For young families with tight budgets, the combination of the new first home savings account and the federal child benefit can be a match made in personal finance heaven. But few of them likely realize this.
Available since April, 2023, the FHSA is a registered account that helps Canadians save for a first home by allowing for both tax-deductible contributions – like those made to a registered retirement savings plan (RRSP) – and tax-free withdrawals, as those made with a tax-free savings account (TFSA).
For parents, the magic happens when putting money into an FHSA yields not only tax savings but a boost to the Canada Child Benefit, a tax-free monthly payment from the federal government that helps families defray the cost of raising kids.
“I just don’t think a lot of younger people, who are the ones who are likely using FHSAs, really have the impact to the Canada Child Benefit on their radar,” said Aaron Hector, a certified financial planner and private wealth adviser at CWB Wealth Management in Calgary.
What triggers the benefit increase is claiming the tax deduction for an FHSA contribution. This reduces the account holder’s taxable income, which may result in a tax refund. But a lower household taxable income also boosts the size of a family’s entitlement to the federal child benefit, resulting in larger payments.
For a given contribution, the size of the increase depends on the household’s net income, the number of children and their age. The maximum benefit is currently $648.91 a month for each child up to the age of 5 and $547.50 a month for older kids up to the age of 17. Those amounts are gradually reduced and eventually phased out at higher income levels.
For parents with moderate incomes and several children, the child benefit increase can be substantial, Mr. Hector said.
For example, consider a single-earner family in Alberta with a net household income of $65,000 a year and three children, two of whom are under the age of 6. If this family put $1,000 into the FHSA of the income-earning spouse, they would see their child benefit payments increase by $190 after claiming the tax deduction on their tax return. That would be in addition to $305 in tax savings.
The family could view FHSA contributions as a way to save for a home purchase while also generating some extra cash to help cover expenses, Mr. Hector said.
Another approach is to use any tax refunds and the child benefit boost to beef up the FHSA, he added. By rolling both back into the account, the family in Mr. Hector’s example would be able to nearly double their FHSA balance over five years without further out-of-pocket contributions and without accounting for investment returns.
Now suppose the same family were able to deposit an initial $8,000 – the maximum annual contribution – into the account. If they reinvested tax refunds and child benefit increases for the following four years, they’d accumulate $40,000 in deposits – the FHSA lifetime maximum – by contributing just over $4,000 out of pocket every year.
How a family can use their child benefits
to boost their FHSA savings
SCENARIO ONE
This example is based on a single-earner family of five living in Alberta with a net annual income of $65,000 and three children, two of whom are under the age of six. The family puts an initial $1,000 into the first home savings account that belongs to the income-earning spouse and then uses the resulting tax refund and increase in their Canada Child Benefit payments to add to the account. By repeating this every year for the following four years, the family would nearly double their savings in the FHSA over five years without additional out-of-pocket contributions and without accounting for any investment returns.
FHSA CONTRIBUTIONS
FROM PREVIOUS
YEAR'S TAX
REFUND AND
EXTRA CBB INCOME
OUT OF
TAX
REFUND
(30.5%)
EXTRA
CCB
(19%)
Y
ear 1
$1,000
-
$305
$190
Y
ear 2
-
$495
$150.98
$94.05
Y
ear 3
-
$245.03
$74.73
$46.55
Y
ear 4
-
$121.28
$36.99
$23.04
Y
ear 5
-
$60.04
$18.31
$11.41
T
otal value of deposits after five years
$1,921.36
SCENARIO TWO
In this example, the same family manages to contribute an initial $8,000, the maximum annual deposit, into the FHSA. They roll into the account the resulting tax refund and CCB increases, then contribute an additional $4,040 out of pocket. By repeating this for four years they'd be able to contribute $40,000 - the lifetime maximum - to the account over five years with only $24,160 contributed out of pocket.
FHSA CONTRIBUTIONS
OUT OF
FROM PREVIOUS
YEAR'S TAX
REFUND AND
EXTRA CBB INCOME
EXTRA
CCB
(19%)
TAX
REFUND
(30.5%)
$8,000
-
$2,440
Y
ear 1
$1,520
$4,040
$3,960
$2,440
Y
ear 2
$1,520
$4,040
$3,960
$2,440
Y
ear 3
$1,520
$4,040
$3,960
$2,440
Y
ear 4
$1,520
$4,040
$3,960
$2,440
Y
ear 5
$1,520
$24,160
$15,840
T
t
o
al
$40,000
T
otal value of deposits after five years
THE GLOBE AND MAIL, SOURCE: AARON HECTOR
How a family can use their child benefits
to boost their FHSA savings
SCENARIO ONE
This example is based on a single-earner family of five living in Alberta with a net annual income of $65,000 and three children, two of whom are under the age of six. The family puts an initial $1,000 into the first home savings account that belongs to the income-earning spouse and then uses the resulting tax refund and increase in their Canada Child Benefit payments to add to the account. By repeating this every year for the following four years, the family would nearly double their savings in the FHSA over five years without additional out-of-pocket contributions and without accounting for any investment returns.
