Top 15 Hacks for Your First Home Savings Account (FHSA) aka The “Renter’s RRSP”
There is a brand new type of account in Canada coming out in April 2023.
It’s called Your First Home Savings Account (FHSA) aka The “Renter’s RRSP”.
You may know about RRSPs & TFSAs, well this is the third one, and it’s worth knowing because for many people, this is going to be the best place to put your money.
It’s also the # 1 way to save for a home.
In my latest video, I give you the top 15 hacks to get the maximum benefit from this new account, so that you can save money not just for a home, but for other purposes as well.
Watch this video & you will be an FHSA expert. Find out:
- What is an FHSA?
- Why were FHSAs created?
- The #1 way to save your down payment.
- Why are FHSAs called the “Renters’ RRSP”?
- Why you should open one this year even if you are not yet saving for a home.
- What’s the difference between an FHSA and the RRSP Home Buyer’s Plan?
- Should you contribute to your FHSA, RRSP or TFSA?
- Should you claim or defer the deduction for your FHSA contribution?
- What’s the difference between an FHSA and a virgin? (1st FHSA joke) 😊
- Why FHSAs make a great gift for your spouse or kids.
- FHSA uses for self-employed business owners with a corporation.
- The FHSA hack for the GIS Strategy for retirees.
- FHSA uses for non-residents.
- How to contribute $2,500 more to your FHSA with “FHSA Top-up Strategy”.
- What to do if you have no extra cash flow to invest.
I hope you enjoy it!
Ed
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Hi Richard,
I think you have figured out the answer, but I don’t fully understand your example. If you withdraw $44,648.73 to buy a house, then you pay no income tax on it. But it does not grow to $76,266, because you cashed in the investments. Are you referring to the opportunity cost only?
Ed
Hi Maru,
Yes, an FHSA contribution should reduce your income to increase your GIS. CRA does not specifically say it, but they essentially use the Net Income line on your tax return.
The reason it does not look that way for you is that the next year GIS is based on CRA’s estimate of your next year’s income. Most income is the same from year-to-year, but the default assumption would be that nan FHSA contribution is a one-time event.
You should be able to get the extra GIS by submitting the “Statement of Income for the Guaranteed Income Supplement” form ISP-3026, to tell Service Canada what your estimated Net Income will be for the next year.
Ed
Hello Ed,
Didn’t see your answer before today, thanks!
My model had a mistake in capital gains calculation, so you’re right, much better to invest in unregistered.
Assumptions are interest 5.5%, withdrawal marginal rate 26.53%, no tax trag on unregistered investments. I’m assuming all registered accounts are full. And 15 years to retirement from starting FHSA.
After 15 years, value in FHSA is 76,266.48$, this moved to RRSP and then withdrawn will result in 56,032.98$ after tax.
If this money was removed from FHSA after 5 years and put in a house (opportunity cost is removing 44,648.73$ from unregistered investments), it would be worth again 76,266.48$ (assuming no tax drag) after 10 other years (15 total). After tax (stocks were sold all as capital gains), it would be worth 72,072.38$.
Ed,
My Question with regards to FHSA Hack #10 GIS strategy for Retirees. Can FHSA contribution be deducted from income calculation for GIS/Allowance? I’m asking because I made a $7000 FHSA contribution and used the $7000 deduction on my 2023 tax return. But my new Allowance amount(July 2024) is substantially cut, by an amount suggesting the FHSA contribution is not a deduction in GIS calculation. Can you confirm before I call the GIS/Allowance office?
Thanks Ed,
Hello Ed! This is a great summary of the FHSA opportunity. I wish I found it earlier. If you can, please answer my questions. I will reach 71 years of age this year in August 2024. My wife, our son, and I have purchased a building lot and are in the process of building a house on it. We are hoping to complete the build by November of next year (looks like we need to finish it before Oct 1). My wife is 55 years old.
Can I still open an FHSA account and utilize at least the $8000 contribution? When would I have to close the FHSA account? Before my birthday in August or by the end of the year?
Thank you in advance! Jaro
Hi Richard,
I like your creative thinking. There are all kinds of creative ideas with FHSAs.
Your idea of maximizing the FHSA & then transferring to RRSP after 15 years is a great idea if your marginal tax rate is over 20%. The higher your marginal tax rate, the better it works for you.
If your marginal tax bracket is 20% or less (income below $50,000), then you will almost for sure pay the same or higher taxes when you withdraw after you retire. 20% is the lowest tax bracket. Retirees have many government benefits clawed back based on your income.
