Exploring the New FHSA: A Savings Plan for Your First Home

Written by Jack Lumsden, MBA, CFP®, Financial Advisor, Assante Financial Management Ltd. Additional editing by ChatGPT.

 Are you a Canadian resident dreaming of owning your first home? (unfortunately, with housing prices and mortgage rates today, often it is only a dream)

As of April, last year, a new savings plan has been introduced to help with your homeownership.

Let's delve into the key details of this First Home Savings Account (FHSA) and find out how it can help you on your journey to becoming a homeowner.

1. FHSA Eligibility

To open an FHSA, there are a few eligibility criteria to keep in mind:

• You must be a resident of Canada.
• You should be at least 18 years old, but not older than 72.
• This plan is specifically designed for those purchasing their first home.
• The plan must be used within 15 years of opening it.

2. Contributions

One of the attractive features of the FHSA is the contribution limits. Here's what you need to know:

• You can contribute up to $8,000 per year.
• The lifetime maximum contribution is $40,000.
• If you don't utilize your full $8,000 contribution in a given year, you can carry forward the unused amount to future years.
• It's also worth noting that you can transfer funds from an existing Registered Retirement Savings Plan (RRSP) to an FHSP. However, it's important to remember that you won't receive an additional tax deduction for this transfer.

3. Deductions

Contributions to your FHSA come with a bonus in the form of deductions on your income tax return. Here's what you should know about these deductions:

• The deadline for contribution is December 31 of each year. (unlike the RRSP deadline of 60 days after year end)
• If you contribute to your FHSA but don't need to claim the deduction in the current tax year, you can carry it forward to future years.

4. Income and Gains

Within the FHSA, all income grows tax-free. This means that your savings can grow without the burden of taxation.

5. Withdrawals

The highlight of the FHSA is that qualifying withdrawals for buying a home are tax-free. Unlike the existing Home Buyers Plan, where you can borrow up to $35,000 from your RRSP but need to pay it back over 15 years, the FHSA's withdrawals for purchasing your first home come with no repayment obligations.

Below a detailed FAQ:

1. What is a First Home Savings Account (FHSA)?

A First Home Savings Account (FHSA) is a registered plan allowing prospective first-time home buyers to save money towards the purchase of their first, qualifying home tax-free. FHSA contributions are tax-deductible (similar to RRSPs) and withdrawals for the purpose of buying a first home are tax-free (similar to TFSAs). Canadian residents between the ages of 18 to 71 who do not currently own their home and have not owned their home in the past four calendar years qualify to open an FHSA.

The 2023 Federal Budget included an effective date of April 1, 2023, for FHSA accounts.

2. What is the definition of a “qualifying” home?

A qualifying home is defined as a housing unit located in Canada and includes single family homes, semi-detached homes, townhouses, mobile homes, condominiums, apartments, and shares in a co-operative housing corporation entitling equity interest.

4. What types of investments can be held in an FHSA?

Qualifying investments for FHSAs include mutual funds, publicly traded stocks, government and corporate bonds, ETFs, GICs and cash.

5. What are the FHSA contribution limits, and can contribution room be carried forward?

The FHSA contribution limits are as follows:

• Annual: $8,000
• Lifetime: $40,000

FHSA contribution room starts accumulating after qualifying individuals open their first FHSA account. Unused contribution room can be carried forward up to a maximum of $8,000 and used in following years. Details regarding FHSA contribution room are reported on an FHSA holders’ notice of assessment or reassessment.

Overcontributions are subject to a tax of 1% per month based on the highest excess FHSA amount in that month.

6. Can assets be transferred directly from a RRSP or Spousal RRSP to FHSA?

Funds can be transferred from a RRSP or Spousal RRSP to a FHSA on a tax-free basis as a direct transfer. RRSP contribution room will not be restored and the FHSA transfer will not be tax deductible.

Transfers from a spousal RRSP to a FHSA are not permitted if the contributing spouse contributed amounts to the spousal RRSP in the same year as the transfer or in the two previous calendar years. If no contributions were made by the contributing spouse during this period, the normal RRSP to FHSA transfer rules apply.

Transfers of assets from a Spousal RRSP to a FHSA registered to the spousal contributor are not permitted.

Assets cannot be transferred from a RRIF to FHSA.

7.  What is a qualifying withdrawal and how is it completed?

A qualifying withdrawal is an FHSA withdrawal for the purposes of buying a first home. The entire balance of a FHSA can be withdrawn on a tax-free basis in a single withdrawal or series of withdrawals. To complete a qualifying withdrawal, the FHSA holder must meet the following conditions:

• Canadian resident
• First-time home buyer
• Written agreement to buy or build qualifying home with acquisition or construction completion date before October 1 of the year following the date of withdrawal
• Intend to occupy the qualifying home as a principal place of residence within one year of buying or building
• Complete RC725 (Request to Make a Qualifying Withdrawal from your FHSA) form.

For qualifying withdrawals, a first-time home buyer is defined as someone who does not currently own their home and has not owned their home in the past four calendar years (except 30 days immediately before the withdrawal).

9. Can a FHSA qualifying withdrawal and RRSP home buyers plan withdrawal be completed to purchase the same home?

Yes. A FHSA qualifying withdrawal and RRSP home buyers plan withdrawal can be completed to purchase the same qualifying home. The home buyers plan allows eligible Canadians to withdrawal $35,000 from their RRSP and pay back the funds over 15 years. Unlike the home buyers plan, funds withdrawn from an FHSA do not need to be paid back.

10. What if FHSA assets are not used to purchase a first home?

If FHSA assets are not used to purchase a first home, they can be transferred to the holders RRSP or RRIF as a direct transfer with no impact to RRSP/FHSA contribution room or immediate tax consequences. Any funds transferred to an RRSP or RRIF would be taxed upon withdrawal. Alternatively, the FHSA assets can be withdrawn on a taxable basis.

 11. What is the maximum participation period for an FHSA?

The maximum participation period for FHSA accounts ends on December 31 of the year in which the earliest of the following events occur:

• Year following first qualifying withdrawal
• 15th anniversary of opening first FHSA
• Age 71

FHSA accounts must be closed prior to the end of the maximum participation period to avoid unintended tax consequences.

FAQ Source: Assante Financial

 Summary

In summary, the First Home Savings Account (FHSA) is a good addition to assist Canadians looking to take their first step into homeownership. With tax advantages, contribution flexibility, and the freedom of tax-free withdrawals, this plan is designed to help with the purchase of your first home.

 For more information, refer to Preserving Wealth: The Next Generation - The definitive guide to protecting, investing, and transferring Wealth by Jack Lumsden, MBA, CFP®.

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 Jack Lumsden is a Financial Advisor with Assante Financial Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. Please get in touch with him at 905.332.5503 or visit www.jacklumsden.com to discuss your circumstances before acting on the information above.

 Insurance products are services provided through Assante Estate and Insurance Services Inc.