Definitions:
FHSA: Tax-Free First Home Savings Account
RRSP: Registered Retirement Savings Plan
TFSA: Tax-Free Savings Account
The Tax-Free First Home Savings Account (FHSA) is a new type of registered account that was created when Bill C-32 received royal assent on Dec 15, 2022. Although the Bill received royal assent in December the FHSA section will not come into force until April 1, 2023. This short article will aim to inform readers about some of the basic’s aspects of the FHSA, like eligibility and the unique tax treatment.
Who is eligible to open an FHSA?
To be eligible to open an FHSA, you must meet the requirements set out in the Income Tax Act. These requirements are defined as a qualifying home, and a qualifying individual. To be a qualifying individual, you must be a Canadian resident of at least 18 years of age, and not have owned the home you resided in (or your spouse or common-law partner) for the last 4 calendar years. To be a qualifying home, the housing unit must be in Canada, and you must begin to use it as a principal residence not later than one year after the purchase.
Benefits of FHSA over traditional TFSAs and RRSPs
The FHSA combines aspects of both the TFSA, and RRSP, and this is what makes it so unique. Contributions to the FHSA account will be tax deductible from your income, like an RRSP. As well, withdrawals from the account will also be tax-free if they are qualifying withdrawals. This essentially shields any money put in the FHSA from any tax as long as the withdrawal is a qualifying one. While the funds are inside the FHSA, like the existing TFSA account, capital gains, dividends, and interest are not taxable, and they will never be taxed for qualifying withdrawals.
Contribution room and carry-forward amounts
Unlike TFSAs and RRSPs, there is a limited carry-forward amount for FHSAs. Ultimately, if you don’t use it, you lose it. Currently, there is a $40,000 cap on contribution room to the FHSA, and there will be an $8,000 a first-year contribution limit. The carry-forward formula is complicated, but the important takeaways are that you need to open an FHSA to take advantage of the carry-forward provisions. Once opened, any amounts up to the $8,000 yearly limit will carry forward, but anything beyond that amount will be lost.
Potential drawbacks to FHSA’s
One potential drawback of the FHSA as compared to an RRSP is it is not creditor proofed, meaning it will not be protected if you go bankrupt. RRSPs are creditor-proofed, but TFSAs are not.
Another potential drawback is the limited lifespan of an FHSA. The FHSA has a maximum lifespan of 14 years after the year that it was opened. However, if you do not use the account in the 14 years, the amount can be rolled into an RRSP, but the tax advantages will be lost, as tax will be payable upon withdrawal. This essentially means the FHSA will be added to your RRSPs, but your RRSP contribution room will not be affected.
How you can take advantage of the FHSA’s
Because the FHSA does not come into effect until April 1st, you will not be able to open one of these accounts until then. Following April 1st, you can expect to be able to open one of these accounts at most chartered banks. Even if you can’t afford to contribute to the FHSA right away, it is still a good idea to make sure you get the account open in 2023 so you can take advantage of the carry forward the following year.
Final remarks
Given the special tax advantages of the FHSA, aside from the fact that it is not creditor-proofed, in my opinion, it is superior to an RRSP for those who qualify for it and is worth considering for all eligible people. Even if you don’t end up buying a house, the funds inside the FHSA account can be rolled into your RRSP, making it essentially a bonus-RRSP contribution as it will not remove contribution room. Talk to a financial advisor to see if opening an FHSA is right for your circumstances, and if your advisor hasn’t heard of the FHSA, find a new one!
