Are you a professional financial adviser? Register for Globe Advisor then subscribe to the new weekly newsletter on our newsletter subscription page. Get exclusive news and insights on the investment industry, top headlines of the week, and what you and your clients need to know.
The new Tax-Free Home Savings Account (FHSA) fills a gap between Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) by providing the benefits of these two investment vehicles – a tax deduction and free withdrawals. This, in turn, should translate into more accessible cash flow for first-time home buyers.
The FHSA is the investment vehicle proposed in the Federal Government’s 2022 budget as part of the housing plan to help more Canadians enter the housing market.
“Where [the FHSA] stands out is that contributions are tax deductible and withdrawals from the plan, including any investment growth on your contributions, are tax free, provided they are used to fund the purchase of your first home,” says Sean Hsu, senior tax and estate planning specialist at Richardson Wealth Ltd. in Toronto.
Also, unlike the Home Buyers’ Plan (HBP), which allows eligible Canadians to withdraw money from their RRSP to buy a home, the money does not have to be the system of government.
While the FHSA is open to any Canadian over the age of 18, Hsu says it would appeal more to younger investors who have a longer time frame before buying.
“They can take advantage of the $40,000 lifetime deposit limit and potential investment growth,” he says.
Wilmot George, vice president, tax retirement and estate planning, at CI Investments Inc. in Toronto, says the plan also gives potential buyers more cash for the intended use.
As young investors are usually at the beginning of their savings journey, this gives them more time to maximize their deposits.
But Mr George says clients should consider whether they can accumulate enough assets in the plan to really benefit from this tax-free growth.
Advantages and Disadvantages of Using FHSA vs BPH
FHSA dues are set at $8,000 per year up to a lifetime membership of $40,000.
Mr. Hsu says this forces Canadians to save for five years and “only really get the maximum benefit later”. Since the FHSA is expected to be introduced in 2023, that means anyone looking to max out the $40,000 lifetime limit would have to wait until 2027.
A shorter home-buying plan of five years or less could explain why clients might want to stick with their original strategy of using HBP, he says.
People can also transfer that money — $8,000 a year, up to $40,000 over five years — from an RRSP to an FHSA without having to pay tax on the withdrawal. Grace Budiono, Wealth Advisor and Client Relationship Manager at Nicola Wealth Management Ltd. in Vancouver says it’s good for clients who already have an RRSP in place.
“If a client already has an RRSP and has the potential to save $8,000 a year, I would say it might make sense to go the FHSA route first because if you don’t maximize it not, you lose that margin and you’ll never get to $40,000,” she says.
If there’s money left over, it can be invested in an RRSP or TFSA depending on the client’s income and whether they need the deduction, she says.
Ms. Budiono adds that clients could also transfer some of the money from the RRSP to the FHSA and pay the rest out of pocket to reach the annual maximum. This way, the client would already have the RRSP tax deduction of the original amount and get the FHSA tax deduction of the remaining contribution.
For those who don’t own a home, opening an FHSA might still make sense even if the money isn’t used to buy a home, Hsu says. After 15 years, the investment can be transferred to an existing RRSP, without using RRSP contribution room, or to a Registered Retirement Income Fund. Therefore, a person who has not used an FHSA for its intended purpose can build up additional funds for retirement.
More details are awaited
The announcement also raised questions, such as the number of FHSAs an individual can open; what if one of the partners holds title to an existing property? Would the other partner still be eligible for FHSA; and the potential tax implications of transferring money between RRSPs and FHSAs, such as double deductions.
A Department of Finance Canada official said by email that while people would be allowed to transfer funds from an RRSP to an FHSA tax-free because the RRSP contribution already benefited from the tax savings, any money transferred “would not give rise to an additional FHSA deduction.
Ms Budiono says the plan is still in its infancy and the answers to questions like these are pieces of legislation that are not yet available.
“It’s basically a comment we got from the budget, so there are all these little niceties that need to be ironed out,” she says.
Additionally, while many welcome the new plan as a planning tool, it still does not address housing affordability or housing prices in the country.
“The goal is to provide Canadians with more flexible access to cash that they can use to contribute to a down payment,” says George.
To learn more about Globe Advisor, visit our home page.