Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss how you can help your kids buy their first home by helping them set up a First Home Savings Account (FHSA).
Specifically, we are going to discuss:
- How does it compare to the TFSA and RRSP?
- What is the FHSA, and how does it work?
- Who can open an FHSA and what are the restrictions?
- What if a home is not purchased?
- Why every eligible person should open this account, even if they don’t plan to buy a home.
- Why it’s so important to open one of these sooner than later.
- A few action items for you to consider.
Home ownership holds a special place in Canadians' hearts. To most, it is a sign of progress, growth, and a step in the right financial direction. However, the dream of owning a home is becoming more difficult with rising interest rates, a slowing economy, persistent inflation, and high home prices.
While these factors may vary depending on the province or territory you live in, one thing remains constant: if you want to one day own a home, you need to have a down payment.
Over the years, we have helped many clients create a strategy to help their kids out with buying a first home. Whether it be gifting money for a down payment or signing as a guarantor or co-signer on their kids' first mortgage, there are a number of options to consider.
I myself had some help from my parents when I purchased my first home. I had scratched and clawed my way into getting a down payment but still needed some help on the mortgage application. As I was single at the time, my income and debt service ratios were on the border of what the bank would accept, so I had to ask my parents to help co-sign.
Co-signing is another ball of wax we may cover in a future episode, but the key thing to understand is that this kind of help also has risks to your credit as the co-signer. If your kid doesn’t make their payment, your phone will start to ring.
Luckily for my parents, their son is a financial planner. So, the moment my debt service ratios were in line, I had them removed from the mortgage.
Earlier this year, the Canadian government announced a new registered account called the First Home Savings Account (FHSA).
This account is their answer to high home prices and an attempt to help Canadians save for their first home. There are a few other methods already available for Canadians to save for their down payments.
The first plan already in place is called the Home Buyers’ Plan (HBP), which is a special program that allows qualified buyers to access money from their RRSP. The plan allows an individual to take out up to $35,000 from their RRSP for a qualified property and is subject to other qualification requirements.
However, there is a catch.
After the HBP withdrawal is taken to purchase a home, it must be repaid within 15 years with a minimum amount of 1/15 being paid back annually. If the annual payment is not made, the amount payable would be included as taxable income for that tax year.
Furthermore, in order to be able to contribute to an RRSP in the first place, your kid would need to have earned income to generate contribution room, and the money contributed MUST stay in the RRSP for at least 90 days to be eligible for the HBP.
The other option is the Tax-Free Savings Account (TFSA). When compared to the RRSP for home down payment savings, it is the more flexible option. However, again there are age and contribution limits, and it lacks the tax deductibility of RRSP contributions.
This is where the FHSA steps in. The First Home Savings Account is a registered plan that allows a prospective first-time homebuyer to save for their first home tax-free.
It combines the features of a TFSA and an RRSP with tax-deductible contributions and tax-free withdrawals if criteria are met.
Unlike the HBP, annual repayments do not need to be made with the FHSA.
One of the key aspects to consider is that the eligible contribution room does not start automatically like a TFSA when you turn 18. With the FHSA, you must OPEN an account first to get the ball rolling on contribution room.
So, if you are considering helping your kids save for a down payment, ask them to open an FHSA before the end of the year. Even if they open the plan and contribute $100, your kid will have generated $8,000 in total contribution room for 2023 and another $8,000 in 2024. Technically, on January 1st, 2024, a $15,900 top-up contribution can be made!
Now, just to be clear here. When I say helping your kids out, I mean gifting them money directly so they can make a contribution to the account. The account must be in your kid’s name, not in your name and not joint. This means that they have control over the money and account.
Here are a few other important things about the FHSA I think you should know:
- The account holder must be 18 years of age and a Canadian resident when the account is opened. In some provinces, the minimum age is 19.
- The account holder and spouse must be considered first-time homebuyers.
- The annual contribution room DOES NOT START until an account is opened. Again, if you are considering opening an account for yourself or helping your children or grandchildren, be sure to do so before year-end.
- The annual contribution limit is $8,000 and the lifetime limit is $40,000.
- Up to $8,000 in unused contributions can be carried forward to the following year.
- Money from an RRSP or TFSA can be transferred into the new FHSA.
- If the account holder decides not to use the funds for a house, they can transfer the money to an RRSP or RRIF without affecting contribution room.
This last point is very interesting.
Say you or your kids plan to never actually own a home and just want to rent. An FHSA could still be opened and contributed to. This would allow an additional $40,000 in tax-deductible contributions over the years. In a way, it is “free RRSP room” that does not require any sort of earned income.
With this fact, even if your kid is unsure if they will ever buy a home, open an account with $100 as soon as possible. The contribution room will grow over time and will act as another tax-deductible account that can be contributed to until age 71, at which point it can be transferred to an RRSP or RRIF and added to retirement funds.
This can be especially important if later in life your child becomes common-law or marries a spouse with a qualified home, which would then make them ineligible to open an account.
When we start to factor in common-law or spousal relationships into this, things can get a bit complicated. So here is the definition used by CRA and a few examples to help make sense of it.
The account holder or account holder’s spouse must not have owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. Sounds confusing, right?
So as an example, if you open an FHSA in April of 2024, the account holder could not have been a homeowner, or the spouse of a homeowner, of a principal residence since January 1st, 2020.
Understanding first-time home buyer status can be a bit tricky. So here are a few scenarios. Let's take a common-law couple, Ryan and Laurie. Ryan wants to open an FHSA, however, he currently lives in a home purchased by Laurie and it is considered a primary residence. If Ryan and Laurie’s relationship subsequently ends, Ryan will still not be able to open an FHSA until the 4-year time frame has passed.
Another scenario could be where the homebuyer status of the spouse has now changed. So, for example, let’s take Jeremy, age 24, who is single and opens an FHSA and begins to contribute to it. A few years later, he becomes the common-law spouse of Theresa, who owns her own primary residence. Jeremy subsequently wants to make a purchase of his own home. In this case, Jeremy must not have lived in a qualifying home as their principal residence in the current year or the previous 4 years, at which point the spouse is no longer taken into consideration at the time of withdrawal.
This is why it’s so important to open one of these accounts as soon as your kid is eligible, even if the thought of owning a home is many years away.
Now, there are a number of other details about the FHSA I am not going to bore you with. If you want to understand all the nitty-gritty about this account, I suggest you read the FHSA comparison document I have added to the show notes and then reach out to your trusted advisor for guidance.
With the spike in home prices post-pandemic, homeownership is a distant dream for many. Although we have seen a decline in some markets across Canada with interest rate increases and a slowing economy, many Canadians wonder if they will ever be able to buy a home.
Perhaps we will see a further decline in home prices, making it more affordable for new buyers while at the same time eroding the net worth of Canadians who have already bought their forever home. Or maybe the government will reduce interest rates, making it more affordable to buy a home while keeping home prices consistent or rising. Either way you slice the current housing market conditions, it’s tough out there.
Alright, so your action items from today’s episode:
1. Talk to your kids about the FHSA and have them listen to this podcast episode and read the FHSA comparison document in the show notes
2. Have them open an account ASAP, preferably before the year-end, so that the contribution room can begin to accrue.
3. If you plan on gifting money to the kids, be sure to update your retirement income plan with your advisor to ensure you are not putting any undue pressure on your own aspirations and goals to have a worry-free retirement.
Ok, that will do it for today’s episode.
For the links and resources discussed, please check out the link in the show notes or visit retiringcanada.ca.
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All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.