First Home Savings Account (FHSA)

A Great Idea? Or A Dud?

Author: Julia Friesen, BSc, ACIA, QAFP™, Associate Financial Advisor

The 2022 Federal Budget proposed a new savings account called the First Home Savings Account (FHSA) scheduled to be implemented in 2023. As currently presented, the FHSA is an alternative to the Home Buyers Plan (HBP) as the FHSA and HBP cannot be used for the same home purchase. Overall, the main benefit of the FHSA is to provide another tool to save towards the purchase of a home as well as providing additional tax benefits by reducing taxable income. So, assuming both will be available in 2023 which is the better choice?

The Basics

For both the FHSA and the HBP you must:

  • Be a Canadian resident at least 18 years of age
  • Not currently own a home in the year the account is opened or in the preceding four years
  • Only use the account for primary residences and not for investment or recreational properties

Contribution Rules

FHSA

  • Annual tax-deductible contribution limit is $8,000/year for a lifetime contribution of $40,000 maximum
  • Unused contribution room cannot be carried forward, unlike a TFSA or an RRSP

HBP

  • Funds are accumulated in an RRSP – 18% of earned income each year up to a maximum ($29,210 in 2022)
  • Unused contributions can be carried forward

Withdrawal Rules

FHSA

  • Withdrawals for the purchase of a first home are tax free
  • Withdrawals not related to the purchase of a first home are treated as taxable income
  • If funds are not used within 15 years, the account is transferred to an RRSP or RRIF and this will not impact RRSP room
  • No maximum withdrawal amount, only maximum contributions (funds have opportunity to grow)

HBP

  • Maximum withdrawal amount of $35,000
  • Money must be paid back to RRSP over a 15-year period (beginning the second year after your home purchase)
  • Any amount not paid back will be treated as taxable income

Who does it help? 

In the saving phase the FHSA functions similarly to an RRSP by reducing the contributor’s taxable income. To examine this savings phase let’s look at two examples of people wanting to buy a home in 5 years or more.

Person 1: Bonnie, a full-time university student, works part-time making $20k per year.

  • Like many university students, she does not have the ability to save $8,000 per year. If she misses her contribution maximum one year, she would not be able to make it up the next year and the contribution room would be lost.
  • Assuming she was able to make an $8,000 contribution one year, the FHSA could provide contribution room that she does not have in her RRSP (she would need an annual income of $44,444 to have $8,000 of RRSP contribution room).
  • The tax benefit of RRSP and FHSA would be negligible since she is in the lowest tax bracket.

Person 2: Brian, a young professional making $120k per year

  • Brian easily maxes out his RRSP contributions each year generating tax savings.
  • By also maxing out his FHSA contributions he will be able to save an additional $2,400 per year in tax.
  • In most cases, the balance after 5 years in the FHSA will exceed the current maximum withdrawal amount from the HBP (currently $35k).

As you can see from the above examples the person that would benefit from the FHSA the most is the person who, based on income, needs the least amount of help getting into the housing market. Of the pool of those eligible to take advantage of these strategies, I’m betting the majority look more like Person 1 than Person 2.

In the payout stage, the FHSA has the clear advantage since the funds will be received tax free and do not need to be paid back. Plus, the balance in the FHSA account will have the opportunity to grow and exceed the current withdrawal limit of the HBP of $35k. The inflexibility of the contribution maximums and absence of carry over room in the FHSA make it harder for the average saver to take full advantage. However, if it’s time to make that first home purchase and there are more funds available in RRSP making the HBP more attractive, then unused FHSA funds can be transferred to an RRSP. So, it can’t hurt to make the FHSA contributions.

But will it improve housing affordability?

It should be noted that the intention of the FHSA by the federal government is to address the increasing problem of housing affordability. While the FHSA may be a useful savings tool, it is unlikely to make any significant impact on housing prices. The people most negatively impacted by rising house prices may struggle to save an extra $8,000 annually to contribute to the FHSA to take full advantage of the tax benefits. It is unclear how many more people will be able to enter the market due the FHSA. More buyers in the housing market could put upward pressure on housing prices in already expensive markets such as Vancouver and Toronto.

So, will the First Home Savings Account make it easier for first time home buyers to get into the market? The jury is still out. Will the FHSA offer more financial planning opportunities for those eligible? Absolutely.

Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting-edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.com

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