Canadians could soon get some assistance when it comes to buying a home when the federal government’s Tax-Free First Home Savings Account (FHSA) launches on April 1.
The program was announced in the 2022 federal budget and is aimed at helping first-time homebuyers jump into Canada’s pricey housing market.
Here’s what you need to know about the savings vehicle that’s set to launch on Saturday.
WHAT’S A FHSA?
The FHSA is a mix between a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), but it’s specifically geared towards saving for a house.
Contributions to an account would be tax-deductible and withdrawals to buy a home would be non-taxable.
In order to qualify for an account, an individual must be a Canadian resident between the ages of 18 to 71 and a first-time homebuyer. In some provinces where the legal age to enter a contract is 19, residents will have to wait until that age to open an account.
If you end up becoming a non-resident of Canada after you’ve already opened a FHSA, you can participate normally in contributions; however, you cannot make a withdrawal to buy or build a home while you’re not a Canadian resident.
There will be an $8,000 annual contribution limit, but unused portions of a yearly contribution can be carried forward into the next year. The lifetime FHSA limit is $40,000.
The account can remain open until the 15th anniversary of opening it, until the person turns 71, or the year following a person’s first qualifying withdrawal of their FHSA, whichever comes first.
INVESTMENTS AND WITHDRAWALS
Canadians can have the same kind of investments as a TFSA, in their First Home Savings Account. This means you can hold assets such as publicly traded securities, mutual funds and bonds.
However, when it comes time to withdrawing funds from the FHSA, there are a few requirements that must be met.
The property the funds are being used to purchase has to be in Canada, the taxpayer has to intend on living in that house as their principal residence and they need to have a written agreement to buy or build a qualifying home before Oct. 1 of the year following the withdrawal.
It’s worth noting that anyone who has funds in both a FHSA and the Home Buyers’ Plan wouldn’t be permitted to make withdrawals from both accounts for the same home purchase.
If you end up transferring more than your FHSA contribution room for that year, you will generally have to pay a one per cent tax per month on the highest excess amount in that month.
The federal government’s website said Canadians can remove excess FHSA amounts by: “Making a withdrawal of a designated amount from your FHSAs (designated withdrawal), or making a direct transfer of a designated amount from your FHSAs to your RRSPs or RRIFs (designated transfer), or making a taxable withdrawal from your FHSA, or any amounts deemed to be included in income if the account loses its status as an FHSA.”
While we are in the middle of tax season, Canadians should take note that contributions to your FHSA during the first 60 days of the year are not deductible on the previous year’s income tax return.
The federal government’s website added that “You also cannot claim a tax deduction for any FHSA contributions that you make after your first qualifying withdrawal.”
While contributions to a FHSA are usually deductible, if Canadians are planning to transfer from their RRSP to the housing account, it will not be deductible.
ENOUGH FOR A DOWN PAYMENT?
Tim Cestnick, co-founder and CEO of Our Family Office, said the FHSA was a great idea from the federal government, but he doesn’t know how much it will help the average Canadian buying a home.
“Forty-thousand dollars is not going to be enough to really act as a down payment in most cases,” Cestnick said in a phone interview last August.
“Most of the time you’re going to need to put down 10 per cent and there’s not too many homes that you can buy for $400,000 in Canada right now, it’s certainly in the major cities like Toronto and Vancouver, where it’s going to be tough to save enough for a full down payment.”
However, Cestnick said all first-time homebuyers should think of setting up an account, regardless if they end up using it.
“I think it’s a no brainer for first-time homebuyers to set up the account because it doesn’t hurt you in any way,” Cestnick said.
“You can pull money out tax-free if you buy a home, if you don’t, that money goes into your RRSP and those are both good options.”
-Hilary Punchard, BNN Bloomberg