First time home buyers now have more options on how to save for what will likely be the largest purchase of their life time. As of January 1, 2023 the federal government put into action a new investment account type, the "Tax-Free First Home Savings Account" or FHSA for short. This new account is different from the first time Home Buyers' Plan (HBP) which uses a RRSP.
First let’s explain who the CRA considers a first time home buyer
To open a HBP or FHSA, you must be a resident of Canada and at least 18 years of age. In addition, you must be a first-time home buyer, meaning that you have not owned a home in which you lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.
Four-year period – The four-year period means the four calendar years prior to a home purchase ending 31 days before the date you withdraw the funds. For example, if you are withdrawing the funds on July 31, 2023, the period is from January 1, 2019 to June 30, 2023.
How does the FHSA work?
Similar to a RRSP, once the FHSA is set-up the you will be able to claim an income tax deduction for contributions made in a particular taxation year. However, unlike RRSPs, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year. Program runs the calendar year from January to December.
Annual contributions are capped at $8,000, up to a lifetime contribution limit of $40,000. No taxes are payable on these assets when used to buy a home. Unused contribution room can carry forward to the following year up to a maximum of $8,000.
The account can stay open for 15 years, or until the end of the year you turn 71, or December 31st of the year following the year when you make a qualifying withdrawal from an FHSA for the first home purchase; whichever comes first.
Non-qualifying withdrawals will be included in the taxable income of the individual making the withdrawal. Financial institutions will be required to collect and remit withholding tax on non-qualifying withdrawals, consistent with the treatment applicable to taxable RRSP withdrawals.
Funds transferred to an RRSP or RRIF will be subject to the usual rules applicable to these accounts, including taxability upon withdrawal. These transfers would not reduce, or be limited by, an individual's available RRSP contribution room. These transfers would not reinstate any of the individual's FHSA lifetime contribution limit.
Lastly, you must also intend to occupy the qualifying home as your principal place of residence within one year of buying or building it.
How does the HBP work?
The HBP program uses the traditional RRSP account. Through the HBP you can withdraw funds from a RRSP as long as you are the owner of that RRSP account. Your RRSP issuer will not withhold tax on withdrawn amounts of $35,000 or less.
Unlike the FHSA, you must repay any funds withdrawn using the HBP from the RRSP within 15 years. Your repayment period starts the second year after the year when you first withdrew funds from your RRSP(s) for the HBP. For example, if you withdrew funds in 2023, your first year of repayment will be 2025. The required repayment is 1/15 per year but the entire amount can be repaid in full at any time. Repayments do not count as a new RRSP contribution.
Can you use both programs?
Yes, you can use the full $35,000 from the HBP and $40,000 from the FHSA program.
Which program should be used first?
Our recommendation will be to save into the FHSA first and then any excess savings above and beyond the $8,000 annual limit can be contributed to a RRSP for the HBP. Keep in mind that there are both tax benefits and tax consequences when using these programs. Before using of these programs it is highly recommended that you should first consult a financial planner as each program is unique to your personal income tax situation.
Should I roll over my current RRSP assets into a FHSA?
Individuals are allowed to transfer funds from an existing RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits and the qualified investment rules. However it's important to note that these transfers would not be deductible and would also not reinstate any of the individual's RRSP contribution room.
How long must the funds be in a HBP or FHSA?
Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP.
For the FHSA, there is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into their home.
On Thursday February 9th, 2023 at 7pm, The Steele Group will be jointly hosting a seminar with Penny Wrightly from HomeTown Financial. Penny is a mortgage specialist and will be joined by Mario Mota and Neel Aggarwal at our office 1575 Bishop Street North, Suite 1.
Feel free to contact The Steele Group or register at www.homeseminars.ca to attend.