Financial Advice: Understanding the FHSA

Understanding the FHSA

New to the team in 2023 is the FHSA! Known the longer form as the First Home Savings Account this is a great account to help individuals save for their first property in Canada. It is a little complicated at first but overall, a great product to help Canadians save for their first home.

What is an FHSA?

The First Home Savings Account was designed to help Canadians save for their first home. This is due to the increasingly difficult scenario of saving for a high-priced home in Canada, while there is no free money here, this will help people save a significant downpayment for a home through saving on taxes.

Who Can Open an FHSA?

To open an account, you must fit the following criteria:

Between the ages of 18 and 71

Canadian Resident

You currently do not own or jointly a home in Canada as your principal residence or have not in the past 4 calendar years

To see the full checklist please go to the CRA website.

Advantages of a FHSA

The FHSA comes with many benefits like other registered accounts. 

Tax-Free Growth and Income - This is the main purpose of this account, to grow investments without having to pay taxes along the way. This does present the best environment to grow money without the tax headwinds.

Contributions are a Tax Deduction - This is a large advantage to reducing your taxes paid, this will allow for more savings to go toward your home purchase.

When you purchase a home, you DO NOT have to pay it back - Different than the RRSP Home Buyers Plan (HBP), you do not have to pay this back over 15 years. 

Does NOT reduce your RRSP Limit - This is a further tax deduction outside of your RRSP. This is a nice benefit to reduce income further if you fit the criteria to open an FHSA.

You can use both FHSA and HBP - You will be able to utilize both accounts to purchase a home giving you a total amount of $75,000.

Disadvantages of a FHSA

Non-Qualifying Withdrawals are fully taxed - If you withdraw funds and are not buying a home you will be taxed at your income level. This is restrictive if you need the funds in an emergency.

You will not gain back room - This appears to be a one-time deal, if you are going to do it you should have the plan of purchasing a home within 15 years and not planning to withdraw.

15-year Limit - These accounts can only be open for 15 years. After you can either transfer to an RRSP or do a non-qualifying withdrawal.

Contributing and Limits to an FHSA

The maximum you can contribute in a year to an FHSA is $8,000. Once you start contributing you gain another $8,000 of room per year until you reach $40,000 (5 years). Any unused room will be carried forward to the next year. 

Contributions will be a tax deduction against your income. Unlike an RRSP, the deadline will be the calendar year-end, and contributions done in the first 60 days cannot be used against the previous year’s income.

Contributions will NOT affect your RRSP contribution room and you will have a separate limit once you open the account. 

Withdrawals, Transfers, and Limits of an FHSA

There are two types of withdrawals: Qualifying and Non-Qualifying.

A Qualifying Withdrawal is when you pull money from the account to purchase a home. For this, you need a written agreement to purchase a home (in Canada) and plan to occupy it within 1 one year of purchase. You may withdraw within 30 days of closing but do not have to move in for a year. You DO NOT have to repay this in the case of a home purchase.

A Non-Qualifying Withdrawal is when you remove the funds without purchasing a home. These withdrawals will be taxed as income for the year and taxes will be withheld similar to an RRSP.

You can only have a FHSA open for 15 years from the opening. After 15 years if you do not use it you can withdraw the balance as a non-qualifying withdrawal or Transfer this amount to your RRSP tax-free. 

Withdrawals of any kind will NOT replenish your limit. Therefore, appears to be a one-time deal.

Penalties for Over-Contribution

If you over-contribute to an FHSA the penalty will be the same as the other registered products out there which is, 1% per month on the over-the-limit contribution. This does add up quickly. Where a $10,000 over-contribution would be a $1,200 penalty over one year. 

Investment Options

You will have the full array of investments available to you, but it will be dependent on where you open your FHSA account. The same as an RRSP or TFSA you can invest in stocks, bonds, mutual funds, GICs, savings accounts, etc. You may also open more than one FHSA, but your total contribution limit remains the same and the combination of all the accounts cannot exceed it.

Should You Invest in an FHSA?

If you plan on purchasing a home with 15 years, yes should. If you do not own a home, never plan on buying a home, and have maxed your RRSP. Once, again yes you probably should. For most people, this should be a priority option over using the RRSP/HBP, because you do not have to pay it back, and that it does not reduce your RRSP contribution room. But the best route would be to maximize both the FHSA and RRSP/HBP will give you a significant down payment for the purchase of a home.

This should be a tool utilized within your unique financial plan and you should speak with a Financial Advisor or Tax Professional to see if this is right for you. 

Sincerely,

Justin, Konrad, and Merriel

More articles and information are available at www.knowprotectgrow.com 

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.

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