The First Home Savings Account is a tax-free registered plan that allows homebuyers to contribute up to $40,000 towards the purchase of their first home. Douglas Easton, CFA, Portfolio Manager and Wealth Adviser at National Bank Financial in Collingwood says, “An FHSA provides some hope for millennials, who may fear being priced out of the market, with a more tax efficient way to save towards a first home.”
How does an FHSA work?
Starting this year, eligible individuals can open a new type of registered plan that allows first-time homebuyers to contribute up to $8,000 a year, with a lifetime limit of $40,000. An FHSA shares many of the same features as a Registered Retirement Savings Plan.
If you’re a new home buyer and employed, the $8,000 contributed to an FHSA can be deducted against your employment income. Easton says, “Over the next few years, you can keep contributing and investing tax-free, as well as receiving your tax deduction. If for some reason you don’t purchase a house within 15 years, you can roll your FHSA into your RRSP – tax-free. It’s a more flexible and tax efficient option than the Home Buyers’ Program.”
FHSA vs HBP
You may be wondering what the difference is between a First Home Savings Account and the Home Buyers’ Plan, the program that allows you to withdraw funds from your RRSP to buy or build a first home.
First Home Savings Account:
- No repayment required
- No withdrawal limit
- No minimum holding period for contributions to be deductible and eligible for withdrawal
- Deadline for contributions is December 31st of each year
Home Buyers’ Plan:
- Repayment required
- Withdrawal limit of $35,000
- Money must be deposited into your RRSP 90 days before you withdraw it
- Deadline for RRSP contributions is 60 days after the end of the year
How is a FHSA invested?
“My clients have been asking about FHSAs for their millennial children,” says Easton. “It is important for many of them that their children can save and purchase a home. The FHSA is a great way to accelerate the process of saving for a down payment. The government is offering a tax deduction and tax sheltering of investments, so it’s an efficient way to save and invest towards the purchase of a first home.”
Parents can help, if they choose, by gifting funds to their adult children for their FHSA contribution, though they cannot claim the tax deduction for themselves. Easton says, “My clients have done a great job saving and investing over the years, so they want to impart the same saving and investing habits to their children. They have also enjoyed tax-exempt wealth creation over the years through the ownership of a principal residence. We don’t know what the future growth rate of home prices will be, but they want their children to participate in home ownership, just as they did.”
With the price of homes, you may need a significant down payment to get into the market. If you need more money, you can combine the HBP, TFSA, and FHSA to make a larger down payment.
“National Bank Wealth Management is in the process of creating FHSAs for their clients,” says Easton, “Thanks to our partners at National Bank, they were quick out of the gate this year offering a GIC, followed by a mutual fund option. To shelter funds early, a number of the children of my clients opened FHSA accounts and took advantage of the higher short-term rates available in one-year GICs for their first contribution.”
If you would like to learn more about the FHSA, and see if this program is right for you, Douglas Easton would be happy to speak with you. Contact (416) 358-6054 Email: [email protected] LinkedIn Facebook
