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Alternative ways to fund and use an FHSA

The First Home Savings Account (FHSA) is a new registered account that lets the account holder save for the purchase of a home. However, there are some creative ways you can use this benefit even if you don’t end up making a purchase. In this first blog of a two-part FHSA series, we’ll look at how you can fund and use this account.

As a Private Wealth Advisor, Aaron has broad and deep experience working with clients across a wide spectrum of wealth management issues. He’s also frequently sought by the media as an expert on wealth management and cross-border financial planning.

A quick primer on the FHSA

To open an account, you must be a Canadian resident between the ages of 18 and 71, and be a first-time home buyer. To meet the definition of a first-time home buyer, you must not have lived in a home that either you or your spouse or common-law partner has owned for the current year, or for the four preceding years.

You can contribute up to $8,000 per year, to a lifetime maximum of $40,000. Those contributions attract an income tax deduction, just like an RRSP.

The account can grow tax-sheltered until you buy a home. When you do so, you can apply to withdraw the entire account balance and it will be tax free, subject to certain qualifying conditions. If you don’t buy a home within 15 years of opening the account, then it must be closed with the withdrawal at that time being fully taxable at your highest marginal tax rate. However, you can opt to defer that tax into the future by transferring the balance from your FHSA into an RRSP or RRIF. It would then be taxed as an RRSP or RRIF withdrawal.

Those are the high-level details on how an FHSA operates. However, when you look a little deeper there are some unique planning ideas that you can consider. Here are three other ways that you can use this account.

Offsetting tight cash flow

There’s no holding period required for an FHSA. This means you could open an account and deposit money into it to attract a tax deduction. Once you’ve signed a purchase agreement, you could make the withdrawal in a short period of time.
An example of how you could use this to your advantage would be if you don’t have a lot of disposable income, and have an upcoming home purchase but haven’t previously funded your FHSA. You could draw from a line of credit to fund the account for a brief time before closing on your home purchase. After you’ve made your contribution and have an accepted purchase agreement on your new home, you could then, in short order, arrange to withdraw the balance of your FHSA account (without tax) and pay off your line of credit. The interest incurred would be minor, as the amount of time the line of credit would be drawn from would be short. Meanwhile, you would get a tax deduction for the full amount of the FHSA contribution that you made.

Benefits even if you don’t want to buy a home

Even those who don’t have the goal of becoming a homeowner can benefit from the FHSA. If eligible, you can contribute up to $40,000 into an FHSA, subject to $8,000 per year annual limits. Those contributions will attract tax deductions which will help reduce the amount of tax you’ll pay each year, just like RRSP contributions do. If you ultimately do not buy a home, those contributions, plus the growth on them, could then be transferred into your RRSP or RRIF. And you don’t need to have RRSP contribution room for this. So, someone who doesn’t intend to buy a home could look at the FHSA as an additional $40,000 above the lifetime RRSP contribution room!

Income splitting

Another benefit for those who don’t have a home ownership goal would be to look at the FHSA through the lens of income splitting, from a high-income spouse to a lower-income spouse. For example, someone who is between ages 65 and 71 could make contributions into their FHSA, and subsequently transfer their FHSA balance into a RRIF. Once the money is inside their RRIF, they could arrange a withdrawal.

Amounts withdrawn from a RRIF when you’re over 65 are considered eligible pension income, and therefore qualify for pension splitting. As a result of these transactions, a high-income spouse could get a full tax deduction on the contributions made into their FHSA, and then withdraw the money (via a RRIF) and only pay the tax on half of the withdrawal. The other half of the income would be allocated to the lower income spouse. This has merit only if the FHSA holder does not want to use the account to purchase a home.

These are just a few ways that you could look at the new FHSA a bit differently. As you can see, understanding the mechanics of an account can open the door to new opportunities that are outside the typical box.

In part two of this series, titled Planning ahead with the FHSA to optimize tax benefits, we’ll look at how you can time the opening of your account and when to claim your tax deduction to get more out of this savings vehicle.

Sources: Canada Revenue Agency

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