Category: Registered Plans

On April 1, 2023 a new registered account will join the RRSP and TFSA. The Tax-free First Home Savings Account (FHSA) is being introduced to help first-time home buyers save for a down payment.

How does it work?

The FHSA combines elements of the TFSA and RRSP. Similar to an RRSP your contributions are tax deductible. Meanwhile your withdrawals, if used to buy a home, are tax-free like withdrawals from a TFSA. Investment income earned in the plan is also tax-free. These features combine to form an incredibly attractive vehicle to accumulate a home down payment.

Who can open a FHSA?

To open a FHSA you must be:

• A Canadian resident
• At least 18 years of age and not over 71 years of age
• First-time home buyer, meaning you haven’t owned a home in which you lived at any time during the year of account opening or the preceding four calendar years

Contribution limits and rules

• You are allowed to contribute a total of $8,000 annually, up to a maximum lifetime contribution amount of $40,000
• Overcontributions are taxed at 1% per month
• You must open a plan to start accumulating contribution room
• Unused contribution room can be carried forward. For example, if you contribute $5,000 in 2023 you could contribute up to $11,000 in 2024 ($8,000 – $5,000 + $8,000)
• The unused contributions you can carry forward is limited to $8,000, therefore the most you can contribute in any one year is $16,000, the $8,000 unused contribution carry forward and $8,000 current year contribution
• Unlike an RRSP, contributions made within the first 60 days of a calendar year cannot be claimed in the prior year
• The FHSA deduction does not have to be used in the same tax year as the contribution and can be carried forward to a future year

Withdrawal Rules

For an FHSA withdrawal to be a qualifying withdrawal, you must:

• Be a first-time home buyer at the time a withdrawal is made. There is an exception that allows you to make a qualifying withdrawal within 30 days of moving into the home
• You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to occupy the home as your principal residence within one year after buying or building it
• A qualifying home would be a housing unit located in Canada
  • A housing share that only provides the right to tenancy in the housing unit would not qualify

If these conditions are met the entire FHSA can be withdrawn on a tax-free basis.

What if i don’t buy a house?

The FHSA can be kept open for 15 years. If at the end of the 15 years you have not purchased a home the following options are available:

1. Take non-qualifying withdrawal – the withdrawal would be treated as taxable income
2. Transfer to an RRSP or RRIF – the transfer would happen without an immediate tax impact and would be treated the same as all the other funds in the RRSP/RRIF going forward.
   • The transfer would not reduce or be limited by your available RRSP contribution room.

Treatment on Death

Similar to a TFSA you are able to designate your spouse or common-law partner as the successor account holder. This allows your successor holder to become the new holder of the FHSA upon your death. If the surviving spouse is not eligible to open an FHSA the amount could be transferred to an RRSP/RRIF or withdrawn as taxable income.

If the beneficiary of the FHSA is not the spouse or common-law partner, the funds would need to be withdrawn and would be taxable income of the beneficiary.

Saving for a home – TFSA vs. RRSP vs. FHSA

	TFSA	RRSP	FHSA
Annual contributions	$6,666.67	$6,666.67	$6,666.67
Tax savings (20% rate)	$0	$1,333.33	$1,333.33
Total annual contributions	$6,666.67	$8,000.00	$8,000.00
5 years of contributions	$33,333.35	$40,000.00	$40,000.00
Value after 5 years (3% return)	$35,394	$42,473	$42,473
Taxes on withdrawal (20% rate)	$0	$1,495*	$0
Net withdrawal	$35,394	$40,978	$42,473

• Home Buyers Plan has a maximum tax-free withdrawal of $35,000. The remaining $7,473 would be taxable income. The Home Buyers Plan (HBP) withdrawals must also be repaid over 15 years.

Other considerations

You can make both a FHSA withdrawal and a HBP withdrawal from your RRSP on the same home purchase. This gives access to the $35,000 of HBP withdrawals plus the balance of your FHSA as tax-free withdrawals for a home purchase.

You can transfer funds from your RRSP to your FHSA to take advantage of the tax-free withdrawal for home purchase. The transfer from your RRSP to FHSA is limited by the FHSA annual and total contribution limit. Therefore, this would only make sense in specific instances.

Conclusion

The FHSA is a better account than both a TFSA and RRSP for saving for a home. The tax-free withdrawals and lack of repayment makes it a better choice than an RRSP. While the tax deductibility of contributions makes it preferrable to a TFSA.

Even if you are not sure if you will buy a home, it should be used for retirement savings before an RRSP because the FHSA balance can be moved to an RRSP tax-free. This gives you an added $40,000 in lifetime RRSP contribution room.

Anyone who qualifies to open an FHSA should do so and deposit at least a nominal amount to begin accumulating contribution room. If you will be purchasing a home in the coming years you should be using the FHSA to save for the down payment.

Many Canadians have heard of the RESP and plenty of us probably had one when we went to post-secondary education. It is a very important and powerful savings plan and is one of the big three registered plans in Canada along with the TFSA and RRSP. 

As the name of the account makes clear, an RESP is a savings plan for education. Specifically this is for post-secondary education which includes college, university, trade school etc. 

It is a tax-sheltered account where contributions grow tax free. The contributions are not tax deductible. Lifetime contributions are limited to $50,000 per child with no annual maximum.

Government benefits

The significant benefit of the RESP is the Canada Education Savings Grant (CESG) which is a 20% federal government match on annual contributions. The government will only match the first $2,500 of contributions each year unless you are catching up for past years, then the match would apply to the first $5,000 in contributions that year. No match will be provided for annual contributions above those limits. The lifetime maximum CESG each child can receive is $7,200. If you don’t exceed the annual maximums you need to make $36,000 in contributions to receive the full $7,200 lifetime CESG.