If you contribute and get a 20% refund, but then withdraw after retirement paying 20% tax plus losing some government benefits, then you would have been better off focusing on TFSA and then non-registered. You can invest non-registered investments tax-efficiently and you pay lower tax rates on capital gains (especially deferred capital gains) and Canadian dividends. If you earn capital gains or dividends in your RRSP, you end up paying full tax on them eventually when you withdraw from your RRSP.
If you buy a home, you don’t have to withdraw from your FHSA, but it is best to withdraw. It’s a tax-free withdrawal. If you leave it in, you will pay tax on the withdrawal in the future. You can invest this withdrawal in your TFSA or in tax-efficient non-registered investments and will almost definitely be better off.
If you own a home but sell it, you become a first-time home buyer again after 5 years. You can get it back! You can then withdraw tax-free.
You said you modelled leaving money in your RRSP instead of withdrawing tax-free. Your model depends on the assumptions you make. If you assume you withdraw tax-free and then invest in TFSA or tax-efficiently in non-registered investments, that will almost definitely be better for you.
Ed
Hi Geoff.
Good strategy. It works.
Ed
Hello Ed,
Thanks all the great articles. I’ve tried to model filling the FHSA and never using the money to buy a house and then transfer it to an RRSP after 15 years. Seems like the best strategy if marginal tax rate is under 30%, isn’t it? I think we’re allowed not to use the FHSA when buying a house. How does it work if we’re not a first time home buyer anymore while filling the FHSA? Can we buy a house, then sell it, then become a first time home buyer at the end of those 15 years to take the money out tax free? Even then, creating new RRSP room might be the best strategy.
Thanks!
Hi Ed, I’m planning on permanently leaving Canada before the 15 years are up. Can I transfer the total accumulated FHSA amount to my RRSP BEFORE the 15 years are up? Ideally I’d like to maximize the 5 years (40k), transfer them to my RRSP after those 5 years.
Hi PTsigane,
If you are a homeowner, you can’t open an FHSA. If you don’t own a home, it is the most beneficial place to invest for almost everyone.
You get a free $40,000 contribution room that is tax deductible. If you don’t buy a home, you can merge it tax-free into your RRSP.
Ed
Hi Ovidiu,
Tax on Split Income (TOSI) rules are complex with a bunch of exemptions. You need to have your corporate accountant that knows all the details about your situation advise on it.
In general, I agree that the parents may be in a lower tax bracket than their child, if the TOSI rules apply.
If the parents gift the money to the child to contribute to an FHSA, the child probably can’t use the tax deduction, but can carry it forward indefinitely until he/she earns enough income to make the deduction worthwhile. In general, it’s best to carry the tax deduction forward until your taxable income is over $50,000.
Ed
Hi Ed,
Did I understand this well? Even as a homeowner who’s maximized his RRSP, you recommend opening a FHSA to get an extra 40K$ of tax sheltered investments, even if I don’t plan on buying a house at the moment? That would give me 15 years of tax deferred growth that I would have to take out and pay tax on after this delay, hopefully at a lower tax rate.
Thanks for the tip,
PTsigane
Hi Ed,
I should have slept on my “sparkling” idea :D. Have finally realized myself the flaws of the post I had written in the spur of the moment:
1. Dividend gross up is actually 15% for non-eligible dividends
2. TOSI is maximally applied on the gross-up dividend (53.31%), whereas any calculated tax refund would be way lower since we’re talking about the lowest possible tax bracket for our student.
The parents themselves could get a higher tax return by using appropriate techniques and simply gift the amount to child. Bottom line, what I was suggesting in my previous post doesn’t make sense at all.
Thank you for any additional comments you might have!
Hi Ed,
It’s been years I am following your very interesting and unconventional wisdom! I’ve just had the chance to watch your latest (today) Youtube video about the new FHSA. Great work as usual, plenty of useful info and ideas!
Your video triggered immediately the following “spark” in my head and I would need your take on its pertinence and feasibility as I am not a CPA or FP.
My idea is regarding an 8 000 $ dividend distribution to the child from the parent’s SB corporation, in order to contribute to the new FHSA. Provided that the child is still a student and has close to none additional income as well as considering the horrific TOSI tax of 53.31 % (QC+FED), would the math described by you still apply in essence?
Does the new FHSA legislation have any provisions that would negatively impact us from this scenario? If not, the punitive TOSI pertaining income split would be an advantage as it triggers in theory a higher tax return: taxable dividend 11 040 $ (8000 $ x 1.38 gross-up) would generate a 5 855 $ tax return.
Another advantage would be that the dividend payed in 2023 is declared in the 2024 personal tax statement so we could think about laddering the dividend payouts in a more efficient manner.
Thank you in advance for either validating or “obliterating” 😀 the above considerations! It’s well worth the question!