First-time Home Buyer’s Plan – A New Registered Plan is Available
Today’s real estate market is at an all-time high; so as a first-time home buyer – it is not only an intimidating but also an expensive time to enter into home ownership. Many homes sold over the past couple of years have been selling with multiple offers and no conditions. Now interest rates have also risen substantially, so the cost of borrowing for most Canadians has added significant pressure for cash flow on families.
For those who may be considering entering the market for the first time, utilizing every resource available is more important than ever. This could include government programs as well as, professional guidance.
Programs Available to First-time Home Buyers
- First-Time Home Buyer Incentive
- Home Buyer’s Plan
- Home Buyer’s Amount
- Land Transfer Tax Refund
- Tax-free First Home Savings Account (New)
What is a First-time Home Buyer?
A First-time Home Buyer in Canada is someone who has yet to own 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. Additionally, the individual must not have occupied a home owned by their current spouse or common-law partner.
The New Tax-free First Home Savings Account (FHSA)
The FHSA is a proposed savings account specifically for those saving to purchase their first home. It acts like an RRSP. The Government expects to roll out the new tax-free savings account on April 1, 2023, but it may not be available at financial institutions until later in the year.
- You must be 18 years of age and a Canadian resident to open an FHSA.
- Contributions are tax-deductible, similar to an RRSP.
- Withdrawals, including accrued investment income or gains, are tax-free, like a TFSA, if the withdrawal is used to purchase a home.
- Your maximum tax-deductible contribution is $8,000 per year, lifetime maximum of $40,000.
- Upon the fifteenth anniversary of opening an FHSA or when the individual turns 71 years old – whichever event occurs first – the account will be closed. Any savings not used towards the purchase a qualifying home can then be transferred into an RRSP or RRIF on a tax-free basis or would otherwise have to be withdrawn on a taxable basis.
- Can be used with other programs (source: https:// www.advisor.ca/tax/tax-news/first-time-homebuyers-can-use-fhsa-and-hbp-feds-propose/)
What you Need to Know about FHSA
Publicly traded securities, governments and corporate bonds, mutual funds, and guaranteed investment certificates are permitted to be held within an FHSA. This is similar to the types of investments eligible to be held in a Tax-free Savings Account (TFSA). Both savings accounts have similar criteria, except for investments such as non-arm’s length companies, land, shares of private corporations, and general partnership units are not permitted to be held within an FHSA.
In a calendar year, the annual contribution limit of $8,000 allows for a tax deduction for contributions to an FHSA. Contributions within 60 days of the following calendar year cannot be deducted against the prior year’s income. This is different from a Registered Retirement Savings Plan (RRSP).
Similar to an RRSP, an individual is not required to claim a deduction in the year contributions were made. The undeducted contributions can be carried forward indefinitely and deducted in a future year. To determine the best strategy for optimizing the deduction of FHSA, consult with your tax advisor.
The total annual contribution limit is $8,000 and a lifetime limit of $40,000, regardless if an individual holds multiple FHSA’s This would apply across all accounts. Only the unused portion of the $8,000 annual limit can be carried forward into the future, the maximum contribution room to be carried forward is capped at $8,000. Overcontributions to an FHSA would be subject to a 1% tax based on the highest amount of such excess each month that the individual remains in an overcontributed position.
In case an individual passes away while holding an FHSA, their spouse should be named as the successor account holder to allow the transfer of the FHSA on a tax-exempt basis to the spouse. To do so, the spouse must meet the criteria to hold an FHSA.
Subject to the FHSA limits and qualified investment rules, individuals can transfer funds on a tax-free basis, from an RRSP to an FHSA, These transfers would not be deductible and would not reinstate an individual’s RRSP contribution room.
If you want to discuss how you or someone you know can use the above First-time Home Buyer’s Plan programs, contact a DJB Wealth Management Advisor. They can discuss which options may be right for you.