FHSA CONTRIBUTIONS
FROM PREVIOUS
YEAR'S TAX
REFUND AND
EXTRA CBB INCOME
OUT OF
TAX
REFUND
(30.5%)
EXTRA
CCB
(19%)
Y
ear 1
$1,000
-
$305
$190
Y
ear 2
-
$495
$150.98
$94.05
Y
ear 3
-
$245.03
$74.73
$46.55
Y
ear 4
-
$121.28
$36.99
$23.04
Y
ear 5
-
$60.04
$18.31
$11.41
T
otal value of deposits after five years
$1,921.36
SCENARIO TWO
In this example, the same family manages to contribute an initial $8,000, the maximum annual deposit, into the FHSA. They roll into the account the resulting tax refund and CCB increases, then contribute an additional $4,040 out of pocket. By repeating this for four years they'd be able to contribute $40,000 - the lifetime maximum - to the account over five years with only $24,160 contributed out of pocket.
FHSA CONTRIBUTIONS
OUT OF
FROM PREVIOUS
YEAR'S TAX
REFUND AND
EXTRA CBB INCOME
EXTRA
CCB
(19%)
TAX
REFUND
(30.5%)
$8,000
-
$2,440
Y
ear 1
$1,520
$4,040
$3,960
$2,440
Y
ear 2
$1,520
$4,040
$3,960
$2,440
Y
ear 3
$1,520
$4,040
$3,960
$2,440
Y
ear 4
$1,520
$4,040
$3,960
$2,440
Y
ear 5
$1,520
$24,160
$15,840
T
t
o
al
$40,000
T
otal value of deposits after five years
THE GLOBE AND MAIL, SOURCE: AARON HECTOR
How a family can use their child benefits to boost their FHSA savings
SCENARIO ONE
This example is based on a single-earner family of five living in Alberta with a net annual income of $65,000 and three children, two of whom are under the age of six. The family puts an initial $1,000 into the first home savings account that belongs to the income-earning spouse and then uses the resulting tax refund and increase in their Canada Child Benefit payments to add to the account. By repeating this every year for the following four years, the family would nearly double their savings in the FHSA over five years without additional out-of-pocket contributions and without accounting for any investment returns.
FHSA CONTRIBUTIONS
FROM PREVIOUS
YEAR'S TAX
REFUND AND
EXTRA CBB INCOME
TAX
REFUND
(30.5%)
EXTRA
CCB
(19%)
OUT OF
Year 1
$1,000
-
$305
$190
Year 2
-
$495
$150.98
$94.05
Year 3
-
$245.03
$74.73
$46.55
Year 4
-
$121.28
$36.99
$23.04
Year 5
-
$60.04
$18.31
$11.41
Total value of deposits after five years
$1,921.36
SCENARIO TWO
In this example, the same family manages to contribute an initial $8,000, the maximum annual deposit, into the FHSA. They roll into the account the resulting tax refund and CCB increases, then contribute an additional $4,040 out of pocket. By repeating this for four years they'd be able to contribute $40,000 - the lifetime maximum - to the account over five years with only $24,160 contributed out of pocket.
FHSA CONTRIBUTIONS
FROM PREVIOUS
YEAR'S TAX
REFUND AND
EXTRA CBB INCOME
EXTRA
CCB
(19%)
TAX
REFUND
(30.5%)
OUT OF
$8,000
-
$2,440
Year 1
$1,520
$4,040
$3,960
$2,440
Year 2
$1,520
$4,040
$3,960
$2,440
Year 3
$1,520
$4,040
$3,960
$2,440
Year 4
$1,520
$4,040
$3,960
$2,440
Year 5
$1,520
$24,160
$15,840
Total
Total value of deposits after five years
$40,000
THE GLOBE AND MAIL, SOURCE: AARON HECTOR
Deductions claimed on contributions to an RRSP have the same effect on the federal child benefit. But for most families eyeing homeownership, putting money into an FHSA should take priority, he added. That’s because drawing from an FHSA to purchase a home is tax-free. First-time homebuyers can also withdraw up to $60,000 from their RRSP through the Home Buyers’ Plan. But they’ll have to put the money back into the account within a required timeframe for the withdrawals to remain tax-free. (Canadians can also use the FHSA and the HBP together, if they meet all eligibility criteria.)
The bottom line with both the FHSA and the RRSP is, it pays to think about about the impact of tax deductions when deciding when to claim a contribution, Mr. Hector said.
Both accounts allow taxpayers to defer deductions. Many financially savvy Canadians know to wait on claiming the tax break if, for example, they’re due for a raise in the next year that will boost their income and yield a larger deduction. But few think about income-tested benefits, Mr. Hector said.
If you expect to become a parent in the new year, or welcome another child into your family, you may want to hold off on that deduction, he said.
