This article appears in the March 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Legislation governing the new Tax-Free First Home Savings Account (FHSA) takes effect April 1, and at least one of the Big Six is set to offer the account before mid-year.
Royal Bank of Canada told Investment Executive it expects to make the FHSA available this spring, while four other banks said the account would be available this year. Bank of Nova Scotia did not respond.
For 2023, the FHSA’s full annual contribution room of $8,000 will be available regardless of when an account is opened this year.
Because FHSA contribution room begins to accrue only after an account has been opened, clients who plan to buy a first home but do not know when can still benefit from opening an account this year.
“There’s almost no downside to opening the FHSA and contributing earlier,” said Mark Chan, vice-president of wealth planning with Gluskin Sheff + Associates Inc. in Toronto. “[Even if] you didn’t have any savings to put toward an FHSA in 2023, you open an account this year, and in 2024, you’ll have $16,000 of contribution room available.”
A client who is unsure if they will buy a home within the 15 years an FHSA can remain open “could wait a few years” before opening the account, said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth in Toronto. However, he warned, “then you’re giving up the growth in those years.”
Said Chan: “Opening the FHSA gives [clients] the flexibility of taking advantage of the program in case they decide to purchase a home down the road. If they decide not to, at least they can transfer the savings to their RRSP or RRIF on a non-taxable transfer, so it still constitutes part of your retirement savings.”
The FHSA could become a financial planning powerhouse, allowing financial advisors to deepen relationships with clients and their families.
“It’s a wonderful opportunity to help clients save for the first home and establish a long-term relationship with [them] throughout their entire lives,” Golombek said.
For example, Golombek said many clients already are considering giving their adult children money to contribute to their own FHSAs, as the rules allow an individual to provide funds to a spouse or adult child without attribution rules applying.
This works particularly well, he said, because an FHSA holder can carry forward a deduction indefinitely. So if an adult child begins earning substantial income in the future, they can claim the deduction then to reduce their tax bill.
The strategy also allows an advisor to bring a client’s adult children into discussions about family wealth. “If you [as an advisor] don’t have a relationship with the kids, you’re probably going to lose the [business]” when the client dies, Golombek said.
The rules governing the FHSA allow prospective homeowners to access both the new account and the Home Buyers’ Plan (HBP) for purchasing the same home.
A couple can double up if each spouse qualifies as a first-time homebuyer. “They can use the HBP for $35,000 each and the FHSA for $40,000, plus growth, each to buy a home,” Golombek said.
However, if a first-time homebuyer client has a limited amount to contribute, they should favour the “FHSA first, [the] RRSP with a view to using the HBP second, and third, the TFSA,” Golombek said.
A first-time homebuyer with a low income, however, might want to contribute to a TFSA before an RRSP, since they’re already in a low tax bracket.
While the HBP essentially amounts to an interest-free loan from a client’s RRSP, the FHSA provides clients with: a tax deduction on contributions, as with an RRSP; tax-exempt growth while money is held in the account; and tax-free withdrawal, as with a TFSA, for the purchase of a
new home.
In addition, there’s no holding period associated with the FHSA before contributions can be used to buy a home, Golombek said. Rules governing the HBP, however, limit the ability to deduct all or part of the RRSP contributions made during the 89-day period before a withdrawal of funds.
“With the FHSA, you could put the money in on a Tuesday, buy the home on the Wednesday, get the deduction and take it out tax-free,” Golombek said.
Jason Pereira, partner and senior financial consultant with Woodgate Financial Inc. in Toronto, suggested clients hold cash or cash equivalents in their FHSA if they’re looking to buy a house within three to five years.
“They’d be foolish to consider anything [riskier] than a high-interest savings account,” Pereira said.
An FHSA holder may have the capacity to take some investment risk in the account, with the associated potential for growth, if they plan to buy a home in a decade or so.
However, as the time approaches to buy a home, all risk should be eliminated from the portfolio,
Pereira said, suggesting an ideal comparison is to the investment approach he recommends for RESPs: “In my book, [investments in an RESP] are in cash the year before the kid goes to school, and prior to that year, they’ve been getting more conservative for years.”
Where to get an FHSA
Investment Executive asked the Big Six banks if the FHSA would be available through the same channels through which they offer RRSPs and TFSAs, and three responded. National Bank of Canada said it was on track to make the FHSA available through all their channels this year, while Bank of Montreal said FHSAs would be made available to branch and wealth advisory channels this year, and through others later. Toronto-Dominion Bank said that once its FHSA was available, clients should contact a personal banker at one of its branches.
FHSA basics
The FHSA provides first-time homebuyers the ability to save up to $40,000 on a tax-free basis, with an annual contribution limit of $8,000. An individual can carry forward unused portions of their annual contribution limit up to a maximum of $8,000.
To open an FHSA, an individual must be a Canadian resident aged at least 18 and not have owned a home during the current year or preceding four calendar years. (For provinces where the age of majority is 19, individuals should ask their financial institution whether an FHSA can be opened at age 18, said Jamie Golombek of CIBC Private Wealth.)
An FHSA can be open for only 15 years, and only until the accountholder turns 71. Any savings not used to purchase a home can be transferred to an RRSP or RRIF on a tax-free basis or withdrawn on a taxable basis.
An FHSA may hold the same types of investments allowed in a TFSA or RRSP, including publicly traded shares, government and corporate bonds, mutual funds and GICs.
An FHSA will stop being an FHSA by the end of the year following the first qualifying withdrawal to buy a home, with any amount not used to purchase a home transferable tax-free to an RRSP or RRIF, or withdrawn on a taxable basis.
Once an FHSA is used to buy a qualifying home, or stops being an FHSA after 15 years or at age 71, an individual can’t open another FHSA.
For an FHSA withdrawal to be a “qualifying” (i.e., non-taxable) withdrawal, the taxpayer cannot be a homeowner but must have made an agreement to buy or build a home in Canada by Oct. 1 of the following year. If the conditions are met, all FHSA funds may be withdrawn, tax-free, in a single withdrawal or a series. Contributions made following a qualifying withdrawal are not tax-deductible.