The Canada Learning Bond is an income-tested government payment of up to $2,000/lifetime. Eligibility depends on family income and number of children. Review this link to see the eligibility criteria. 

When can I start?

You can begin contributing to an RESP for your child in their first year. If you contribute the $2,500/year you will have received the full CESG before the end of your child’s 15th year.

What if I haven’t contributed yet?

As mentioned you can catch up on CESG by contributing up to $5,000 a year and still get the 20% match. Your child can continue to get the CESG up until the year they turn 17 but there are some special rules. 

To receive the CESG between ages 15 and 17 the RESP contributions by December 31 of the year the beneficiary turns 15 must either:

• Total at least $2,000
• Have had annual contributions of at least $100 in any 4 previous years. 

Withdrawals

When it comes time to withdraw, the contributions are not taxable but the earnings and the grants would be taxable income when withdrawn. These would be taxable on the beneficiary’s (student) tax return. In many cases the student will not end up paying taxes because they will have low income and tuition tax credits to offset any income taxes from the RESP withdrawals.

What if my kids don’t end up going to post-secondary education?

If the funds are not used by your child there are some other options:

• The RESP can be transferred to a sibling fairly easily. Although the grants may need to be repaid. 
• Contributions can be withdrawn tax free but the grants would need to be repaid and there would be taxes charged on the earnings in the plan. 
• The contributions and earnings could be transferred to the beneficiary’s RRSP (if they have contribution room). 
• The contributions and earnings could be transferred to the beneficiary’s Registered Disability Savings Plan (RDSP) if the beneficiary qualifies for one.  

Keep in mind that RESPs can stay open for up to 36 years so you do not have to close it if your 18 year old child decides they don’t want to go to school. They could always change their mind. 

Conclusion

The RESP is a great tool in saving for your loved one’s post-secondary education. Receiving a 20% return on your investment as soon as you contribute is incredibly powerful in accumulating funds. Coupled with the tax-free growth in the plan, the RESP becomes an extremely compelling investment vehicle.

If you have any questions or would like a projection for your RESP, please do not hesitate to call or email us.

One of the first questions when Canadians begin saving and investing is:

What account do I use, the RRSP or the TFSA?

The RRSP has a long history and Canadians have used it for their retirement investing for decades. Meanwhile the TFSA is the new(er) kid on the block and is quickly gaining in popularity. While the choice between RRSP and TFSA comes down to your particular situation there are some general principles that can inform your decision. 

A brief description of each account:

The RRSP (Registered Retirement Savings Plan) is intended for retirement savings. Any contributions made to the plan are deducted from your taxable income. The growth and earnings accumulate tax-free. Withdrawals are considered income and are taxable. 

The TFSA (Tax Free Savings Account) is intended to be more flexible and used for other savings goals in addition to retirement. The contributions are not deducted from taxable income and withdrawals are not considered income and therefore not taxable. As with the RRSP, the growth and earnings within the plan accumulate tax-free. 

Both of these accounts can hold the same types of investments including stocks, bonds, mutual funds, ETFs and more.

General guidance on your choice

The general guidance on when to use each account is based around your current and future tax brackets. If you are paying taxes in a higher bracket when contributing than when withdrawing the RRSP makes the most sense. If your tax bracket will be the same or higher when you withdraw the money then the TFSA makes more sense. Here is a quick example:

In the first comparison, there is more money after-tax when using the RRSP. This is due to the lower tax rate when the funds were withdrawn. In the second comparison you would have more after-tax money available if you had saved within the TFSA. The tax rates don’t affect the results of investing in the TFSA but they have a large impact on the RRSP results. 

Keep in mind the benefit of the RRSP is dependent on contributing more than you would in the TFSA (the tax deduction allows you to contribute more to the RRSP).

Additional RRSP features:

The Home Buyers’ Plan allows RRSP account holders to withdraw up to $35,000 for a home down payment without paying immediate taxes. Keep in mind this is only available if you are considered a first-time home buyer purchasing a qualifying home. More information and rules about the HBP can be found here.

You are allowed to withdraw the money out under the HBP without paying taxes but you must repay the funds over a 15 year period starting the second year after the year you withdraw the funds. If you don’t make the repayments, 1/15th of the amount withdrawn will be added to your income each year starting at the first required repayment year.

There is a similar plan called the Lifelong Learning Plan that allows you to withdraw up to $20,000 ($10,000 per year) to fund the pursuit of your education and repay it over a 10 year period. More information can be found here. 

Flexibility of the TFSA

The TFSA is a much more flexible savings vehicle as it allows you to withdraw funds without worrying about the tax consequences. This can be great for emergencies, large purchases and in your retirement. Since TFSA withdrawals are not considered income they also do not affect eligibility for federal income-tested benefits and credits, such as GIS and OAS clawback.

Withdrawals from the TFSA are added back onto the contribution room the next year. This is not the case with the RRSP as withdrawals do not affect contribution room. This allows you to withdraw money from the TFSA and then reinvest that same amount back into the TFSA in the future.

Conclusion

The TFSA should be the first stop savings vehicle for investors unless they are in a high tax bracket now and expect to be in a lower one when the funds are withdrawn. The flexibility of the TFSA and ability to withdraw without worrying about taxes makes it a more useful vehicle. 

On the other hand, if you have trouble leaving your savings alone, maybe the tax payment on RRSP withdrawals will stop you from withdrawing and spending your savings. 

If you have questions about your specific situation please send us an email or give us a call.