Owning a home is a dream for many.
Unfortunately it seems that more and more that dream is moving further away from becoming a reality.
However, in March of this year (2023), the Canadian government introduced a new registered savings plan specifically targeted at helping first-time homebuyers. This initiative is the First Home Savings Account (FHSA) and it comes with a few tax benefits to help you save up for a down payment more quickly.
In this blog post, we'll cover the key details of this program, exploring who is eligible, the tax benefits it offers, contribution limits, transferring from TFSA and RRSP, and how you can withdraw funds for eligible purchases.
Let's get started!
Who is Eligible?
The FHSA is designed to empower first-time homebuyers in Canada.
To be eligible, you must:
Be a Canadian resident
Between the ages of 18 and 71 years old
Be considered a first-time homebuyer*
It's important we define who is considered a first-time homebuyer as it's not as straight forward as it might sound.
Per the CRA website, for the purposes of opening an FHSA you will be considered a first-time home buyer:
"if you did not, at any time in the current calendar year before the account is opened or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that either: you owned or jointly owned OR your spouse or common-law partner (at the time the account is opened) owned or jointly owned)".
We also need to consider your status at the time of withdrawal. The CRA considers you to be a first-time homebuyer for the purposes of a qualifying withdrawal:
"if you did not, at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned."
In simpler terms, you may be considered a first-time homebuyer even if you own a home, so long as you have not lived in the home in the last 5 years. This might be the case if you purchased an investment property that you rent out, or you own a property that you lived in previously but have been renting it out for at least 5 years or more.
Participation Limits, Contribution Limits and Carryovers
There are limits to how much you can contribute to the account, as well as how much unused contribution room can be carried over to future years. As of writing, the annual participation limit is $8,000, with a cumulative lifetime limit of $40,000.
Side note - your account may hold more than $40,000, however only $40,000 can be contributed by you. The money that you contribute can be invested and as a result grow. This is how the total amount in the account may exceed the $40,000 contribution limit.
It's important to note that if you don't contribute the maximum amount in a given year, you can carry over unused contribution room to the next year. For example, if you opened the account this year but did not contribute anything, you can carryover the full $8,000 to the next year and have a contribution limit of $16,000 next year. Note that the maximum you may carryover is $8,000 and you may not exceed $16,000 contribution limit.
Transferring from TFSA and RRSP
Since the FHSA was just introduced earlier this year, it's likely that some of you have already been diligently saving in either a TFSA or RRSP and you might be wondering if you can transfer those funds to the FHSA, and if it even makes sense to do so.
First, let's look at transferring from RRSP to FHSA.
You can transfer without any tax consequences as long as it is a direct transfer and it doesn't exceed your unused FHSA contribution room at the time of the transfer. Because contributions to your RRSP are tax deductible, you will not be able to deduct the contribution to your FHSA as a result of the transfer as this would be considered double dipping. Also important to note that transferring from your RRSP to FHSA will not restore your unused RRSP deduction room.
So why would you want to transfer from your RRSP to FHSA?
One reason would be to avoid having to repay your RRSP if you had planned to use the Home Buyers Plan to withdraw funds from your RRSP to go toward purchasing your home. When you transfer the RRSP funds to your FHSA and then use it to purchase a home, there is no requirement to repay the funds back.
Now, let's look at transferring from TFSA to FHSA.
Unlike with the RRSP transfer, there is no direct way to transfer from TFSA to FHSA. Instead, you first need to withdraw funds from your TFSA and then deposit them into an FHSA account. There are no tax implications to withdraw from your TFSA and the amount you withdraw will be added back to your TFSA contribution room the following year.
In this case, why would you want to transfer from your TFSA to FHSA?
A great reason to transfer from your TFSA to FHSA is the tax benefits in doing so. We will talk about this in more detail in the next section, but when you make a contribution to your FHSA, the contribution amount is tax deductible. This essentially lowers your income for the year and allows you to receive a tax refund at tax filing time. If you don't have enough cash to max out your FHSA, but you do have funds in your TFSA, it may make sense to move funds from your TFSA to your FHSA to get the most out of the tax benefits.
Tax Benefits of FHSA
There are 3 main tax benefits when you use the FHSA.
First, contributions that you make to the FHSA are tax deductible.
As mentioned, this means that you can deduct the contributed amount from your income to see a tax refund. Note that transfers from RRSP will not be tax deductible.
Also worth noting, you do not have to recognize the tax deduction in the same year that you contributed. For example, if you received gifted funds and/or your income is low, it may make sense to defer your tax deduction to a future year when your income (and taxes) is expected to be higher.
The second benefit is that investment income that is generated inside the FHSA is tax sheltered.
This means that you can grow your FHSA through investments, tax free!
And last, when you withdraw the funds for an eligible home purchase, you will not be taxed on the withdrawal.
How to Get Started?
To get started, you will need to open an FHSA account with a bank or other financial institution. Most of the Big 5 Banks now offer an FHSA account, or you can go with a self-directed investment account through a Questrade or Wealthsimple. Which path you choose will depend on how comfortable you are with investing.
You are permitted to have more than one FHSA account however the contribution limits apply on the accounts collectively. For example, you can have an FHSA account with your bank and a second account with Wealthsimple. You may only contribute a maximum of $40,000 combined to both accounts. Having two accounts does not mean you can now contribute $80,000.
Conclusion
The First Home Savings Account is a game-changer for first-time homebuyers in Canada. With its tax benefits, contribution limits, and the ability to transfer from other savings accounts, it provides a strategic and flexible approach to saving for your first home.
As you begin this exciting journey, consider consulting with a mortgage professional to optimize your financial strategy. The FHSA is more than just a savings account; it's a key to unlocking the door to your first home.
Remember, when it comes to down payment assistance and exploring various down payment programs, the FHSA is a valuable resource. Start your homeownership journey on the right foot with the First Home Savings Account.
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