House for sale

For many of our clients, the number one savings goal (apart from saving for retirement) is buying their first home. If your client is considering purchasing their first home at some point in 2024, here’s a few tax planning strategies to review with them.

First home savings account (FHSA)

Launched last year, the FHSA is a new registered plan that gives prospective homebuyers the ability to save $8,000 per year, up to a $40,000 lifetime limit, on a tax-free basis toward the purchase of a first home in Canada. The FHSA combines the best feature of the RRSP — a tax-deductible contribution — with the most attractive feature of the TFSA — the tax-free withdrawal of all contributions, investment income and growth earned in the account when used to buy a first home.

To open an FHSA, the client must be a resident of Canada and at least 18 years of age. The FHSA’s definition of a first-time homebuyer is that the individual doesn’t live in a qualifying home as their principal residence, which is owned, jointly or otherwise, either by them or their spouse or common-law partner in the calendar year in which the account is opened (prior to the home purchase) or in the preceding four calendar years.

Just like RRSP contributions, the contributor doesn’t have to claim the FHSA deduction in the year they make the contribution. The contribution can be carried forward indefinitely and deducted in a later tax year, perhaps when the contributor may be in a higher tax bracket.

Clients who don’t have the cash to contribute to an FHSA can choose to transfer funds from an existing RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. Obviously, they can’t claim a deduction for the transfer, as a deduction was available for the RRSP contribution itself.

Clients who are planning to buy a home in the very near future should be reminded that there’s no minimum time period that FHSA contributions must remain in the account prior to buying that first home. In other words, a client could contribute $8,000 to an FHSA today, claim a tax deduction (in 2024 or any future year) for the amount contributed, and then withdraw the $8,000 (plus any income or growth) tax free, beginning the following day if they buy a qualifying home.

Home Buyers’ Plan (HBP)

The federal HBP allows a first-time homebuyer to withdraw up to $35,000 from their RRSP to purchase or construct a new home without having to pay tax on that withdrawal. Individuals may also participate in the HBP if they have lived in a home with their spouse or common-law partner, but, due to a breakdown in their marriage or partnership, they have been living separate and apart from their spouse or partner for at least 90 days.

Under the HBP, any funds withdrawn must be used to acquire or build a home before Oct. 1 of the following year. Amounts withdrawn under the HBP must be repaid over a maximum of 15 years, starting in the second calendar year after the withdrawal; otherwise, the amount that was required to be repaid but was not repaid in a particular calendar year is added to the participant’s income for that year.

A client thinking about buying a home can participate in both the FHSA and the HBP. But, unlike the FHSA, the borrowed funds to be withdrawn under the HBP must be in the client’s RRSP for at least 90 days before they are taken out, or the RRSP contribution may not be deductible.

Home buyers’ amount (HBA)

Finally, when it comes time for clients to file their 2024 personal tax return for the calendar year in which they bought their first home, remind them to claim the HBA. It’s a non-refundable tax credit worth $1,500 to first-time homebuyers who acquired their first home during the year.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.