Saving and investing towards your first home with the new Tax-free first home savings account (FHSA)

By

In a January 2023 poll conducted by The Harris Poll on behalf of NerdWallet, nearly two-thirds of Canadians (67%) listed owning a home as a priority. For those with the financial goal of buying their first home, the Canadian government introduced the Tax-free first home savings account (FHSA) on April 1, 2023, to help Canadians over 18 save and invest towards home ownership.

The FHSA is a registered plan that allows you to save and invest up to $40,000 tax-free toward your first home purchase. Learn what you should consider before opening an FHSA account.

1) The FHSA offers the best perks of the RRSP and TFSA

The FHSA takes the best benefits of a Registered retirement savings plan (RRSP) and a Tax-free savings account (TFSA). Your contributions to your FHSA within a particular calendar year will also reduce your taxable income when you file your tax return. Unlike RRSPs, where your withdrawals are taxed as income, withdrawals from your FHSA to purchase your first home are tax-free, including all the investment income you may have generated in the account, like a TFSA. This allows you to maximize your savings towards your first home purchase while minimizing income tax.

2) The FHSA has annual contribution limits and qualifying withdrawals

For those wanting to use this newly registered account, the Government of Canada imposed limitations on how much you can save and invest in your FHSA before incurring penalties. Starting in 2023, Canadians can contribute up to $8000 in their FHSA yearly, with any unused contribution amounts carried forward to a max of $8000. Over-contributing to your FHSA will incur a 1% tax on the over-contributed amount each month unless brought below contribution limits.

To make a qualified tax-free withdrawal or series of withdrawals, you must be a first-time home buyer when you make the withdrawal(s). To qualify as a first-time home buyer, you must not have lived in a home you owned at any time during the part of the calendar year before the withdrawal is made or at any time in the preceding four calendar years. Any non-home related purchases may result in withdrawals being treated as taxable income.

3) You can combine your FHSA savings with the Home buyer’s plan

Before the FHSA was introduced, Canadians could use the Home buyers plan (HBP) to pay for a down payment. The HBP allows you to take up to $35,000 from your RRSP without taxation for your first home purchase. Any amount withdrawn through an HBP must be paid back to the RRSP within fifteen years or you lose the contribution amount from your RRSP and it is treated as taxable income. Combining the use of both accounts, potentially gives you access up to $75,000 in savings and investments towards your home purchase.

Saving and investing toward your first home purchase can be challenging, but leveraging the unique benefits offered by the newly introduced FHSA can help you reach your goal quicker and more efficiently than any other registered plan or account currently available.

How to successfully approach your new year’s resolution to invest

By

Now more than ever, investing has become top of mind for many, with new investors ready to jump in and start their investment journey in 2022. While investing can be a core component to growing your wealth, approaching it wisely will help you reach your goals and avoid costly mistakes and fraud. If your new year’s resolution is to start investing, consider the following steps to hit the ground running and invest wisely in 2022 and beyond.

1) Map out your financial goals first
While you may be raring to go with starting your investing journey and building out your investment portfolio, remember that success relies on planning your goals and utilizing the appropriate investments to get you there. By understanding the time horizon (the length of time you expect to hold an investment before needing the funds), you can assign suitable investments with varying levels of risk to drive the best returns over time. Before you consider any investment, first map out your short (6 months to 5 years), medium (5-10 years) and long-term goals (10 years or more).

2) Learn about the registered and unregistered accounts available to you
As a Canadian citizen, registered accounts are available to you with unique properties to help you reach your financial goals. A registered retirement savings plan (RRSP) is an account designed to reduce the income tax you pay on the money you contribute towards your retirement. A tax-free savings account (TFSA) is an account allowing you to save or invest a defined amount tax-free each year throughout your life. These are examples, and you have access to a variety of accounts that can help you achieve your goals. Learn more about the different accounts and how you can leverage them.

