What to know about the proposed First Home Savings Account

Experts suggest home buyers plan out a savings strategy before deciding upon a program be it an RRSP, TFSA, HBP or the new FHSA (Getty Images/The Good Brigade)

Canadians looking to buy a home can tap into a new way save, while receiving a tax break, with the new First Home Savings Account (FHSA). Slated for introduction in 2023—which means parameters are subject to change dependent on legislation—here’s what to know so far.

THE BASICS

FHSAs will be available to Canadians residents, who are 18 years old or older and have not owned a home in the year the account is opened or the preceding four calendar years.

The annual tax-deductible contribution limit is $8,000 up to a lifetime contribution maximum of $40,000. Unused contribution room—unlike other savings vehicles such as the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plans (RRSP)—does not carry forward and the plan must be closed after 15 years.

Funds withdrawn to make a qualifying home purchase are not subject to tax. Any funds not used towards a home purchase can be transferred to an RRSP or Registered Retirement Income Fund (RRIF), penalty free and tax deferred, without impacting the taxpayer’s contribution room. Withdrawals for other purposes will be taxable.

• Resource: Just the facts: Helping you talk about money
• Publication: A Canadian’s guide to money-smart living

On the flip side, funds currently held in an RRSP can be moved into a FHSA but will be subject to the FHSA contribution limits. Although the taxpayer will not be eligible for an additional tax deduction, a transfer will allow for a tax-free withdrawal. This, notes Bruce Ball, FCPA, vice-president of taxation at CPA Canada, could provide for a lot of flexibility.

“You can transfer funds from an RRSP to a FHSA and vice versa, so there’s a lot of flexibility,” he says. “For example, if you’ve got $8,000 for next year’s contribution and RRSP room you may not otherwise use, you could put it in an RRSP now if you have contribution room to get a tax deduction and transfer it tax-free when the FHSA becomes available assuming the FHSA rules are enacted as announced.”

THE BENEFITS

The main advantages of the FHSA are tax related for both contributions and withdrawals, says Ball, with features parallel to RRSPs and TFSAs.

Like RRSPs, contributions are tax deductible, meaning that if you contributed $8,000 a year, your taxable income would decrease by the same amount. And, like the TFSA, withdrawals, including any capital gains or income earned, are also tax free, if they are used towards the purchase of a qualifying home.

At this point, some may be wondering what the difference is between the FHSA and the existing Home Buyer’s Plan (HBP).

• Survey: Home ownership feels out of reach for many
• Feature: Buying a home with a good friend? Read this first

While the HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP tax free, the total amount must be paid back within 15 years, starting the second year after the year when you first withdrew funds from your RRSP(s). Missed HBP payments are counted as income with RRSP contribution room lost permanently. Also, amounts repaid to an RRSP will eventually be subject to tax as funds are withdrawn from the plan. So, a FHSA provides more of a tax advantage since contributions are deductible and withdrawals are not taxed if conditions are met.

Notably, the HBP and FHSA cannot both be used at the same time, so it’s important to establish which account would work best for you, says CPA Stan Swartz, principal at Infomoney Solutions Inc.

“You need to be extremely careful when utilizing these programs whether it be an RRSP combined with a HBP, TFSA or now FHSA,” says Swartz. “That’s where planning comes in, analyzing which plan is better for you.”

“For example,” adds Ball, “if you’re planning to buy a home in 2023, you may only be able to contribute $8,000 to a FHSA while a withdrawal of up to $35,000 can be made under the HBP. So, cash flow is a consideration.”

THE ADDITIONAL DETAILS

Certain details specific to the FHSA should be weighed by prospective home buyers when deciding what savings vehicle works best for them and more review will be needed later when the final rules are announced.

Once an individual has made a non-taxable withdrawal to purchase a home, they would be required to close their FHSAs within a year from the first withdrawal and would not be eligible to open another FHSA.

Finally, multiple FHSA accounts can be opened by one person individually, but the combined contributions to each plan in total cannot exceed the annual ($8,000) or lifetime contributions ($40,000) limits. This means the contribution limits are per person, not per account.

“There’s a lot of thought that should go into utilizing this program,” says Swartz. “Much will depend on the changes we see to its rules and the regulations between now and when it is implemented by the federal government.”