Get your foot in the door of your brand-new home

by Ben Machel, CFP®

For this month’s article we have a special treat – rather than my regular column I’ve brought in a guest writer. My son, Ben, joined the family practice seven years ago, and because the topic of this article is aimed at younger Canadians, I thought it would be best to hear from someone in that demographic. Read on for Ben’s thoughts about the Canadian government’s newest solution for those trying to enter the housing market.

Regards, 
Arnold

I’ll confess, when I heard of the First Home Savings Account (FHSA) for the first time, I thought, “No way. This is too good to be true.” Yet sure enough, it’s coming in 2023 – and with some enhancements to boot! This is how you can Get your foot in the door of your brand-new hom.

If you haven’t heard of it already, the FHSA allows first time homebuyers to make tax-deductible contributions and earn tax-free growth to make their down payment completely tax free. 

Here’s how it works
Contributions to the plan are tax-deductible (similar to an RRSP) up to a yearly limit of $8,000 and subject to a lifetime limit of $40,000. Within the FHSA you can hold the same investments that a TFSA allows, which can include mutual funds, publicly traded stocks, cash, bonds, and ETFs (exchange-traded funds). Your contributions and any growth in the plan can be withdrawn tax free (similar to a TFSA) to buy or build a qualifying home. 

Here’s where it gets interesting: it’s a totally new registered plan, so this doesn’t take up any of your existing RRSP or TFSA room! In fact, even if you don’t end up using the funds for a home purchase, they can be rolled into your RRSP without affecting your existing contribution room.

As with an RRSP, you are not required to claim the tax deduction in the same year the contribution was made. These can be carried forward indefinitely and deducted in a later tax year, for example a year in which your earned income puts you in a high marginal tax bracket.

Eligibility

To open an FHSA you must be a resident of Canada, be between the ages of 18 and 71, and not have owned a home within the current calendar year or the preceding four years. This includes any beneficial ownership of property, such as a home owned by a trust or a corporation.

Once you have the account and funds set up, a qualifying withdrawal will be allowed for those who meet the definition of a first-time home buyer and who have a written agreement to buy or build a qualifying home in Canada before October 1st of the year after the year of withdrawal. You must also intend to occupy the home as your principal place of residence within one year after buying (or building) it. 

Additional Details

If you are unable to max out the $8,000 limit in one year, there is some catch-up room available. However, this only starts accumulating after the account is opened. Once the plan is initiated, you can carry forward unused portions of your annual limit, up to a maximum of $8,000. For example, if you contributed $2,000 in the first year, your second year’s room will be the regular $8,000, plus the catch up of $6,000 for a total limit of $14,000 that year.

Once opened, an FHSA can be kept open for a period of 15 years or until the holder turns 71 years old, whichever happens first. If the funds are not used in that time for a qualifying home purchase, they can either be withdrawn and taxed as income or rolled into an RRSP/RRIF. As mentioned already, this rollover would not impact your RRSP room at all!

Conclusion

The First Home Savings Account is going to be a game changer for Canadians trying to break into the housing market. We don’t know exactly when in 2023 they will be available, but as a millennial living in Vancouver I plan to open one myself the moment I can.

Combining the savings with a spouse (through marriage or common law) promises to be even more valuable. A couple who utilizes the full combined $80,000 lifetime limit ($40K each) is looking at a potential $42,800 in up-front tax savings (using the highest marginal tax rate of 53.5% in BC). This doesn’t even include any potential growth within the plan, which will also be tax free! 

I highly encourage you to consider if a First Home Savings Account is appropriate for you or anyone you know. In my estimation, most working-age individuals and couples who don’t already own their home will find immense value with the FHSA. Please also consider passing this news on to any of your friends or family who may benefit.

Sources: 

1. Advisor’s Edge: https://www.advisor.ca/tax/tax-news/new-first-home-savings-account-everything-you-want-to-know/?utm_source=ADVR_NL&utm_medium=email&utm_campaign=Weekly_Indicator&hash=emailhash 
   
2. Canada.ca: https://www.canada.ca/en/department-finance/news/2022/08/design-of-the-tax-free-first-home-savings-account.html

Ben Machel, CFP®, is a Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services, located in White Rock, BC. His recent education combined with flexible and strategic thinking allow him to help clients develop and implement unique solutions to their financial needs. Questions and comments can be directed to him at ben@visionvest.ca or through his website at www.visionvest.ca. 

Arnold Machel, CFP®, lives, works, and worships in the White Rock/South Surrey area. He is a Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed. 

Arnold is now accepting a limited number of invitations to speak. If you are interested in having him speak to your congregation or other group regarding money matters, please contact us at admin@visionvest.ca or (604) 542-2818 with your preferred date and time.