The new Tax-Free First Home Savings Account.
In previous years, when considering options to save for your first home, a popular option has been the Home Buyers Plan through your RRSP contributions. You have the ability to withdraw up to $35,000 tax free to go towards your first home purchase, with the stipulation that whatever you withdraw to purchase your first home would be paid back within 15 years. This year there is a new savings option that has become available, the Tax-Free First Home Savings Account (FHSA).
The FHSA is a registered savings account for Canadian residents, aged 18 years or older, to save towards the purchase of their first home within Canada. To be considered a first-time home buyer, it means you or your spouse or common-law partner did not own a qualifying home that you lived in as a principal place of residence at any time in the year the FHSA account is opened or the preceding four calendar years. Every year you are able contribute up to a maximum of $8,000, and up to a maximum lifetime limit of $40,000. If you do not contribute the maximum amount each year, that extra contribution room can be carried forward to the next year. For example, if you contribute $6,000 the first year, the second year you can contribute up to $10,000.
Contributions made to the FHSA are tax deductible, and the withdrawals made for the purchase of a home are non-taxable. Unlike the RRSP Home Buyers Plan, the amount withdrawn for the purchase of a home does not have to be repaid to the account. To illustrate how a FHSA or an RRSP can help with the future purchase of a home, we need to look at the tax deductibility of contributions. A New Brunswick resident earning a gross (before tax) income in 2023 of $53,359-$95,431, has a marginal tax rate of 34.5%. Therefore, if this person normally breaks even at tax time (no significant balance owed or refund), simply contributing $5,000 per year to a FHSA or RRSP and claiming the deduction could net a tax refund of up to $1,725.00. This refund could be contributed to the FHSA or RRSP to reach your savings goal quicker. If this same person contributed another $5,000 the following year along with the refund of $1,725, the total contribution would amount to $6,725 and could produce a refund of up to $2,320 for the following year, which again could be contributed back to the FHSA or RRSP.
Funds contributed to a FHSA can be invested in mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs). Returns on these investments are able to grow on a tax-free basis.
The FHSA account can be open for up to 15 years or to the end of year in which you turn 71; whichever is earlier, and after that time must be closed. If you have not purchased a home within that time, you are able to transfer any unused savings to an RRSP, or withdraw the savings as taxable income.
If your debt is keeping you from being able to think of your savings options or becoming a homeowner, there are options.
If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options. Every financial situation is unique and viable options can differ from person to person. A conversation free of judgment and cost, is the first step to determine options for debt that make sense for you. For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.