Over the past decade, affording a home has become a challenging task. To address this, the federal government launched the First Home Savings Account (FHSA) to assist first-time homebuyers. Let’s dive into its details and understand how it compares with other financial instruments like RRSPs and TFSAs.
Understanding RRSPs and TFSAs
RRSPs:
- Contributions are deductible from income, and investment income isn’t taxed within the plan. However, withdrawals are taxed as ordinary income.
- Often termed “tax-deferred savings,” these allow tax exemptions on contributions and returns inside the plan but impose taxes upon withdrawal.
TFSAs:
- Contributions are made post-tax without deduction, akin to RRSPs. They grow tax-free, and withdrawals aren’t taxable.
- TFSAs are less “tax-free” and more “tax-prepaid.”
Getting to Know the FHSA
Introduction: Announced in the 2022 federal budget, many institutions now offer the FHSA as a distinctive tax-free Canadian savings scheme.
Contributions: Potential homeowners can set aside up to $40,000, tax-free, with an annual limit of $8,000. This contribution is tax-deductible.
Growth: The investment choices within the FHSA are similar to those held by RRSPs and TFSAs and include mutual funds, exchange-traded funds (ETFs), publicly traded securities, government and corporate bonds and guaranteed investment certificates (GICs). The initial investment and growth aren’t taxable for a first home purchase.
FAQs on FHSA Contributions and Withdrawals
- Do I get my FHSA limit back after a withdrawal? No, FHSA withdrawals do not restore the contribution limit for future years, unlike TFSAs.
- Can I use the money without buying a qualified home? Yes, but such withdrawals will be taxed at your marginal rate. Unused funds can also be moved to your RRSP/RRIF tax-deferred.
- Can my parents chip into my FHSA? Parents can’t contribute directly, but they can gift money. The adult child can then get a tax deduction on this contribution.
- Are funds given to my spouse or child for FHSA attributed back to me? No, there’s an exemption for funds gifted for FHSA contributions.
- How is FHSA different from the Home Buyers’ Plan (HBP)? The main difference lies in the repayment process. The HBP acts like a loan from your RRSP, which must be paid back within a specified period or get taxed. FHSA, however, offers tax-deductible contributions and tax-free withdrawals for a qualifying home without any need for repayment.
- How is a FHSA treated on death? If you appoint your spouse as the successor to your account, they will automatically become the primary account holder upon your passing, provided they qualify for an FHSA. Taking over an FHSA this way won’t affect their contribution limits, and the account’s closure timeline would adjust to theirs. If your spouse doesn’t meet the FHSA requirements, the funds can be shifted tax-deferred into their RRSP or RRIF or withdrawn and taxed.
If someone other than your spouse is the beneficiary, the funds must be withdrawn soon after your death and given to the beneficiary. This disbursed amount will be counted as income for the beneficiary and be subject to withholding tax.
- Can both my spouse and I use FHSAs for the same property? Both partners can have individual FHSAs and pool resources for a qualifying property.
Conclusion
The introduction of the FHSA by the federal government underscores a commitment to making homeownership more attainable for Canadians. In an era where housing affordability is a significant concern, the FHSA serves as a strategic tool and a beacon of hope for many aspiring homeowners.
With its attractive tax advantages, the FHSA simplifies the financial journey towards homeownership. Its flexible withdrawal terms also ensure that potential homeowners are not tied down with stringent conditions, thus enabling them to make decisions best suited to their circumstances.
Furthermore, the fact that both partners can pool resources from their respective FHSAs for a qualifying property amplifies its effectiveness, potentially doubling the available resources for a down payment. This collaborative aspect can significantly reduce the time it takes to save for a home, especially in competitive markets.
For first-time homebuyers, understanding and utilizing the FHSA can be the difference between years of saving and fast-tracking their homeownership dreams. It’s a testament to the importance of being financially informed and leveraging available tools for significant life milestones.
The FHSA is more than just another financial instrument; it reflects a broader goal to empower Canadians in their homeownership journey. Remember, with the FHSA, it’s not just about the savings; it’s about the dream – and with its tax-free in, tax-free out model, that dream is closer than ever.
