First Home Savings Accounts
NOTE: This article was originally published in the September 2023 edition of the Light Christian Magazine (www.lightmagazine.ca)
At the beginning of the year, my son, Ben, wrote about the new First Home Savings Account (FHSA) that was announced by the Canadian government. At the time, financial firms had not put the required infrastructures in place to offer them, even though this brand-new account type had been introduced by the government and approved as a new tax-free savings vehicle. There are still firms that don’t have them available yet, but just about every week more and more firms are announcing that they are finally providing them as an option.
FHSAs are so incredibly generous that if you know anyone who qualifies as a first-time home buyer (someone who (a) is a Canadian resident between the ages of 18 and 71, and (b) has not owned a home within the current calendar year or the preceding four years), I encourage you to pass this article on to them. Even if you know someone who meets the criteria who is not planning to purchase a house anytime soon, they should seriously consider these vehicles. And they should seriously consider doing so before the end of the year as there can be a notable cost to delaying.
As a reminder, contributions to the FHSA are tax-deductible (like an RRSP) up to a yearly limit of $8,000 and subject to a lifetime limit of $40,000. FHSA investment rules are like RRSP and TFSA rules—mutual funds, publicly-traded stocks, cash, bonds, and ETFs (exchange-traded funds) are all allowed. The huge added benefit of the FHSA is that (unlike an RRSP) your contributions and any growth in the plan can be withdrawn tax free (like a TFSA) to buy or build a qualifying home. In other words, you get the tax break going in, but not the tax cost when you take it out.
If you’re unable to contribute the $8,000 limit in a year, there are some catch up provisions, but they only start kicking in after the account is opened. So it’s in your best interest to open one sooner rather than later. After the account is opened, you may carry forward unused portions of your annual limit, up to a maximum of $8,000. So, for example, if you contributed $4,000 in the first year, your second year’s room will be $8,000 plus the catch up of $4,000 for a total limit of $12,000 that year.
Wait, there’s more! This limit is independent of your RRSP or TFSA room. And, even if you don’t end up using the funds for a home purchase, they can be rolled into your RRSP without affecting your existing contribution room.
Just like an RRSP, you don’t have to claim the tax deduction in the same year the contribution was made. The tax deductions can be carried forward and deducted at any time in the next 15 years. For example, if you have a year in which your earned income puts you in a high marginal tax bracket, you can defer the FHSA contributions to help offset additional taxes.
One of the stipulations of the FHSA is that it may only be open for a period of 15 years or until the holder turns 71, whichever happens first. This may cause someone to wait before opening an FHSA. If you plan to buy a home, but don’t think it will happen in the next 15 years, then it may be wise to delay. However, according to a money.co.uk study (1), the average first time home buyer in Canada is 36, implying that the average age of someone opening an FHSA should be 21 years old. So, except for a few very unusual situations, it's my opinion that every eligible person over the age of 25 should open up an FHSA immediately.
Now let’s look at some tangible numbers. A BC couple in the highest tax bracket who maximizes the plan from day one and earns 4.5% on their contributions for 15 years would save a whopping $75,997 in income tax. Yes, that’s right—almost seventy-six thousand dollars! For those of us not in the highest tax bracket, the tax savings may be a bit lower, but they are still incredible.
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Someone asked me recently, “I don’t think I’ll have enough to buy a house on my own. Could both my son and I take advantage of our own FHSAs and buy a house together?” I’m happy to say that the answer is yes. The most common scenario will likely be spouses pooling their accounts together to use as a down payment to purchase their first home, but it’s not restricted to spouses. It can be family or friends, too.
I really can’t emphasize this enough: by offering the best of RRSP and TFSA tax benefits, the government has provided potential first-time home buyers in Canada with an amazing new option: one that everyone eligible should consider and most should take advantage of.
If you are eligible, call your advisor today and seriously consider opening an account right away. And if you know someone who is eligible, pass this on to them. Why pay the government any more than you need to?
Sources:
Arnold Machel, CFP?, lives and works in White Rock, British Columbia. If you have any questions or comments, please visit our website at visionvest.ca.
Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.?