May 6, 2022
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The federal government announced a Tax-Free First Home Savings Account (FHSA) to help more Canadians get into the housing market.
It would be a stretch to say this account will make housing more affordable, but there’s no denying the tax benefits that it offers.
How the FHSA works
Since the FHSA hasn’t been implemented yet, the details are subject to change. That said, the government has already outlined how the account works.
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- Will be available in 2023
- Must be 18 years old to open an account
- Must be a Canadian resident
- You must not have owned a home in the preceding four calendar years when opening your FHSA
- $8,000 yearly contribution limit
- Lifetime contribution limit of $40,000
- Unused contributions each year do not carry over
- Accounts must be closed after 15 years
At face value, the account features and benefits are excellent. However, this assumes you have the funds available to fill it. Not many people will have an extra $8,000 to set aside for a home purchase.
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The tax benefits of the FHSA
Contributions to the FHSA are tax-deductible. So if you were to contribute $2,000 one year, your taxable income would decrease by the same amount. This is similar to how Registered Retirement Savings Plan (RRSP) contributions work. Any withdrawals, which include investment gains, are tax-free. This is similar to your Tax-Free Savings Account (TFSA), but withdrawals can only be used for purchasing a home.
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From a tax standpoint, this account is useful since you get a tax break on contributions and withdrawals.
Reducing your taxable income is never a bad idea, but if you’re in a low tax bracket, the tax savings are minimal.
Gains or profits made from your FHSA contributions are also tax free, but could have limited use. That’s because most people who are saving for a down payment consider it a short-term goal. Generally, if you’re saving for the short-term, you’ll only want to invest in lower-risk products, such as a high interest savings account, guaranteed investment certificates, and bonds. These products have limited growth potential.
You could take a chance and invest in riskier products such as individual stocks, but it may not be worth it. Your investments could possibly go up 20% by the time you’re ready to buy a home. However, your stocks also have a chance of falling 20%. Most people saving for a down payment don’t want to risk their funds, so the tax-free capital gains will have a minimal impact.
The FHSA is better than the Home Buyers’ Plan
What makes the FHSA announcement surprising is that there was already a similar program in the Home Buyers’ Plan (HBP). In case you’re not familiar, the HBP works like this:
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- First-time homebuyers can withdraw up to $35,000 from their RRSP
- Withdrawals are tax-free, but need to be repaid over 15 years
- Any missed repayments count as income and the RRSP contribution room is lost permanently
The HBP is a pretty popular program as it allows people to withdraw funds from their RRSP when they’re ready to buy a home. The repayment policy is fair since you only need to pay back 1/15 of what you used starting the second year when you withdrew the funds.
So, if you withdrew $15,000 from your RRSP as part of the HBP in 2021, you’d have to start repaying $1,000 a year starting in 2023. Even though this amount is reasonable, there have been reports that more than 40% of HBP users failed to make repayments.
With the FHSA, repayments aren’t a concern since you don’t need to repay any withdrawals made. If your goal is to buy a home, then the FHSA is likely the best account for parking your down payment.
That said, the HBP is still useful since many people will naturally start saving for their retirement as soon as they can. If you have the funds available in your RRSP, and you want to buy a home, then using the HBP is not a bad idea.
You can have both an RRSP and FHSA set up at the same time. You can also transfer funds from your RRSP to FHSA, but you’re still bound by the FHSA contribution limits. You also wouldn’t get the contribution income deduction since you already received it when you made the initial RRSP contribution.
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Keep in mind that you can only use the HBP or the FHSA, not both when buying a home. When you’re ready to buy a home, you can decide which option benefits you more.
One thing to note. Once you open an FHSA, you have 15 years to use it. If you haven’t used it by that time, you can transfer it to your RRSP or Registered Retirement Income Fund (RRIF). The RRSP contribution room you have available doesn’t matter as FHSA transfers don’t count toward it.
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Who benefits the most?
The FHSA can be beneficial to all savers, since it’s another account that gives you a tax break.
However, those who can afford to max out their savings accounts will benefit the most, so high income earners would likely see the most benefit from the FHSA. They could max out their RRSP, TFSA, and FHSA, and then use the HBP when they’re ready to buy.
Sure, they’ll need to repay the funds, but presumably, they wouldn’t have any problems doing so. They could then transfer the unused FHSA to their RRSP without having to worry about contribution limits. The FHSA would have essentially given them an additional $40,000 tax break. The capital gains made to date would also be transferred tax-free.
Those who are renting, but plan on buying when they retire, could also use the FHSA to their advantage. You could shift up to $40,000 from your RRSP to your FHSA and then withdraw the funds when you need them. The withdrawal wouldn’t count as income, so it wouldn’t affect retirement benefits such as Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). Plus, there’s no need to pay the funds back.
The new account won’t make housing more affordable, and therefore it likely won't help more people enter the market, but it’s one extra tool that people have access to that can help them reduce their overall tax burden.
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Barry Choi is a Toronto-based personal finance and travel expert who makes frequent media appearances. When he's not educating people on how to be smarter with money, he's earning and burning miles and points for luxury travel.
