To start, let me simply state that if you are Canadian and you have a goal to buy your first home, you should use an FHSA as the best way to save for your down payment. Also, if you are a parent with a goal of contributing to your child’s first house down payment, then helping them with an FHSA contribution is a great idea too.
Now that I
have your attention, let’s first dive into the details and facts surrounding
the First Home Savings Account. Then, we’ll talk about some strategies and
recommendations to squeeze maximum advantage from this program.
What is
the FHSA?
The FHSA is
a new tax advantaged registered account meant to help Canadians save for and
purchase their first home. Like an RRSP or a TFSA, the FHSA is something you must
register for by opening a specific FHSA account and then deposit savings into
that account. The key advantage of an
FHSA is that it provides direct tax savings in three ways:
First, when
you put money into a FHSA, you can claim a deduction on your taxes just like
you can with RRSP contributions. For
example, let’s say you earn $70,000 per year and you contribute $8,000 to your
FHSA that year ($8,000 also happens to be the maximum FHSA contribution allowed
each year, see more on this below). You
will then be able to deduct $8,000 from your gross income resulting in a
reduction of income tax payable. In
Alberta, for example, where the gross marginal tax rate (in 2025) for those
that earn between $60,000 and $114,750 is 30.5%, you would generate tax savings
of $8,000 times 30.5% or $2440.
Second,
while the funds are in the FHSA, they accumulate tax free just like an RRSP or
TFSA. You do not have to claim any
investment income while your money grows inside the FHSA.
Third, when
you withdraw funds from the FHSA to buy your first home, the withdrawal is tax
free and you do not have to claim income from the withdrawal. This works just like a TFSA. The cool thing about an FHSA, and why you
want one, is that it combines the best features of both RRSPs and TFSAs
resulting in bona fide tax savings that can stretch your hard earned savings.
Who Can
Qualify for an FHSA?
In short,
individuals or couples that have not already purchased a house qualify for the
FHSA. Just to be clear, even if one
member of the couple has purchased a home before the couple cannot use the FHSA. There are some finer points to the rules to
be aware of:
•
You
must be between the ages of 18 and 71
•
You
must be a current tax resident of Canada
•
You
have not lived in a home that you or your partner owned in the current calendar
year or any of the previous 4 calendar years
Who much
can you contribute to an FHSA?
You can
contribute up to $8,000 per year to a maximum of $40,000 lifetime. The $8,000 contribution room starts in the
year you first open your FHSA and each $8,000 in any given year can carry over
for exactly one year. The one year carry over is an important restriction, so
let’s fully understand it. Say, for
example, you open your FHSA and contribute $3,000 to it that same year leaving
you with $5,000 of contribution room left for that year. Next year, you will have $13,000 in available
contribution room ($8,000 plus $5,000 carryover). If, however, you do not contribute in that
next year, you will lose the $5,000 of contribution carryover.
Note also
that the FHSA is for individuals, so if you are a couple each of you can
contribute $8,000 per year allowing you to double up on the FHSA to a
total contribution of $80,000.
What can
you do with your FHSA savings while it is in the account?
Once the
funds are in the FHSA account, you have lots of freedom to invest the
money. You can hold it in cash accounts,
purchase Guaranteed Investment Certificates (GICs), you can buy stocks (or
equities), bonds, Exchange Traded Funds (ETFs) or Mutual Funds. However, it is also important to consider the
time horizon you have planned for your house purchase. The shorter the horizon, the more important
it is to preserve your capital or initial savings. More about this below.
When can
the FHSA funds be used?
FHSA funds
can be used anytime you make your qualifying (see below) home purchase. Note
that FHSA funds must be used within fifteen years of first opening your FHSA
account. However, if you do not use your
FHSA funds to buy a home you can still:
a) Withdraw the funds.
Sadly, you will have to add the FHSA amount withdrawn to your income for
the year, generating more income tax payable.
b) Transfer the funds to an RRSP.
This is a great option and doesn’t even affect your RRSP contribution
room for the year.
What is
a qualifying home?
A
qualifying home is defined as a housing unit located in Canada, whether
existing or being constructed. The
criteria is broad and includes detached and semi-detached homes; townhouses;
mobile homes; condominium units; and apartments in duplexes, triplexes,
fourplexes and apartment units. You can
even include a share in a co-op housing corporation. There are also more complicated rules for
multiple housing units and mixed residential/commercial units that is beyond
the scope of this article.
For
withdrawals, if you have a written agreement to buy or build a qualifying home
by October 1 of the following year, and you live or plan to in that home as your
primary residence within a year of buying or building it, you can make a
tax-free qualified withdrawal from their FHSA.
You must
still be a first-time home buyer, but the rules are different when withdrawing
from the account than when opening it! For
the withdrawals, a first-time home buyer is someone who has not owned or
jointly owned their primary residence in the current year, except for the 30
days immediately before the withdrawal, or any of the previous four years.
Also, when
you make a qualifying withdrawal, it doesn’t matter whether you live in a home
that your spouse or common-law partner owns or jointly owns when you make the
withdrawal.
Tips and Strategies
Carefully
Consider the timing of opening your first FHSA
The moment
you open an FHSA, your contribution room starts but remember that you can only
carry forward one year’s worth of contributions. If you like the idea of an
FHSA but are not yet able to contribute to it for several years it may
be better to hold off on opening an FHSA.
Understand
Your Home Purchase Timeline and Invest Accordingly
Unless your
time horizon to purchase your first home
is beyond ten years, it makes sense to invest your FHSA conservatively
and in things like GICs, money market
funds, or high interest savings
accounts. These low-risk and low
volatility investment will most likely ensure
that your savings will be preserved when
you are ready to pull the trigger on
a home purchase.
Not
convinced? Have a look at this article from JP Morgan
where they show the range of outcomes by investing in the stock market for 1
yr, 5 yr, 10 yr, and 20 year period. Note that even a 10-year equity
investment is capable of, historically, generating a minus 4% return.
Give
your partner money to contribute
Remember
that an FHSA is an individual program
and there is nothing stopping you from contributing to your partner’s plan. They will claim the contribution on their taxes, but even if they have little
or no income for the claim, they can defer their claim of contributions to a
later date.
Use an
FHSA to buy into your partner’s home
If you open
an FHSA and then later you start living in a home owned by your spouse or
common-law partner, you still qualify as a first-time home buyer for purposes
of making an FHSA withdrawal if you intend to live in that home within a year
of acquisition. This rule is
specifically helpful if you want to use FHSA funds to buy part of your partner’s
home.
Watch
out for the 30-day exception.
This allows
a homeowner to move into a qualifying home and then make the qualifying
withdrawal. Thirty days can zoom by when
you are buying a home and have lots of stuff going on. If you miss the 30 day window, you won’t be
able to make a qualifying withdrawal for that home at all.
Conclusion
As stated
in the opening paragraph, if you are
Canadian and you have a goal to buy your first home, you should use an FHSA as
the best way to save for your down payment.
Comments
Post a Comment