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Timing Is Key: Proper Planning for Opening an FHSA

June 30, 2023 | Posted by: Kiruban Kana

The tax-free first home savings account (FHSA) is a registered plan that enables first-time homebuyers to save for their first home on a tax-free basis. However, opening an FHSA requires careful consideration and timing to maximize its benefits. In this article, we will explore the factors that clients should consider when deciding to open an FHSA and provide insights on how to properly plan its opening.

Key Points:

Consider the Timing of the Home Purchase:

  • FHSA eligibility criteria apply at the time of account opening and when a qualifying withdrawal is made.
  • Opening an FHSA at a young age may seem appealing, but it requires the accountholder to purchase a home by a specific deadline, such as by the time they turn 33.

Potential Consequences of Opening an FHSA Too Early:

  • Many Canadians are buying their first homes at a later age, around 36 on average.
  • If an FHSA is opened too early, the accountholder may face challenges in meeting the home purchase deadline.
  • In such cases, the FHSA holdings can often be transferred to an RRSP on a tax-deferred basis, enabling the use of the government's homebuyers' plan (HBP) with a maximum withdrawal of $35,000.

Tax Implications and Hybrid Strategies:

  • If the FHSA amount is not transferred to an RRSP and is withdrawn for a home purchase, it becomes taxable income.
  • Withholding tax, similar to RRSP withdrawals, applies to the taxable amount.
  • A hybrid strategy involves transferring a portion of the FHSA amount to an RRSP for the HBP and withdrawing the remaining taxable amount from the FHSA.
  • The hybrid strategy allows for a larger down payment but requires repayment of the HBP amount to the RRSP.

Proper planning for opening an FHSA is crucial to ensure maximum benefits. Timing considerations, such as the expected age of the home purchase, need to be taken into account. Opening an FHSA too early may result in tax implications and limited access to the full amount for a tax-free down payment. It is important to provide clients with advice tailored to their needs, objectives, and savings capacity while considering the FHSA's eligibility criteria. By understanding these factors, clients can make informed decisions and optimize the benefits of an FHSA.

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