For many Canadians, saving for their first home can seem like a daunting task. Skyrocketing real estate prices in most Canadian markets, coupled with rising interest rates, have made it increasingly challenging to qualify for a mortgage without a substantial down payment.
But there’s good news on the horizon for aspiring homeowners in Canada. Earlier this year, the Government of Canada introduced the First Home Savings Account (FHSA), a registered investment account designed to make it easier for Canadians to save for their first home in a tax-friendly manner.
While the FHSA may not provide sufficient funds to purchase a new home outright, it does offer a tax-advantaged way to kickstart your savings journey at a young age. There are numerous benefits to the FHSA that make it an attractive option. Withdrawals from the account for the purpose of buying a qualified home are tax-free. If you don’t use the funds within 15 years of opening the account, you can transfer them to an RRSP or RRIF without incurring taxes.
Fidelity Investments Canada is one of the pioneering financial institutions to offer the FHSA to Canadian investors, making it accessible to a broader audience. In addition to the FHSA, Fidelity provides a wide selection of mutual funds, exchange-traded funds (ETFs), and a rich library of investor education resources.
To be eligible to open an FHSA, you must meet certain criteria:
Similar to other registered accounts like the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), the FHSA has specific annual and lifetime contribution limits:
Unused contribution room can be carried over to future years. For example, if you contribute only $6,000 to your FHSA in one year, you can contribute up to $10,000 the following year ($2,000 carried forward plus the $8,000 annual limit). Earnings and growth within the FHSA grow tax-free.
Contributions to your FHSA can be deducted from your taxable income, similar to RRSP contributions. The actual tax savings from FHSA contributions will depend on your marginal tax rate. Contributions made in the first sixty days of the new year are not counted toward the previous year’s contributions, unlike RRSPs.
It’s essential to note that any over-contributions to your FHSA will be subject to a 1% tax penalty applied to the highest excess amount for each month.
While the FHSA is referred to as a savings account, you have the option to invest your contributions, potentially maximizing their growth, especially if your home purchase is several years away. Here are some of the qualifying investments you can hold within your FHSA:
ETFs are investment products that contain a diversified portfolio of assets, such as stocks, bonds, or a mix of both. Fidelity offers access to various ETFs, including all-in-one ETFs, fixed income ETFs, factor ETFs, active ETFs, and even crypto ETFs like Bitcoin and Ether ETFs.
Mutual funds are similar to ETFs, holding a variety of different assets, but they do not trade on stock exchanges. Fidelity offers several actively managed mutual fund portfolios.
Like TFSAs and RRSPs, you can hold individual stocks within your FHSA. Alternatively, you can use an equity ETF or mutual fund to gain exposure to multiple stocks and diversify your investment risk.
FHSA holders can invest in various types of individual bonds, including corporate and government bonds. Bond ETFs or mutual funds can be considered for simplicity and diversification.
GICs are generally low-risk, fixed-income assets. They involve lending money to a financial institution for a predetermined period at a fixed interest rate. Non-redeemable GICs may have penalties for early withdrawal, so it’s crucial to consider this if you plan to use your FHSA for a quick home purchase.
Before the introduction of the FHSA, many Canadians relied on RRSPs for saving and used the Home Buyers’ Plan (HBP) for withdrawals to make a down payment on their new homes. However, there are key differences between the two:
Funds withdrawn through the HBP must be repaid to your RRSP within 15 years. In contrast, funds in your FHSA are meant for your new home and do not require repayment.
If you are a Canadian seeking to purchase a new home, the FHSA could be a tax-friendly way to save for it. With the FHSA, you can grow your investments tax-free, receive a tax deduction on your income tax return for contributions, and make tax-free withdrawals for a qualified home purchase.
To maximize your down payment, you can combine the FHSA with the HBP and a TFSA if applicable to you and your spouse. This combined approach can potentially help you accumulate a significant down payment.
Ultimately, the decision to use the FHSA should align with your financial goals and homeownership aspirations.
Now available through Fidelity, the FHSA offers prospective first-time homebuyers the opportunity to contribute $40,000 tax-free toward the purchase of a home. Plus, you have a chance to win $8,000 that can be used to maximize your Tax-Free First Home Savings Account!
To enter the contest, sign up between August 1, 2023, at 2:00 p.m. ET, and September 15, 2023, at 5:00 p.m. ET.
(Note: The contest winner will receive a prize of a cheque to be used or invested at their discretion; it is not required to be invested in an FHSA.)
Remember that eligibility criteria apply, and full contest rules and entry details can be found in the Official Contest Rules and Regulations.
In summary, the FHSA offers Canadians a tax-advantaged way to save for their first home, and with careful planning, it can be a valuable tool in achieving homeownership goals.
