One of the many promises made by then candidate Justin Trudeau was to create a specific savings account for first-time home-buyers, if he was re-elected. Now that he was re-elected, it’s time for the Liberal Party to make good on this campaign promise.
But What is a FHSA Anyway?
Please note all the details haven’t been ironed out at the time of writing
FHSA stands for First Home Savings Account. This new account will allow Canadians who are 18 or older and haven’t owned a home in the current calendar year, or in the previous four calendar years, to save up to a total of $40,000 towards the purchase of a home.
The account will be available in 2023.
The FHSA combines elements of both the RRSP and the TFSA, but is exclusively geared towards the purchase of a home.
How Does The FHSA Work?
FHSA account holders can contribute up to $8,000 a year, while earning a tax deduction on the contributions, just like with an RRSP. Any money withdrawn from the account, as well as any capital gains, interests or dividends paid aren’t taxed, just like with a TFSA.
The maximum contribution is $ 40 000.
You can hold cash, stocks, bonds, mutual funds or ETFs in this account as well. You’ll probably need to stick to Canadian currency, government and companies if you want to make the most of the tax-free feature. It’s unlikely there will be any tax treaty with other countries for this account, just like with the TFSA.
The best feature of the FHSA is that you don’t have to reimburse the amounts withdrawn, unlike the RRSP Home Buyer Plan. You don’t have to declare these to CRA either.
Are There Limits to the FHSA?
Yes, there are.
- Contribute or loose it: if you don’t contribute the full $ 8 000 per year, you loose the remaining contribution room. It doesn’t carry over.
- Home purchase only: if you use the money for something else, it becomes taxable.
- Can’t combine HBP and FHSA: you can’t use both programs. it’s either one or the other.
- 15-year limit: you have 15 years to purchase a property once you open the account. After that, your account will be closed. You can transfer the money to your RRSP or pay tax on it otherwise.
FHSA or HBP?
I previously wrote about the Home-Buying Plan program here.
If you’re just starting out and don’t have much saved, the FHSA is probably the better choice for you. Same applies if you’re not certain about home ownership, as you can transfer the money to your RRSP if you change your mind. You’ll be taxed and penalized under the HBP, even if you put the money back in your RRSP immediately.
If you already have an RRSP and/or other savings, the HBP is probably the better option. It will allow you to buy sooner. A lot can happen in 15 years….
Will The FHSA Helps with Home Affordability?
Sadly, no. It’s not the purpose of this product. Home affordability has nothing to do with Canadians’ abilities to save money.
Lack of supply and strong demand are the number one reason homeownership is so expensive in Canada. The FHSA won’t change this.