First home savings account brand-new tool in tax arsenal

Aspiring homebuyers looking for a way to start saving for their first home this tax season might want to take a look at a new tool implemented by the federal government last year.

Implemented in last year’s federal budget was the tax-free first home savings account (FHSA), which allows first-time homebuyers to save up to $40,000 with rules similar to registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA).

Starting this year, Canadians at least 18 years of age who have not owned a home in the previous four calendar years can contribute up to $8,000 a year to a FHSA. There is, however, an exemption for eligible people to make a withdrawal within 30 days of moving into their new home.

While high interest rates — including the Bank of Canada raising its prime interest rate to 4.5 per cent on Jan. 25 — might be a deterrence for some people to buy homes, Westoba Credit Union senior financial planner and insurance adviser Ellen Murray says FHSAs provide an opportunity for future homebuyers.

“This really gives people who want to defer [their purchase] until rates come down a bit for mortgages the opportunity to save some money tax-free,” she said.

If someone doesn’t contribute their yearly maximum amount to their FHSA, it will also carry over to the next year like with RRSPs and TFSAs.

On the federal government’s website, it states that someone who contributes just $5,000 to their FHSA in 2023 would be allowed to contribute $8,000 in 2024, plus the $3,000 in room carried over from the previous year for a contribution maximum of up to $11,000.

There are some caveats, however. Canadians cannot open an FHSA if they are 71 or older or after the 15th anniversary of opening their first FHSA.

“The objective is not to keep that money tax-free forever,” Murray said. “It’s really geared towards a shorter time period.”

After those milestones are reached, a person’s FHSA ceases to be and the money can be transferred tax-free into an RRSP or a registered retirement income fund (RRIF).

When a person is ready to withdraw funds from their FHSA, they have to meet certain conditions in order for that withdrawal to be non-taxable. If someone is trying to figure out if they should invest in an FHSA, TFSA or RRSP, Murray recommends they speak with a financial consultant to figure out which option is best for them.

But if you’re not looking to buy a home in the next 15 years, it might be more valuable to pick an option other than an FHSA.

“If they are younger and relatively low-income and their income is liable to increase, I generally recommend tax-free saving contributions because people with low incomes don’t pay much tax,” she said. “Down the road, when your income is higher, you get a better tax return by taking that money out of your TFSA and depositing it into your RRSP at that time.”

They must have a written agreement to buy or build a home in Canada before Oct. 1 of the following calendar year and must occupy that home within one year of buying or building it.

A share in a co-operative housing corporation that allows a homebuyer to possess and have an equity interest in a home qualifies, but being in a situation where a share in a co-op only provides a right to tenancy but not ownership does not.

Like with RRSP contributions, those putting money into an FHSA can deduct the amount being deposited from their taxable income.

If a non-qualifying contribution is made, it would count toward the individual’s taxable income.

Unlike with RRSPs, where spouses can make contributions to their partner’s accounts and still receive a reduction in their taxable income, only the account holder for an FHSA receives any taxable benefits.

For that reason, Murray recommends that both spouses contribute to their own plans if they want to see a difference on their taxes.

A pre-existing program, the Home Buyers’ Plan, allows Canadians to withdraw up to $35,000 from an RRSP to put toward purchasing a home under certain conditions.

While the federal government’s website states that a homebuyer cannot use both the HBP and the FHSA at the same time, a column published by the Winnipeg Free Press on Jan. 18 states that the final legislation did not include that provision.

A commonality between TFSAs and FHSAs is the penalty for making a contribution greater than an individual’s annual limit. A one per cent tax on all funds over the contribution limit is charged for both types of accounts.

Should someone desire, they’d also be able to transfer funds from an FHSA to another FHSA, an RRSP or a RRIF without affected an RRSP’s annual contribution limit.

» cslark@brandonsun.com

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