"First Home Savings Account" to be Rolled Out this Fall 2023
Note: We mistakenly said that the Home Buyers Plan and First Home Savings Account cannot be used in conjunction. Thankfully, the two accounts can be used together to purchase your first home.
By Jeff Pollock
A new tax sheltering account – the First Home Savings Account (“FHSA”) – was announced last year. Though it became available April 1, most banks aren’t yet ready to roll it out for clients. Our custodian, the National Bank Independent Network, plans to make the account available starting this fall.
It will be useful for young Canadian residents looking to save for a down payment to buy their first home.
The account borrows attributes from both the RSP and the TFSA.
Like an RSP, contributions will be tax deductible. You can put in $8,000 each year and lifetime deposits will be capped at $40,000.
Just like a TFSA, capital gains and dividends grow tax-free. When the accountholder withdraws money – as long as it’s for the purpose of buying their first home – there is no tax implication.
If you fail to maximize the full $8,000 annual contribution limit in a given year, unused room carries forward to the following year (up to a maximum of $8,000). For example, if you contribute $7,000 to your FHSA in 2023, you could contribute $9,000 in 2024 (i.e., the regular $8,000 plus the remaining $1,000 from 2023).
To be eligible to open the account, you must be a Canadian resident at least 18 years old.
Once the account is opened, it needs to be closed within 15 years (and used to purchase your first home) if you want to use the funds tax-free. Otherwise, the money transfers to your RSP/RRIF or is withdrawn on a taxable basis.
We like this idea because it helps young Canadians shelter tax and make their first down payment easier to achieve.
If someone deposited $8,000 every year once turning 18 until they turn 22 ($40,000 total) and earned 7% on average each year along the way, the account would be valued at just under $65,000 by their thirtieth birthday.
Remember that those $8,000 annual deposits (or any annual amount, for that matter) are tax deductible. That being said, it might make better sense to wait until you have a full-time job after finishing school to benefit most from the tax deduction. Until that time, perhaps make TFSA deposits.
There’s also the Homebuyer’s Plan (“HBP”), which allows you to withdraw $35,000 from your RSP on a tax-free basis to buy a home. The qualification is that you must repay the money back into your RSP over a 15-year period (1/15th every year) or else it counts as income. Repayment of funds is not required for the FHSA.
We like the concept and will encourage our younger clients to take advantage of the account once it becomes available this fall.
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