A Nexus Feature on: First Home Savings Accounts (FHSA)

Q2 | July 2023

Topic: Tax Planning

Brad Weber  CPA, CA, CFP, CIM

July 26, 2023

Image used with permission: iStock/Nuttawan Jayawan


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A Nexus Feature on: First Home Savings Accounts (FHSA)

Q2 | July 2023

The FHSA is a registered plan to help Canadians save for their first home and could play a role in either your or your adult child’s overall wealth strategy. While still new and officially launched on April 1, 2023, there are only a small number of institutions currently offering the account to clients. However, as more time passes and processes are put in place, FHSAs are expected to be more readily available to Canadians.

At Nexus, we are committed to the financial success of our clients. We hope to have more information for our Nexus clients on the availability of the FHSA as we learn more from our custodian, RBC Investor Services Trust, and we will communicate this in the coming months. Until then, we have put together an overview of the key facts, benefits, and overall tips of the FHSA.

Key Facts:

  • Account holders can contribute $40,000 over the lifetime of the plan
    • Annual contributions are capped at $8,000. Unused contribution room can carry forward to the following year, up to a limit of $8,000 (contribution room only begins to accumulate once an account is opened)
  • Contributions are tax-deductible
    • The contributions must be made in the calendar year (no extra 60 days like the RRSP deadline)
    • Deductions can be carried forward indefinitely and deducted in a later tax year
  • Investment income earned in the account is tax-sheltered
  • Qualifying withdrawals are non-taxable
  • The funds do not have to be paid back (unlike the Home Buyers’ Plan)

To be eligible the person must be:

  • A Canadian resident
  • 18 years or older but not more than 71 years of age on December 31 of the year the account is opened
  • A first-time home buyer who the government defines as: someone who did not, at any time in the current calendar year before the account is opened, or at any time in the preceding four calendar years, own or jointly own a home

What is a Qualifying Withdrawal?

  • The account holder must have a written agreement to buy or build a qualifying home located in Canada before October 1 of the year following the year of withdrawal, and
  • The account holder must intend to occupy the home as their principal residence within one year of buying or building it

When must an FHSA account be closed?

The earliest of:

  • 15 years after the account was opened
  • the end of the year the account holder turns 71
  • the end of the year following the year the account holder makes a qualifying withdrawal for their first home purchase

What if the account holder doesn’t buy a home?

  • Any savings not used to purchase a home can be transferred to an RRSP or RRIF on a non-taxable basis. This does not require RRSP contribution room, nor does it reduce the current contribution room
  • If the funds are withdrawn and not transferred to a RRSP or RRIF, the funds will be taxed
  • Neither withdrawals nor transfers reinstate FHSA contribution room

Can it be used with the Home Buyers Plan?

  • It is possible to use both the Home Buyers Plan and the FHSA
  • The Home Buyers Plan allows Canadians to withdraw $35,000 out of their RRSPs for a first home purchase without tax consequence. The withdrawal from the RRSP must be repaid over 15 years.
  • Funds can also be transferred from an RRSP to the FHSA, but subject to the annual and lifetime FHSA contribution limits. Those funds are not taxable on withdrawal from the FHSA. But they do not create a tax deduction, nor do they reinstate RRSP contribution room.

Naming Beneficiaries

  • You can name your spouse as a successor holder similar to a TFSA, and the account can be transferred to your spouse’s existing FHSA or RRSP
  • You can list a non-spouse beneficiary, including your estate, but they will need to declare the funds they receive as taxable income

Tips for FHSAs:

  1. Help your children save for their first home: If you are able to and want to help your children buy their first home, you can gift each adult child $8,000 x 5 years.  This money can then grow tax-free for up to 15 years after opening the account.
  2. If you are close to buying your first home, it still makes sense to maximize contributions to your FHSA to take advantage of the tax deduction.
  3. Keep in mind the difference between these accounts:

There are many benefits to the FHSA, however it might not be suitable for all circumstances. Contact our Wealth Planning team for guidance specific to you.

 

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