new tax tool: the FHSA.

Many more details are still to be clarified, but this saving accounts already holds the promise of multiple tax benefits, so much that those who wish to become homeowners in the coming years might feel tempted to review their saving plans.

In this blog post, learn everything we know about the FHSA so far.

What is the FHSA?
The RRSP and TFSA’s baby!

To better understand what this new savings account is, let’s see what each letter forming the acronym “FHSA” stands for: First Home Saving Account.

As you will have understood, this registered account will be set up to allow individuals to save money for the purchase of their first house, first condo, etc. It will hold several types of assets, including stocks, bonds, cash, exchange-traded funds, and more.

As of January 1, 2023, any major eligible Canadian resident will have the possibility to open a FHSA and deposit up to $8000 annually, until they reach the maximum amount allowed of $40 000, for a period of up to 15 years, after which the funds will have to be used for the purchase of a property, withdrawn or transferred (we will come back to this).

The FHSA will combine the benefits of the RRSP and the TFSA:

1. As with the RRSP, the contributions you make will be tax-deductible.

You will therefore be able to claim tax deductions when you complete your annual tax return, which will reduce your amount to be paid in tax annually.

2. As with the TFSA, the investment gains and the withdrawal (for the purchase of a first property) will be tax-free.

This means that if you contribute to your FHSA and invest that amount in stocks, and then those stocks go up in value, capital gains will not be subject to taxes. In addition, when you withdraw your savings and the interest generated from your FHSA to buy your first home, you will not have to pay taxes on this amount either.

Another interesting fact: RRSP holders will be able to transfer money from their RRSP to their FHSA without paying taxes on this withdrawal!

In addition, as with the TFSA, unused contribution room can be carried forward, but under certain conditions: only the previous year’s contribution room can be carried forward to the current year, and only once the account is opened.

So if you open your TFSA in 2023 and contribute $6,000, the $2,000 in unused contribution room will be added to your $8,000 contribution for 2024!

Who is the FHSA for?

To be eligible to open a FHSA, you will have to be a Canadian resident, be 18 to 71 years old and not have owned a home in the previous four years.

So yes, as you can now understand, the FHSA will not be for first-time home buyers only! People who have already been homeowners will also be able to qualify provided they have not lived in a property that belongs to them during the year of the account’s opening and during the four preceding calendar years.

Even people who do not wish to buy a property will be able to benefit from it… Let us explain!

Not buying property with your FHSA?
An investment tool to consider!

As mentioned, if you use the money in your FHSA to buy a property, you won’t pay taxes on that withdrawal. On the other hand, if you use money from your FHSA for purposes other than buying a house, the Canada Revenue Agency will tax this amount…unless you make a transfer to your RRSP (or your RRIF)! In other words, if the money saved up in your FHSA (interests included) does not ultimately serve you to become a homeowner, it can be redirected to your retirement plan without penalty.

In addition, a transfer from your FHSA to your RRSP (or your RRIF) will not reduce your contribution room to the latter! Note, however, that if you make a transfer from your FHSA to your RRSP (or your RRIF), this will not release additional contribution room to your FHSA for the current year.

In conclusion, even if you don’t want to become a homeowner, you could take advantage of the FHSA by using it as an investment vehicle, since the returns are tax-free. Once the life of the account (15 years) has been reached, all you will have to do is close it and transfer the funds to your RRSP (or RRIF).

HBP or FHSA?
That is the question!

If you’re thinking of buying a property, you’ve probably heard of the HBP or Home Buyers’ Plan. According to the HBP, one can borrow up to $35 000 from their own RRSP – and do so tax-free – to buy their first home. They must then repay the amount they withdrew within 15 years.

With the FHSA, it’s up to $40 000 (the maximum amount allowed in the account) plus the returns generated that you can withdraw to buy your first home. And you won’t have to bail out the account later. Interesting, right?

What is even more interesting is that you will have the possibility to combine the HBP and the TFSA to make your first real estate purchase. Which means you can save up to $75,000 for your down payment through these two programs.

Good to know!
With the FHSA, unlike the HBP, your money will not have to spend 90 days in your account before it can be used to purchase a home. In fact, there will be no minimum holding period for FHSA contributions to be deductible and eligible for withdrawal.

Combining FHSAs

If you want to buy your first home with someone else, it will be possible to combine the amount in your TFSA with someone else’s TFSA for your down payment.

What saving strategy should you adopt?

With the arrival of this new player in the world of registered accounts, you might be wondering if you should review your current savings plan. If you want to become an owner in the next few years, this is very likely!

In order to establish the best strategy, we recommend that you make an appointment with your financial adviser so that he can analyze your personal situation and issue appropriate recommendations.

And if you do not have a financial advisor, do not hesitate to contact us, we will be happy to help you!