Many Canadians are looking to buy a first home. Just make sure it’s in a good location. Ask Ray Minter, of San Jose, Calif., what can happen if your home is in a bad spot. His residence has been hit 23 times by cars as they exit a highway next to his home. “Four times they’ve gone as far as the kitchen,” he said. In fairness, Mr. Minter’s home was there before the highway.
Assuming you can find a good home in a good location, the next challenge is coming up with the down payment. The new Tax-Free First Home Savings Account (FHSA) will be available in 2023 to help with this.
Last week I shared some ideas for using FHSAs. Today, I want to finish the conversation and share 10 ideas related to withdrawals, investments in an FHSA, and some nuances to think about.
1. Buy a home within the deadlines. Your FHSA will cease to be a FHSA on the 15th anniversary of opening the plan, or at the end of the year in which you reach age 71. So, be sure to buy a home before these deadlines.
2. Time your withdrawals carefully. To make withdrawals, you have to sign a written agreement to buy or build the home before Oct. 1 of the calendar year after the year you make your first withdrawal. Oh, and by the way, you cannot have acquired the home more than 30 days prior to your first withdrawal. Also, the amount in your FHSA can be withdrawn all at once, or in separate withdrawals over time. Finally, your FHSA will have to be closed by the end of the calendar year following the year of your first withdrawal, and you won’t be able to set up another FHSA when finished with your first one.
3. Watch your status upon withdrawal. You’ll have to be a first-time homebuyer when you open your FHSA, and also at the time you make your withdrawals. A first-time homebuyer is someone who has not owned a home at any time in the year the FHSA is opened, or in the preceding four calendar years. Also, it has to be your intention to live in the home as your principal residence, and the home must be in Canada.
4. Transfer assets to your RRSP. If you don’t buy a home within the 15-year or age-71 deadlines, or you otherwise decide you won’t be buying a home, you can transfer your FHSA assets to your registered retirement savings plan or registered retirement income fund on a tax-free basis. This won’t use up RRSP contribution room, and you’ll still have the Home Buyers’ Plan available if you want to use your RRSP assets to help buy a home.
5. Choose qualified investments. Your FHSA can hold the same types of investments allowed in your tax-free savings account or RRSP, which includes publicly traded securities, mutual funds and more. The rules that prevent TFSAs and RRSPs from holding private company shares in some cases, and other non-qualified investments, also apply to FHSAs.
6. Watch your asset allocation. If you don’t expect to buy a home in the next five years, consider investing the funds in your FHSA in equities for more growth potential. As you get closer to buying a home, you’d be wise to dial back the risk by, for example, investing a higher proportion in fixed income or money market investments.
7. Meet the eligibility requirements. I mentioned that you’ll have to be a first-time homebuyer to open an FHSA, but you’ll also need to be a resident of Canada, and at least 18 years of age.
8. Contribute by Dec. 31 each year. You’ll be granted $8,000 of contribution room each year once you open your FHSA, to a lifetime maximum of $40,000. You can deduct your allowable contributions in the year you contribute or any future year. Unlike RRSPs, contributions made in the first 60 days of a calendar year can’t be deducted on the prior calendar year’s tax return, so be sure to make your contributions by Dec. 31 each year.
9. There is no spousal FHSA. Sorry, but unlike RRSPs there is no spousal FHSA available. But as I mentioned last week, you can give your spouse (or kids) money to contribute to his or her own FHSA if they qualify for one. Then your spouse (or kids) can claim the deduction.
10. Name your spouse a successor holder. Similar to TFSAs, you can name your spouse or common-law partner as a successor holder of your FHSA, which will allow your spouse to own the assets inside your FHSA in addition to his or her own if you die. It won’t affect your spouse’s own FHSA contribution room. This is the most efficient way to deal with your FHSA assets if you pass away.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.