If you’re a Canadian resident between the ages of 18 and 71, you can open an FHSA, provided that you or your spouse have not been an owner in the year when the account is opened or in the previous four years.
The annual contribution limit is $8,000, and the lifetime limit is $40,000. And this is where it gets interesting: The contributions are deducted from your taxable income, and the disbursement of contributions and returns is tax-free when made for the purchase of a first property. It should be noted, however, that the FHSA has a limited duration of 15 years.
A powerful RRSP-TFSA hybrid
You read that right. Like an RRSP, contributions are deducted from your taxable income. This mechanism mainly allows you to obtain potential tax refunds that can be used to accelerate your savings rate.
As with the TFSA and in contrast to the RRSP, you won’t be taxed at the time of disbursement if you use the funds to buy your first property. And, unlike the Home Buyers' Plan (HBP), you won't have to pay yourself back.
Let’s take the example of a young engineer who would like to become a homeowner within five years on a salary of $68,000. With a marginal tax rate of 36.12%, he could save $2,889.60 in taxes on his first contribution of $8,000. If he invests his tax refund, it will cost him $5,110.40 to maximize his FHSA in subsequent years.
By putting aside $28,441.60 over five years, our young engineer could contribute the maximum allowed of $40,000. If he contributes on a monthly basis and gets a hypothetical annual return of 3% in a low-risk portfolio consisting mainly of fixed income, he can expect to end up with about $43,000 for his down payment – about $14,500 more than the amount he put aside!
Combining the FHSA and HBP
Why not? The combination of these two tax tools could increase your down payment. The Home Buyers’ Plan (HBP) allows you to withdraw $35,000 tax-free from your RRSP to buy a home. Because an RRSP also allows you to deduct taxable income, you could get even bigger tax refunds by contributing to both vehicles at the same time. Note that the HBP component of your down payment will have to be repaid during the 15-year period after the disbursement.
Joining forces with your spouse
This too can be done! With the FHSA and the HBP both! If you add each person’s FHSA contribution room plus HBP withdrawal room, you could have a down payment of $156,000. And even more with the return on your FHSA. But take note of the qualification rules. For example, by moving into your new spouse’s property, you could lose the right to open an FHSA or to disburse it tax-free.
What if you don't become a homeowner after 15 years?
The FHSA must be closed 15 years after it’s opened or no later than December 31 of the year you turn 71. After that time, the FHSA is converted into an RRSP or RRIF without using your available RRSP space. Your FHSA could turn into additional retirement savings allowing you to continue to earn tax-sheltered returns.
Strategy for optimal use of the FHSA
Over the next few years, as the FHSA is put to the test of reality, several strategies and opinions will emerge. But just like the RRSP and the TFSA, this new tool should be used according to your goals and financial situation. FÉRIQUE Investment Services can guide you through the process.