July, 2024
Alex Wynter
With rising Canadian home prices and declining affordability, the FHSA offers a new way for prospective home buyers to save for their first home.
It is no secret that Canadian home prices have soared since the beginning of 2020 due to several factors. The Aggregate Canadian Home Price Composite Index has increased 35% during the 4-year period prior to April 30th, 2024. Locally in Greater Moncton, the inflation is even more pronounced with the index increasing 96% over the same stretch.
In response to the declining affordability of housing nationwide, the federal government has introduced numerous initiatives. One of the most notable is the relatively new registered savings account designed to help prospective home buyers save for these higher prices: the First Home Savings Account (FHSA). Launched in the spring of 2023, the FHSA is a unique savings vehicle that combines the benefits of RRSPs and TFSAs to provide a tax-advantaged way for Canadians to save for their first home.
Contributions and Withdrawals
The Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are Canada’s most popular registered savings/investment accounts. The FHSA combines the best features from both plans, creating one of Canada’s most generous registered investment accounts. Like an RRSP, contributions to the FHSA are tax-deductible, and contributors are not required to claim the deduction in the same tax year. Additionally, similar to a TFSA, withdrawals made for the purchase of a first home, including all investment growth and income, are non-taxable.
The lifetime maximum contribution room in the FHSA is $40,000, with an annual maximum of $8,000. There is up to $8,000 carryforward available if you do not contribute the maximum amount in the previous year and the account was open. Essentially, the maximum amount that can be contributed in a given year is $16,000. For example, if you open an account in year one and do not contribute, you could contribute $12,000 in years two and three for total contributions of $24,000 over the three years.
It is important to avoid making withdrawals before purchasing a home because they will be fully taxable at your marginal tax rate. But if you do not buy a home in Canada, the FHSA balance can be transferred into an RRSP without affecting your RRSP contribution room or incurring any tax penalties. The FHSA must be closed, either redeemed or transferred out, within 15 years of its inception.
Investment Strategies
Opening an FHSA is similar to that of other registered investment accounts, and it can be done through most banks or brokerages in Canada. While some providers offer limited investment options, the FHSA can hold the same types of investments as a TFSA or RRSP. This includes publicly traded securities such as stocks and ETFs, government and corporate bonds, GIC’s, and mutual funds.
Your investment decisions within the FHSA should be guided by several factors, beginning with when you plan to purchase a home and the estimated cost. If your timeline allows for more risk, and you can tolerate market fluctuations, consider stocks or ETFs for potential higher returns over the long term. For shorter timelines, or a lower risk tolerance, conservative options like bonds or GICs may be preferable to safeguard your capital.
Consulting with a professional can be beneficial in developing a personalized investment strategy that aligns with your timeline, risk tolerance, and financial goals. While the FHSA offers tax advantages for saving towards a first home, remember that withdrawals for other purposes are taxable. It may be prudent to maintain accessible savings in a high interest bank account or TFSA for unforeseen expenses.
Gifting Strategies
For parents who are thinking about using the FHSA to help their children with the purchase of their first home, there are a few things to consider. The account can only be opened in the name of the future first time homebuyer, who must be at least 18 years of age. To fund the account, deposits must only come from the subscriber’s bank account. So, for parents (or grandparents) who want to fund their child’s FHSA, they must first give the money to the child, who will then invest in a FHSA. It is important to remember that once the gift is made, the donor no longer has control over the gifted amount. Also, If the child is still in school or is currently earning a low wage, it may be advantageous to defer the income deduction to later years when their income is higher.
Author:
Alex Wynter is a Private Wealth Associate with Louisbourg Investments. Comments or questions may be submitted to Alex at alex.wynter@louisbourg.net.
This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.
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