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The new Tax-Free First Home Savings Account (FHSA) fills a gap between registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) because it offers the benefits of both of those investment vehicles – a tax deduction and tax-free withdrawals. That, in turn, should result in more accessible cash for first-time homebuyers.
The FHSA is the investment vehicle proposed in the federal government’s 2022 budget as part of the housing plan meant to help more Canadians get into the housing market.
“Where [the FHSA] distinguishes itself is that contributions are tax-deductible and withdrawals from the plan, including any investment growth on your contributions, are tax-free, provided they’re being used to fund the purchase of your first home,” says Sean Hsu, senior tax specialist, tax and estate planning, at Richardson Wealth Ltd. in Toronto.
Plus, unlike the Home Buyers Plan (HBP), which allows Canadians who meet the necessary requirements to withdraw money from their RRSPs to buy a home, the money doesn’t have to be paid back into the plan.
While the FHSA is open to any Canadian over the age 18, Mr. Hsu says it would cater more to younger investors who have a longer timeline before buying.
“They can take advantage of the lifetime deposit limit of $40,000 and potential investment growth,” he says.
Wilmot George, vice president, tax retirement and estate planning, at CI Investments Inc. in Toronto, says the plan also gives prospective home buyers more cash flow for the intended purpose.
As younger investors are usually at the beginning of their savings journey, that gives them more time to maximize their deposits.
But Mr. George says clients should consider if they can accumulate sufficient assets in the plan to be able to truly benefit from that tax-free growth.
Pros and cons of using the FHSA vs HBP
Contributions to the FHSA are set at $8,000 a year up to a lifetime contribution of $40,000.
Mr. Hsu says that it forces Canadians to save over five years and they “only really get the maximum benefit later.” As the FHSA is expected to be introduced in 2023, that means anyone looking to maximize the $40,000-lifetime limit would have to wait until 2027.
A shorter home buying plan of five years or less may be why clients might want to stick to their original strategy of using the HBP, he says.
People can also transfer that money – $8,000 annually, up to $40,000 over five years – from an RRSP to an FHSA without having to pay taxes on the withdrawal. Grace Budiono, wealth advisor and client relationship manager at Nicola Wealth Management Ltd. in Vancouver, says that’s good for clients who already have an RRSP in place.
“If a client already has an RRSP and they have the ability to save $8,000 a year, I would say it might make sense to go the FHSA route first because if you don’t maximize it, you lose that room and you’ll never hit the $40,000,” she says.
If there’s any cash left over, that can be put toward either an RRSP or TFSA depending on the client’s income and if they need the deduction, she says.
Ms. Budiono adds that clients could also transfer some money from the RRSP to the FHSA and contribute the rest out of pocket to reach the annual maximum. That way, the client would already have the RRSP tax deduction from the original amount and would get the FHSA tax deduction from the remaining contribution.
For those who don’t own a home, opening an FHSA could still make sense even if the money isn’t used toward buying a home, Mr. Hsu says. After 15 years, the investment can be transferred into an existing RRSP, without using any RRSP contribution room, or into a registered retirement income fund. Therefore, a person who didn’t use an FHSA for its intended purpose can build up additional funds for retirement.
More details are expected
The announcement has also raised questions, such as the number of FHSAs an individual can open; what happens if one partner has the title to an existing property – would the other partner still qualify for the FHSA; and the potential tax implications of moving money between RRSPs and FHSAs such as double-dipping.
A Department of Finance Canada official said via e-mail that while people would be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis as the RRSP contribution already benefited from the tax savings, any money transferred “would not give rise to an additional FHSA deduction.”
Ms. Budiono says it’s early days for the plan, and the answers to questions like these are pieces of the legislation that are not yet available.
“It is basically just a commentary that we received from the budget, so there are all these little intricacies that need to be ironed out,” she says.
Furthermore, while many welcome the new plan as a planning tool, it still doesn’t address housing affordability or housing prices in the country.
“What it is intended to do is provide Canadians with more flexible access to cash that they can use to contribute towards a down payment,” Mr. George says.
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