3) Understand your risk tolerance
Investments carry a level of risk in line with their potential for return. One of the most common mistakes investors make is exposing themselves to a level of risk far outside what’s appropriate for them. This is called investment risk tolerance, and ignoring or not knowing your ability and willingness to take risk can expose you to dramatic losses. If you are unsure what your risk tolerance is, you can take the Check your risk tolerance quiz. By answering these questions openly and honestly, you can get a better sense of the level of risk you are comfortable taking with your investments, before you start.

4) Improve your investment literacy
If you feel like you still need to learn more about investing before starting, that’s great. It’s important and worthwhile to enhance your knowledge and learn how to invest your hard-earned money wisely. The Alberta Securities Commission offers free, unbiased investment literacy programs with partners across Alberta, covering everything from starting your investing journey to recognizing and avoiding scams and investing in cryptocurrency. If you are interested in attending a virtual program, visit Investing 101 classes and events page to learn more.

Understanding investment accounts

By

Just as it’s important to select the right type and mix of investment products (e.g. cash equivalencies, fixed income securities, equities and investment funds) to meet your financial goals, so too is choosing the appropriate type of account to hold them in. Understanding the different types of accounts available to you can help you maximize your gains and reduce the amount of income taxes you owe. 

You can use several types of investment accounts in Canada that are broadly categorized as either “registered” and “non-registered”.

Non-Registered Investment Accounts

Non-registered investment accounts are the most flexible, with no restrictions on how much you can contribute or withdraw. They can be opened at any financial institution or registered firm.

Interest income in a non-registered account is fully taxed at your marginal tax rate, with some special considerations for dividends and capital gains. Dividends are taxed based on the province you live in, while capital gains and losses are calculated on a net basis with taxes at your marginal rate paid on 50 per cent of its value. While this account may seem like a logical first step for new investors, it’s worth understanding the benefits and characteristics of registered accounts before opening a non-registered account. In order to learn more about the different investing accounts available to Canadians, visit CheckFirst.ca and the Government of Canada website.

Registered Investment Accounts

Tax-Free Saving Accounts (TFSAs)
TFSAs, launched in 2009, have unique features that allow you to shelter your investment gains from most taxes. Without the tax implications found in a non-registered account, investment gains in most cases can be fully realized once withdrawn. As a result, TFSAs are becoming increasingly popular among Canadians.

Another unique feature of TFSAs is the contribution room limit. Every year the Canadian government provides additional contribution room to all Canadians. If you were 18 or older in 2009, you are eligible to contribute the full amount of $75,500; if you were younger than 18 in 2009, your contribution room would have started when you turned 18. For the 2021 tax year, every Canadian 18 and older received an additional $6,000 contribution limit in their TFSA. It’s important that you don’t over contribute to your TFSA however, as the excess amount will be subject to a one per cent per month penalty tax.

Registered Retirement Savings Accounts (RRSP)
RRSPs were introduced to Canadians over 60 years ago in order to encourage and reward them for building a nest egg for retirement. By using them strategically, they can benefit you now and in your retirement. For example, contributions you make to your RRSP allow you to reduce your income tax in a specific year by your marginal tax rate applied to your contribution and, if contributions are invested, can even grow tax-free. Additionally, you can use the money in the RRSP account to purchase or build a first home (Home Buyers Plan) and for post-secondary expenses (Lifelong Learning Plan) tax-free if paid back within 15 years. Once you retire, any withdrawals from your RRSP will be taxed at your retired tax bracket, which in theory should be lower than when you contributed during your working years.

While an RRSP can help you grow your wealth for retirement, special rules do apply. You may only contribute up to 18 per cent of your earned income from the previous year, and if you withdraw funds from the account early, immediate withholding tax is applied and your contribution room is permanently reduced. Once you reach 71, your RRSP is automatically converted to a Registered Retirement Income Fund (RRIF) and you can no longer contribute to the account. Instead, you must withdraw a calculated amount each month, which will be taxed at your marginal tax rate. If you withdraw more than the allotted amount, you will be subject to the same withholding taxes as if withdrawn prior to retirement.

When it comes to investing, where you invest is just as important as what you invest in. With a better understanding of the different accounts and their unique benefits and downsides, you may find that one or a mix of different types of accounts can help you better realize your financial goals and grow your wealth for retirement.