We will have yet another financial acronym to add to the mix soon. The Tax-free First Home Savings Account (FHSA) coming this July is designed to help Canadians under 40 save for their first home.
Skyrocketing home prices over the past few years have raised concerns over affordability for home ownership. Homes that would have been traditionally considered starter homes are no longer in affordable territory for many. These hefty increases in property values have first time home buyers worried about how they can possibly afford home ownership.
Ask any financial advisor helping their young clients save for a down-payment, any real estate agent searching for affordable homes for their first-time buyers, or any parent wondering how their young adult will afford to purchase a house, and they will agree the struggle is real.
The last federal budget brought about a promise to implement a new First Home Savings Account (FHSA) to be launched in July 2022 to allow qualified first-time home buyers under the age of 40 to contribute up to $40,000 saving toward their first home within this new registered savings vehicle.
The amount of $40,000 was selected for the FHSA maximum as it represents 5% of the average home price in Canada of $736,000.
Contributions to the FHSA are tax deductible when they are saved, similar to a Registered Retirement Savings Plan (RRSP). When you deposit into the FHSA you receive a tax break in the year of saving. In other words, the income tax deduction makes it tax-free on the way in.
However, unlike an RRSP which is taxed on redemption of the funds in retirement, the growth and withdrawals from the FHSA are tax-free, when used to purchase a qualified home. This tax-free withdrawal is similar to a Tax-Free Savings Account (TFSA). In other words, it becomes tax-free on the way out having generated tax-free growth along the way.
Unlike the current first-time home buyers plan where first-time home buyers can take an RRSP loan toward a home purchase and repay the funds over a 15-year period, the FHSA funds withdrawn to purchase the home do not need to be repaid. Funds may be withdrawn from the FHSA with no requirement to repay it.
This may all sound good so far with great tax-free benefits, but there are rules for a potential first-time home buyer to consider before making their final decision to invest in an FHSA. The timeline parameters imposed on the FHSA will make it important for young savers to make sure they understand these rules prior to starting an FHSA. They will need to look at their own timeline and determine whether using an FHSA will suit their needs for saving and withdrawals.
Time parameters include:
- At least 50% of the funds withdrawn from the FHSA need to be invested for at least four years before redeeming them.
- No funds may be withdrawn within a year of being contributed.
In addition to evaluating the timeline, first time home buyers considering using the FHSA will also want to consider their income tax bracket to estimate the potential tax savings in the contribution years as well as other withdrawal variables.
Our understanding at this point in time is the FHSA contributions go against an individual’s RRSP contribution limits so you will need the RRSP contribution room to be eligible to participate.
There has been some question around whether an individual could transfer funds already saved in their RRSP to an FHSA when it becomes available and the answer at this point is unclear. This is only one question among many that will arise as we wait for further information to be rolled out.
One thing is for sure, there will be many Canadians keeping their eyes on the Registered Home Savings Plan as details are revealed in the coming months to determine if it will be a viable tool for them to reach their down payment savings goals and help make their home ownership dreams a reality.
Column appeared in This Month in Elgin magazine March 2022 issue.
Stephanie Farrow, BA., Certified Financial Planner, Stephanie has over 29 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010. Stephanie and her husband own Farrow Financial Services Inc. About our Farrow Financial Team.