Should you take advantage of the First Home Savings Account?
It’s become far more difficult for the average Canadian to afford a home. Housing prices are forecast to be a whopping $670,389 on average in 2023, according to the CREA.
The good news is that major banks and financial institutions began offering First Home Savings Accounts (FHSAs) to eligible residents this spring.
Below, I’ll explain how FHSAs work, who’s eligible for the program, and outline the contribution rules so that you can take advantage of this incentive.
IS THE FHSA OPEN YET?
On December 15, 2022, Bill C-32 received royal assent, and the First Home Savings Account program was enacted. This program allows first-time home buyers in Canada to save up for their first home in a registered tax-advantaged account.
While the FHSA program was passed in December, it wasn’t officially enacted until April 1, 2023.
The program has been in effect for two months now, and major banks such as RBC, TD Bank, and others are offering FHSAs to qualifying individuals. To open an FHSA, you can simply visit a participating bank and speak to a financial advisor to open your account. You can also open one through your online bank portal, provided it has the FHSA available.
It’s worth noting that not all financial institutions are offering FHSAs yet, though.
Since the program is new, some smaller banks and credit unions are still working to incorporate FHSAs into their infrastructure.
HOW DO FHSAS WORK?
One of the primary goals of the FHSA program is to make homeownership more accessible and affordable, despite the high levels of inflation and recent interest rate hikes.
Although the cost of homes has dropped compared to the highs we saw in early 2022, the cost of homes climbed 1.6 per cent this past April, according to the latest CREA housing market report.
FHSAs allow eligible Canadian residents to save and invest money in a registered account, similar to a TFSA, to make a down payment on their first home. Contributions to FHSAs are tax-deductible, and the funds can grow tax-free while they’re invested in:
- Mutual funds
One of the best things about an FHSA is that the money is tax-free once it’s withdrawn, as long as it’s put towards purchasing your first home.
Curious about opening an FHSA? Here are the requirements, as outlined by the CRA:
- The applicant must be a legal resident of Canada
- The applicant must be at least 18 years old
- The applicant must be a first-time home buyer
The last item on the list is the most important. Since the program is designed for first-time home buyers, those who already own a home or have purchased a home in the past will not be eligible to open an FHSA.
CONTRIBUTING TO YOUR FHSA
For example, if you only contribute $5,000 in your first year, you could add the remaining $3,000 of contribution room to the next year for a total of $11,000.
If you overcontribute to your FHSA, the excess amount will be subject to a 1 per cent tax penalty until it’s removed from the account. If you’re unsure about your remaining contribution room for the year, you can speak to a financial advisor at the issuing bank where you opened your FHSA.
ARE FHSA WITHDRAWALS TAXED?
Qualified withdrawals from your FHSA are non-taxable. This means that as long as the withdrawal is used to purchase or build your first home, you won’t pay any taxes on the amount.
Should you satisfy the necessary conditions for withdrawal, it's possible to take out the entirety of your assets from your FHSAs without any tax implications. This can be done through a single withdrawal or multiple withdrawals.
Some other stipulations for a qualified withdrawal include:
- You must intend to live in the home for at least one year after moving in
- You must not have acquired the home more than 30 days before the FHSA withdrawal
- You must have a written agreement to buy or build a house by October 1 of the year following the withdrawal
- You must be a current resident of Canada to make your first qualifying withdrawal
If the funds withdrawn are not qualified, you won’t receive the tax-advantaged benefits of the account, and the funds will be subject to income tax.
WHEN DO YOU CLOSE THE FHSA?
Unlike TFSAs, which are often held for life, FHSAs must be closed once they reach their maximum participation period. This period begins when you open your first FHSA. It ends on December 31 of the year when one of the following events occurs (whichever comes first):
- You turn 71 years old
- The FHSA reaches its 15th anniversary
- The year after your first qualified withdrawal
The FHSA, in my opinion, is a vast improvement on the Home Buyers’ Plan, which involves withdrawing from your Registered Retirement Savings Plans (RRSPs) to buy or build a home. A big downside to the Home Buyers’ Plan is that the withdrawn amount must be repaid to the RRSP, whereas the FHSA does not have any such stipulation.
If you’re saving up for your first home, FHSAs are an incredible incentive to take advantage of. Contributions are tax-deductible, and account growth and qualified withdrawals are all tax-free - something that no other registered account in Canada currently offers.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.