Tax free first home savings account - the best of both worlds?
I have discussed RRSPs and TFSAs previously, and outlined the pros and cons of each here, but in an effort to combat the growing difficulty in entering the home owner’s market, the government has introduced a new account type that just may combine the best of both accounts. Scheduled to become available in 2023, the Tax Free First Home Savings Account may not roll off the tongue well, but is poised to be an exciting addition to the TFSA for young (and some not-so-young!) investors looking to build up a down payment for their first home.
Who Qualifies?
Like most tax-advantaged accounts, this one has some conditions to be able to access it. The first are pretty straightforward - you must be a Canadian resident who is at least 18 years of age (these are the same requirements to open a TFSA account). However, since this account is designed to help potential home buyers break into the market for the first time, there is an extra condition that you must qualify as a first-time home buyer.
Who qualifies as a first-time home buyer? While that seems like it would be a simple answer, it wouldn’t be a government definition without getting a little more complicated! A first-time home buyer is someone who has not owned a home in which they lived at any time during the calendar year the account is opened, or at any time during the preceding four calendar years.
Why the best of both worlds?
The FHSA combines elements of TFSA accounts, RRSPs and even some elements of RESPs. Like the TFSA, contributions are not tied to your income - you can contribute $8,000 per year to a lifetime limit of $40,000. If you contribute less than $8,000 in a year, you can carry forward the unused portion to the next year (so if you contribute $5,000 in 2023 you can contribute up to $11,000 in 2024 - to a maximum of one full years contributions being able to be carried forward, like an RESP).
You can also deduct your contributions from your income, like an RRSP. Also like an RRSP, you do not have to deduct your contribution in the year you actually contribute, so if you have a lower income this year than you expect to in future years you can carry forward the deduction. In addition, if you become non-resident after opening a FHSA, you can maintain it and even continue to contribute to it, similar to an RRSP, however you cannot make a qualified withdrawal if you are non-resident.
Like any tax-sheltered account, all the growth within the account is tax-free, however where this account differs from both a TFSA and an RRSP is that there are two types of withdrawals that can be made from the account.
Qualifying Withdrawals
A qualifying withdrawal occurs when the account holder has a written agreement to buy or build a qualifying home before October 1st of the year after the withdrawal is made, with the intent to occupy the home as their principal residence within one year of building or buying the home. They must also still qualify as a first time home buyer. If these conditions are met - the entire withdrawal is tax free (like a TFSA).
Non-Qualifying Withdrawals
If the conditions above are not met, the withdrawal is considered non-qualifying and would be taxable as income in the year of the withdrawal, with the financial institution being required to withhold tax on the withdrawal (like an RRSP).
What if I don’t buy a house?
The FHSA must be closed by December 31st in the year in which the individual turns 71 years old, or reaches the 15th year of the first FHSA account being opened. If all goes well, you will have contributed, deducted the contributions from your income, enjoyed some tax-free growth and now you have a written agreement to buy a home and you withdraw the funds on a tax free basis to pay your down payments. But if you decide not to purchase a home after all, or you don’t need all of the funds, there is still another option - you can roll your FHSA into your RRSP account on a tax deferred basis, without impacting your RRSP contribution room. While your RRSP withdrawal will be taxable, so would taking the funds out of the FHSA so there is no negative impact to this, and in fact you gain additional years of tax deferred savings with this rollover - and in effect you increase your RRSP contribution room by the $40,000 maximum FHSA contribution.
Isn’t there a Home Buyers Plan already?
Yes, first time home buyers can absolutely withdraw from their RRSP for the Home Buyers plan and not have their withdrawal be taxable as income. Because the funds were contributed to an RRSP, the income deduction was also available - so why bother with this plan?
Well there are a few reasons for this:
The FHSA contribution room does not impact your RRSP contribution room, so you can effectively gain 40K in total contribution room and potential income deductions
The Home Buyers Plan requires the withdrawal to be paid back over a 15 year period. If a required repayment is missed in any given year, that amount is added to your income for tax purposes. The withdrawal from the FHSA does not need to be paid back.
The Home Buyers Plan has a maximum withdrawal of $60,000. The FHSA has a maximum contribution of $40,000, and any additional growth would also be eligible for withdrawal (or transfer to an RRSP if not needed).
You can use both the FHSA and HBP for a purchase, and if you and a spouse are purchasing a property together (and both qualify) you can each use your withdrawals on your portion of the purchase.
Will this help first time home buyers get into the market? As the account hasn’t even rolled out yet, it’s definitely too soon to tell, there are still questions that will remain regarding these accounts (will the IRS recognize this as a registered account like the RRSP, or not like the TFSA? Will it be possible to open another FHSA if you re-qualify as a first time home buyer within the 15 year period?) however, anytime the government gives you the ability to invest in a tax advantaged manner, it’s always worth considering!
If you are a young adult just starting investing, it’s likely you would qualify as a first time home buyer, and this account could work nicely into your plans along with your TFSA savings. If you want to know how to make the most of your savings dollars, please reach out here.
Information relating to the Tax Free First Home Savings Account is pulled from Department of Finance bulletin and accurate as of September 30th, 2022, but details are subject to change. Check with your Financial Advisor about the rules in effect when you choose to open an account.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta, Ontario, and PEI. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations.