Since it was first mentioned in the Federal Budget proposal of August 2022, more information about this innovative new program designed to aid first-time home buyers has now officially become available. Could it be right for your Edmonton or Kelowna home purchase?
The bill (C-32), which was approved by Parliament on December 15, 2022, now allows for the First Home Savings Account, which became effective on April 1, 2023. A brief recap: This is a new category of a registered plan known as the FHSA which enables qualified first-time home buyers to save up to $40,000 tax-free over the course of the plan and up to $8,000 in any given year. Tax deductions are available for contributions made to an FHSA, and any earnings or gains made inside the account as well as any qualified withdrawals are tax-free. Plus, up to $8,000 in unused annual contributions may be carried forward to subsequent years, making it even easier for first-time homebuyers to save up for a down payment. Great news for all Canadians, and if your in Edmonton or Kelowna, we we can help you understand all the details. So here we go . . .
1. One major benefit of the FHSA is that it may help more people enter the Canadian housing market by reducing financial barriers to homeownership. This program could have a significant impact in the Edmonton real estate market and in different regions like Kelowna, along with other cities across Canada, too.
2. The tax-free savings offered through the FHSA are designed to incentivize saving and provide relief from some of the costs, carried over by account holders for use in a subsequent year (subject to the lifetime contribution limit). For example, if you open an FHSA in 2023 and contribute $3,000, you can contribute up to $13,000 in 2024. Carry-forward amounts do not start accumulating until after you open an FHSA.
If the following criteria are satisfied, withdrawals from an FHSA are tax-free:
- You are a first-time home buyer, as defined above, at the time that you make the withdrawal.
- You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal.
- You must intend to occupy the home as a principal place of residence within one year after buying or building it.
If you transfer any money left over after making a qualified withdrawal by December 31 of the following year, you can transfer it penalty-free and tax-deferred to an RRSP or RRIF (registered retirement income fund). Your ability to contribute to an RRSP is unaffected or not restricted by transfers. Any FHSA savings that are withdrawn as a non-qualifying withdrawal (other than to purchase or construct a qualifying home) must be included in income for the year of the withdrawal, and tax will be withheld. FHSA contribution limits are not replenished by withdrawals or transfers. FHSA contribution limits are not replenished by withdrawals or transfers.
First Tax Strategy Tip: For those who own a rental property other than their primary residence, an FHSA may be advantageous because you can transfer money from an FHSA to an RRSP or RRIF without affecting your RRSP limit. With an FHSA, you may still be able to qualify as first-time home buyers, build up money tax-deferred, and transfer the money to an RRSP or RRIF even if you do not ultimately purchase a qualifying home.
Second Tax Strategy Tip: The attribution rules do not apply to the income earned in the FHSA from contributions made by a person’s spouse when they make FHSA contributions. The same is true if you give money to an adult child to put towards their FHSA.
Third Tax Strategy Tip: Tax-free money transfers from RRSPs to FHSAs are permitted up to the $8,000 annual and $40,000 lifetime contribution limits. It’s important to note that neither a tax deduction nor the restoration of your RRSP contribution room would occur with these transfers.
The good news is that a qualifying withdrawal from your FHSA following the transfer from your RRSP to an FHSA would be tax-free, effectively making it a tax-free withdrawal from your RRSP to purchase that Edmonton starter home or Kelowna property.
Fourth Tax Strategy Tip: The Home Buyers’ Plan (HBP) enables first-time home buyers to withdraw up to $35,000 tax-free from their RRSP in order to buy or build a home. You can use both the HBP and FHSA program for the same eligible home purchase because the HBP is still available under the current rules!
Consider using your TFSA. Although not specifically designed for first-time home savings, TFSAs are worth considering for several reasons, such as:
- Tax-free savings
- No repayment of withdrawn funds is necessary, and an equal amount of contribution space is restored in the TFSA in the year following the year of withdrawal.
- The ability to take money out of a TFSA and deposit it into an FHSA to get a tax deduction as soon as space in the FHSA becomes available.
Finally, did you catch that last part? It’s a big one! YES, you can use the FHSA in conjunction with the Home Buyers’ Plan (HBP) program that allows you to withdraw up to $35,000 from your registered retirement savings plans (RRSPs) to buy or build a home. How cool is that? The specifics of each plan should be discussed by first-time home buyers with a Benchmark Mortgages licensed mortgage brokers serving Alberta & Britich Columbia (B.C.) in order to determine how to maximise these programs to increase their down payment options.
Resources:First Home Savings Account (FHSA) & The Home Buyers’ Plan (HBP)
At Benchmark Mortgages, we establish meaningful long-term relationships with both Edmonton, Alberta and Kelowna, B.C. clients. We work hard to help them achieve financial freedom faster with diverse and customized mortgage options. The term “benchmark” originates from the chiseled horizontal marks that surveyors made in stone structures as an established point of reference. Believe in Better®