Ally Pyle
November 03, 2023
The FHSA is a great tool, but you have to read the manual
Mariah Carey’s holiday season wasn’t the only event to officially begin at midnight on November 1st. Equally as important (if you ask the money nerds), it also marked the start of Canada’s Financial Literacy month, with this year’s theme being ‘Managing Your Money in a Changing World’. In keeping with this, we thought we would dedicate this weeks newsletter to the change in our registered account lineup; the addition of the First Home Savings Account (FHSA).
Introduced in Federal Budget 2022, the FHSA was first announced as one facet of the governments initiative aimed at making housing more accessible and affordable to Canadians. This comes after a period of peak housing prices and a decline in home ownership. The chart below outlines the proportion of Canadian households who own their home, and in 2021 this rate was 66.5%, continuing on a decline from the peak of 69.0% in 2011. Looking at the demographic that this account is geared towards – millennials – the percentage of those aged 25 to 29 in homeownership fell from 44.1% in 2011 to 36.5% in 2021.
Source: Statistics Canada and Census of Population, 1971 to 2021 and National Household Survey, 2011
Fast forward a year and a half later, and we are starting to see the adoption of these accounts across financial institutions. Whether or not these accounts will be successful in helping Canadians save for a downpayment is yet to be determined, but making sure this new account is understood will play a crucial role in it’s success. So let’s dive in.
The FHSA assimilates features of both the TFSA and the RRSP but has it’s own unique elements. To be eligible to open a FHSA, you must be a Canadian resident of at least 18 years of age (or the age of majority in their province/territory) to 71, do not currently own a home and have not owned a home in the past four calendar years. Like the full suite of our registered accounts, growth within the account is tax sheltered. It’s important to note here, that unlike the TFSA which has no “maturity” date, the FHSA has a lifetime of 15 years and we’ll get to what you do after 15 years in just a bit.
First let’s breakdown how contributions work. From the year you open a FHSA, you are eligible to contribute $8,000 per year-this is unlike a TFSA where contributions automatically begin to accumulate once an individual turns 18 or like an RRSP accumulation starts once you start to earn income. The lifetime maximum is $40,000 and any unused contribution room can be carried forward, however this is limited to $8,000. For example, if a FHSA was opened in 2023 with an initial contribution of $6,000, then in 2024, a contribution of $10,000 could be made ($2,000 carry forward from 2023 plus the annual limit of $8,000). Like an RRSP, contributions are deductible against income and the deduction does not have to be used in the current taxation year, in other words it can be carried forward indefinitely and deducted in a later tax year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year, cannot be used to reduce income in the prior tax year. There is no limit to the number of FHSAs an individual can open, but the same limits apply to one as it would to all and it is on the account owner to keep track of this. Any overcontributions are subject to the same 1% per month penalty on the excess amount that exist in that month.
Okay, so now you, a child or a grandchild have accumulated monies in a FHSA and it’s time to take the funds out; withdrawals are classified as either ‘qualifying’ or ‘non-qualifying’. In order for a withdrawal to count as qualifying (in other words non-taxable), it must be used for the purpose of buying a first home, meaning you as the homebuyer, must still qualify as a first-time home buyer. Oh, and the property must be located in Canada, so a tropical beach house south of the border doesn’t count (sorry guys). For those Canadians that have been planning to use their RRSP as part of a downpayment under the Home Buyers’ Plan, the two are not mutually exclusive. Both can be used for a combined downpayment, with the benefit being that the funds withdrawn from the FHSA do not need to be repaid. In a non-qualifying withdrawal scenario, the amount withdrawn would be included in income in the year of withdrawal and your financial institution would be required to withhold and remit taxes (similar to the treatment applicable to RRSP withdrawals). But what if you are nearing the 15-year maturity and buying a home is no longer a goal, or perhaps you no longer qualify as a first time home buyer, well there is no need for concern. Understanding that financial plans and circumstances change, you are allowed to transfer the funds in your FHSA into your RRSP or RRIF without incurring tax (just make sure this is done before the FHSA expires). Particularly, this transferred amount does not impact your available RRSP room, which can ultimately help your retirement savings.
What happens between the inception and termination of the FHSA is equally important, and here is where I think it’s important to highlight considerations when thinking about the investment strategy of the plan. An FHSA is permitted to hold the same qualified investment which are currently allowed in a TFSA. These include cash, GICs, government and corporate bond, ETFS, mutual funds and individual stocks, just to name a few. And while we normally advise for a unified investment or asset allocation strategy, the securities you chose to hold in a FHSA may need to be looked at under a different lens. More specifically, the time horizon (a factor in determining one’s investment objective) may be inherently different for someone with a goal of purchasing a home in 5 years vs someone saving for retirement in 25 years. In any case, the power of compounding would still suggest to max out your contributions in the first five years of opening a FHSA, and here we would agree.
A few other potentially useful tidbits of information, that may not be as widely discussed surround the FHSA I’d like to offer up. First, you certainly do not need to be in your early 20s to take advantage of this account, take the case of a Canadian in their 50s that is currently in a rental situation with no plans to purchase a home, they would be eligible to open and contribute to a FHSA, benefiting from tax deferred savings and income deduction. Second, as long as you qualify as a first time home buyer when you open the FHSA, contributions can still be made even if that individual enters into a cohabitation agreement later on in life with someone who owns their home (attention still must be paid to the 15 year expiry if the account owner does not want the funds to be withdrawn as a non-qualifying withdrawal). Lastly, consideration should be paid when naming a beneficiary on your FHSA. Like a TFSA, you are permitted to designate your spouse or common law partner as the successor holder, and should you pass, the FHSA can maintain its tax-exempt status under two scenarios: (1) your spouse is a qualifying individual (meaning they meet eligibility requirements to open a FHSA), in which case they become the account owner and the amount they inherit will not impact the surviving spouse’s contribution limits, or (2) your spouse is non-qualifying and the funds in your FHSA could be transferred tax deferred to their RRSP or RRIF or withdrawn on a taxable basis. If you do not name a spouse/common law partners as successor holder, but another beneficiary, then the funds would be required to be withdrawn and paid directly to the beneficiary, this amount would be included in the beneficiary’s income and subject to withholding tax.
Home ownership is a goal for many and hopefully the adoption of this new account will help Canadian’s achieve just that. Of course, with any and all financial decisions, always consult your investment and tax professionals.
On behalf of the team at Pyle Wealth Advisory, we hope you have a wonderful weekend.
Ally Pyle
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Ally Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. She and her clients may own securities mentioned in this column. The views of Ally Pyle do not necessarily reflect those of CIBC World Markets Inc.