The way of things in Canadian personal finance is that it can takes years for a new vehicle like the First Home Savings Account to achieve mass popularity.
Let’s skip that whole getting-to-know-you thing with the FHSA. If you’re serious about buying a first home, or you’re the parent/grandparent of someone in this position, contributing to an FHSA is a no-brainer. Do it now, even if you have only a little money to spare.
FHSAs were officially launched April 1 for people aged 18 and older. At least one investment company, Questrade, now offers accounts. Expect FHSAs to be offered throughout the investment world in the months ahead, even if they won’t be a big revenue generator.
That’s because the lifetime contribution limit is just $40,000, with annual maximums of $8,000. FHSAs are in no way the answer to high home prices in big cities, but they’re too good to miss out on as a way to build a down payment.
FHSAs combine the best of tax-free savings accounts and registered retirement savings plans. You get a tax deduction on your contributions, as with the RRSP, and you get the TFSA’s tax-free withdrawals when using the account to buy a home. As with both RRSPs and TFSAs, investment gains earned in an FHSA are tax-sheltered.
Before the FHSA, people saving for a first home had the choice of using the federal Home Buyers’ Plan, where you essentially borrow money from your RRSP, or TFSAs. “Now, the decision is really easy,” said Natasha Knox, a certified financial planner (CFP) at Alaphia Financial Wellness in New Westminster, B.C. “Use the FHSA instead.”
FHSAs are available to people who did not own a home in the part of the calendar year before an account is opened or the previous four years. You’re ineligible if your spouse or common-law partner owned a home over these periods.
FHSAs must be closed after 15 years, or by the end of the year you turn 71. If you don’t end up buying a house at the end, you can roll the holdings in your account into an RRSP or registered retirement income fund with no tax implications and no impact on your normal RRSP contribution room. If you withdraw from an FHSA for purposes other than buying a qualifying house, the money is added to your income and taxed accordingly.
One aspect of FHSAs that requires some thinking is how you plan your contributions. An 18-year-old probably wouldn’t get much use from the tax deduction associated with an FHSA contribution. Also, it could take that 18-year-old more than 15 years to save for a home in expensive cities like Vancouver and Toronto.
That said, you can start an FHSA with modest contributions and catch up later. For example, you could contribute $4,000 in 2023 and $12,000 in 2024, which represents the $4,000 in unused room from 2023 plus the usual $8,000 limit for 2024.
In these inflationary times, finding money to contribute to an FHSA can be a struggle for young adults. Parents and grandparents, you can help by gifting money to your adult children without tax consequences for you or the beneficiary (the tax deduction goes to the beneficiary). How about an FHSA contribution as a graduation present?
A survey of several banks and independent investment companies about FHSA availability late last week suggests the rollout will take time. Bank of Nova Scotia and investment dealer Raymond James are targeting this summer for their FHSAs, while Canadian Imperial Bank of Commerce said it will give an update on timing in the coming months.
Questrade started preparations for the FHSA a year ago, after the official announcement in the 2022 federal budget. “We think this is a very important product, particularly where the economy is right now,” said Edward Kholodenko, president and CEO of Questrade Financial Group. “Across Canada, and in large urban centres for sure, prices are so high that it’s difficult for first-time buyers.”
Eligible investments for FHSAs include the same choices available for TFSAs and RRSPs, including stocks, bonds, exchange-traded funds, mutual funds and guaranteed investment certificates. A suggestion for building an FHSA over 10 to 15 years: Start with an asset allocation ETF using a growth mandate, which means 80 per cent stocks and 20 per cent bonds. When your house hunting gets serious, reduce the risk level by parking your funds in high-interest savings account ETFs or mutual funds.
A final thought on FHSAs is that they likely won’t be enough to save for a home in expensive cities like Toronto or Vancouver. The average resale home price in both cities is more than $1-million, and so requires a minimum down payment of 20 per cent. Suggestion: Take the tax deduction from an FHSA contribution and add it to your RRSP or TFSA as additional saving for a down payment.
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THE GLOBE AND MAIL
PERSONAL FINANCE COLUMNIST
The Globe and Mail, April 3, 2023