Ready, save, and wait to buy

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This article was published 06/05/2023 (1048 days ago), so information in it may no longer be current.

First-time homebuyers, start your savings!

The new federal first home savings account (FHSA) officially launched April 1 after being announced in the 2022 budget and more than a year of ironing out details.

It’s so new, even many financial institutions are still in the process of making it available to clients.

But here’s what we know for certain: the FHSA is designed for Canadian citizens, at least age 18, who have never owned a home, or not owned a home for four years.

Most notably, it is aimed to help these individuals by accelerating their ability to save for a down payment.

That’s done via two important characteristics.

One, contributions to a FHSA result in a commensurate deduction against their income, just like contributions to an RRSP.

Two, growth and income inside the FHSA are tax-free, as are withdrawals when used to purchase a first home. In that way, a FHSA is much like a tax-free savings account (TFSA).

Those two traits together make it “a fantastic account, and if you’re a first-time homebuyer,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto.

“There is no downside whatsoever for a first-time homebuyer.”

Of course, the FHSA isn’t going to have a big impact on first-time buyers house-hunting right now.

But good things come to those with more time to be patient, particularly five years or more.

That’s because the maximum annual contribution to an FHSA is $8,000 with a lifetime maximum of $40,000. So presumably, an account holder could make five years of contributions starting this year, and then withdraw the money in Year 5 with $40,000 and growth.

The money can be invested however they choose: stocks, bonds, GICs, high-interest savings accounts and mutual funds.

And the contributions are attributed to the account holder, which could be your 18-year-old child even if you—the parent already with a home—is the one contributing.

“It goes beyond first-time home buyers too, as it also makes an FHSA also available for Canadians who have owned before, but not in the calendar year the account is opened, or in the previous four calendar years,” says Stuart Gray, director of the financial planning centre of expertise at RBC.

RBC, by the way, is among the first financial institutions to offer the FHSA, having made the announcement in mid-April of its availability.

Gray’s advice is to open the account sooner than later even if you have no money to save or plan to buy a home in the near-term.

“Unlike TFSAs or RRSPs, contribution room only starts to accumulate after an FHSA has been opened, so it’s important for anyone wanting to use this new account to get it opened before the end of 2023, to start accumulating that contribution room in this calendar year.”

Even though individuals may not have money to contribute, in five years, they could potentially start contributing more than $8,000 a year upon completing post-secondary and embarking on a career.

Also of note, rules allow for individuals to carry-over missed contribution room up to $8,000 from one year into the following year only. So, individuals could contribute up to $16,000 in any given year after opening an account, if they had not made any contributions the year before. But they could not contribute $24,000 in one year if they had, for example, two prior years of missed contribution room.

One caveat is, once open, the money must be used for a down payment within 15 years.

If not used by then, the account holder can withdraw the money — not a great idea because it would be taxed as income — or transfer the entire amount to their RRSP — a great idea.

Among the benefits is moving the entire sum to the RRSP does not affect contribution room or result in taxes owing.

That said, FHSA contribution to the RRSP would not result in a deduction to reduce taxes because the monies already received a deduction on the original contributions to the FHSA.

Ideally, the FHSA is used to buy a home in an increasingly expensive real estate market. The average home price in Winnipeg is about $330,000 and more than $700,000 nationwide.

For couples, the FHSA could really prove beneficial as they could have combined contributions of $80,000 in lifetime, plus growth, says Ali Fares, vice-president of investment strategy at National Bank of Canada, the first financial institution in Canada to offer the FHSA.

“Then it could be used with the Home Buyers’ Plan allowing withdrawals from their RRSP, tax-free.”

This federal plan lets individuals withdraw up to $35,000 from their RRSP tax-free so long as it’s paid back within 15 years. Combined with the FHSA, a couple could have more than $150,000 to purchase a home.

“That’s one reason why the FHSA is such a powerful savings strategy,” Fares adds.

As for how to invest in a FHSA, it really depends on the timeline to buy.

“A GIC strategy could be the right fit, especially with rates currently higher than they were a year ago,” Fares says for a medium-term goal like five years.

For timelines less than five years, a high-interest savings account would suffice — also benefiting from high interest rates.

“If your time horizon is more like 10 to 15 years, consider a balanced portfolio,” Golombek says.

“And as you get within five years to the date you want to buy, start shifting to a more conservative strategy.”

Even someone who plans to purchase a home right now can benefit, he adds.

“The main opportunity is the tax deduction,” says Golombek. “If you’re going to buy a home in the next three months, put the money in to get the deduction.”

Then withdraw the $8,000 for the down payment, and come tax season, claim the deduction and use the tax refund to pay down the mortgage, he says.

“It’s really a no-lose proposition.”