Parents who want to help their adult children get into the housing market should start getting to know the new Tax-Free First Home Savings Account.
The FHSA was promised by the federal Liberals in the last election campaign and a 2023 launch was confirmed in the federal budget earlier this month. We await draft legislation to find out exactly how the FHSA will work, but it already has potential to become a go-to savings tool for both home buyers and their parents as well.
“The FHSA is a great deal for people who can afford to do it,” said Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth.
A few key points about the FHSA: Anyone 18 and older can open an account and contribute up to $8,000 a year to a maximum of $40,000. Contributions generate a tax deduction, like money added to a registered retirement savings plan. Withdrawals of contributions and investment gains are tax-free, just like tax-free savings accounts. FHSAs can remain open for 15 years and the money transferred on a tax-free rollover basis to an RRSP or registered retirement income fund if not used to buy a house.
A big question for parents is whether there will be zero tax consequences for a parent, grandparent or someone else who gives someone money for an FHSA contribution. This is already the case with TFSAs, so there’s an encouraging precedent.
Let’s assume parental gifts to be used for an FHSA contribution are treated similarly to TFSAs. In that case, some strategizing will need to be done about when to start gifting money for this account. The seemingly obvious answer is at age 18, so as to begin tax-free compounding as soon as possible.
But if you start an FHSA when a child is 18, you’re basically saying they have to buy a house by age 33. Remember, FHSAs must be closed after 15 years if the money isn’t used to buy a house.
Another consideration in when to start an FHSA is whether an adult child has taxable income that can be used to exploit the tax deduction these accounts offer. “If the child doesn’t have a substantial income, or really any income, then the FHSA is not going to be helpful,” Mr. Golombek said.
An income of at least $20,000 to $25,000 might be a good point to start in giving a young adult money for an FHSA, he said.
Parents may want to use FHSAs even if their adult kids are iffy on home ownership. The reason is that unused FHSA assets can be transferred into an RRSP, regardless of whether the RRSP holder has contribution room. Essentially, parents would be subsidizing an adult child’s retirement, if not a house purchase.
During the last federal election campaign, the Liberals said the FHSA would be available to people under age 40. This limit wasn’t mentioned in the budget, but it may yet resurface in the draft legislation to come.
The reason is that under current rules, FHSAs could be opened by a confirmed long-term renter, or anyone else, and then transferred tax-free to an RRSP after 15 years. In essence, the FHSA could be used for an end run around RRSP contribution limits.
For now, parents who want to help their adult kids buy a home can advise them not to use the federal Home Buyers’ Plan, under which up to $35,000 can be withdrawn from an RRSP tax-free to buy a first home. First off, the HBP can’t be used in conjunction with the FHSA. Second, the withdrawal must be repaid into the RRSP over 15 years. When the money is withdrawn in retirement, it’s taxed as regular income.
“The Home Buyers’ Plan is just an interest-free loan to yourself,” Mr. Golombek said. “The FHSA is better by a million times.”
CIBC Economics issued a report last fall saying parents gave their kids just over $10-billion in down-payment help during the previous year, which was 10 per cent of total down payments in that period. Close to 30 per cent of first-time buyers got this help, which averaged $82,000.
Mr. Golombek’s suggestion for parents who want to help their adult kids save for a home and have more than the maximum $40,000 that can go into an FHSA is to supplement with a TFSA. “We’ve been saying for years that gifting funds for a TFSA is a wonderful way to transfer wealth from one generation to the next.”
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Rob Carrick