The new FHSA ⋆ Financière des professionnels

For a few years now, home prices have reached record highs, particularly in large urban areas.

The increases in the Bank of Canada policy rate aim at slowing the rise in demand, but access to home ownership remains difficult, particularly for young people at the start of their careers. Even if they are eager to buy a first home, they generally lack the income and savings necessary to do so under current conditions.

The Canadian government established a new savings product, the Tax-Free First Home Savings Account or FHSA, which aims to facilitate the purchase of a first home.

We asked our tax expert Anik Bougie, Practice Leader, Financial Planning and Taxation, to tell us about this product and explain its potential.

Can you explain to us what the FHSA is and tell us who it’s for?

The FHSA is a new registered account allowing individuals to save for the purchase of their first home. To be eligible for the FHSA, a Canadian resident must be at least 18 years of age and not have lived in a home they owned at any time in the year of the opening of the account or during the four previous calendar years.

Participants may contribute a maximum annual amount of $8,000 to their account, up to a lifetime limit of $40,000. It the contribution is less than $8,000 in a given year, the unused amount ($8,000 less the contribution made in that year) could be added to the annual contribution limit of a subsequent year. For example, if an individual contributes $5,000 to his FHSA the year, he or she could contribute $3,000 more the following year, for a total of $9,000. Carry-forward amounts would only start accumulating after the FHSA account is opened.

What is the attraction of this product for a first-time home buyer? Is it more advantageous than the HBP?

The FHSA is very attractive since the contributions entitle you to a tax deduction for the year in which they were made and the return earned on the amounts invested is not taxable. For some people, this tax deduction will enable them to receive a tax refund, which can then be used for their next contribution to their FHSA. What’s more, qualifying withdrawals aren’t taxable.

One of the great advantages of the FHSA is that a first-time home buyer doesn’t have to pay back the funds they withdraw from their account for the purchase of their home. However, you should also know that if the person holding the account hasn’t used the accumulated funds for the purchase of a first eligible home within 15 years of opening the account, the account must be closed. In this case, it will still be possible to transfer the savings from their FHSA to their RRSP without tax impact, and also without reducing their accumulated contribution room.

The FHSA has certain restrictions: can you tell us about them?

Yes, of course. The FHSA can only be used for one home during a person’s lifetime. Following the first withdrawal, the participant must make sure to make other eligible withdrawals, or transfer the remaining amounts to an RRSP or RRIF in order to be able to close the account, which must be done within 12 months of the first withdrawal.

Lastly, what do you think of the FHSA? Should it be favoured over an RRSP as a savings product? If we consider home prices, can it really help new buyers, or are there other measures that are more effective?

The FHSA can offer several advantages that other investment vehicles can’t match. The FHSA resembles an RRSP and a HBP, but it is also different from them since, unlike an RRSP, the participant won’t have to pay tax on withdrawals, nor will they have to pay back withdrawals, as they would with a HBP.

This is a measure that seems quite generous on the part of the government, since participants can receive tax refunds thanks to the tax deductions they can claim on the $40,000 contribution, in addition to tax-free growth of their savings and tax-free withdrawals from the account. So it should definitely help first-time home buyers.

I should point out, though, that to take advantage of the full savings amount of $40,000, you will have to make sure to contribute the maximum amount. Obviously, we don’t know what the Canadian real estate market will look like for new buyers in the future, whether in terms of interest rates, the ability of banks to lend, or the market value of homes…

If you’re planning to buy a condo or house, talk about it now with your advisor. Together, you’ll be able to see if the new FHSA can help bring your plan to fruition. We’re ready to help you and find the best solutions for you.