For anyone who reads the newspaper or checks their news daily online, the cost of housing and home ownership continues to dominate the headlines, and for many, the thought of owning a home remains to be nothing more than a lovely dream. This is especially true for those looking to purchase their first home, where prices remain far out of reach for so many.
The Federal Government recently introduced the First Home Savings Account, or FHSA, a new savings vehicle designed to assist first time home buyers to save tax-free to buy or build their first home. FHSA’s were approved in the April 2023 budget and most financial institutions had FHSA accounts available to open by Winter of 2023. This new investment vehicle is a welcome new strategy to help Canadians save tax-free toward the purchase of their first principal residence.
Sounds great! However, there are some important qualifying rules that need to be met. To open an FHSA in BC, you must be between the ages of 19 and 71, be a resident of Canada, and have never owned a principal residence, either solely or with someone else, either this calendar year or the previous four calendar years. If you are married or are common-law, you cannot have lived in a home owned by your spouse or partner, either this year or the past four calendar years.
Assuming that you meet all the qualifying criteria, opening a FHSA is as simple as visiting your bank, credit union, trust company, insurance company, or friendly wealth advisor (like us!).
Your FSHA is like an RRSP in that the money you invest grows tax-free, and similar to your RRSP, and contributions to your FHSA are generally tax deductible. You can also transfer funds from your RRSP – and due to the fact that your RRSP has already benefitted from a tax deduction you wouldn’t get a new contribution slip. The real plus of having a FHSA is that when you withdraw from your FHSA account to buy your qualifying home, the withdrawal is tax-free, providing you meet all of the withdrawal criteria required. Another big win is that you do not have to re-pay the funds you have withdrawn (like the First Time Homebuyer’s RRSP Withdrawal).
When investing in a FHSA, there are a wide variety of investment strategies to meet everyone’s requirements and risk tolerances. Generally, investments permitted in your FSHA are similar to those permitted in an registered retirement savings plan or tax-free savings account. This includes your typical investments such as
- Cash
- Mutual funds
- Most securities listed on a designated stock exchange
- Exchange traded funds (ETF’s)
- Guaranteed investment certificates (GIC’s)
- Canada savings bonds and provincial savings bonds
- Certain shares of small business corporations
You can contribute $8,000 per year up (starting the year you open your FHSA) with a lifetime maximum contribution of $40,000. Like an RRSP, unused contribution room can be carried forward, however there are some important distinctions you need to be mindful of. Additionally, there are overcontribution guidelines that must be followed as well. Making an excess contribution can be an expensive error with over-contribution taxes of 1% per month being charged. It’s definitely worth working with an advisor to get good advice for you personal situation.
Also, because of the unique purpose of the FHSA, there are very specific conditions that must be followed around how long your FHSA can remain open. Your FHSA must be used for a home purchase or closed the earlier of:
- The 15th anniversary of the opening of your FHSA
- Your 71st birthday
- The year following your first qualifying withdrawal, ie: if you purchase your first home
When you do close your FHSA, if you have funds remaining you can transfer that amount into your RRSP or RRIF, or you can withdraw them as taxable income.
There is no question that the new First Home Savings Account is a real game changer in helping Canadians save for their first principal residence. What makes this account even more attractive is that it can be combined with the existing RRSP Home Buyers Plan, creating a powerful first time home buyers strategy.
On the surface, this new FHSA may look like the perfect tool for you. That said, like any investment strategy, there are complexities involved that really require you to sit down with a qualified wealth professional to help guide you through your journey. At Sea Glass Wealth, we have the experience and expertise to help you navigate through the process and provide you with the advice you need. If buying your first home is on your radar, we would love to meet with you to help make your dreams come true.
https://seaglasswealth.com/contact/
https://seaglasswealth.com/contact/
We are looking forward to the opportunity to meet you! For more information, please feel free to reach out.
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