Students heading back to school this fall have a new option to sock away any excess savings — the new first home savings account (FHSA). While, traditionally, many students have contributed their summer earnings to a TFSA, the FHSA may prove to be a better choice. Let’s see why.
The FHSA is a registered plan that gives first-time homebuyers the ability to contribute $8,000 per year, up to a $40,000 lifetime limit, to save on a tax-free basis toward the purchase of a qualifying 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 or growth earned in the account, when funds are used to buy a first home.
Students with minimal income may not wish to take the FHSA deduction currently, and can save it and carry it forward indefinitely to be deducted in a later tax year when the student may be in a higher tax bracket.
Consider Ishaan, who is in his final year of post-secondary studies. While in school, he worked part time and summers and, after paying for the cost of his studies and living expenses, has $8,000 remaining. He could contribute that to an FHSA in 2023 and save that deduction for a later year when he’s in a higher tax bracket. This would give him a head start toward saving for a down payment should he ultimately buy a home within the next 15 years.
Students should also make sure they file a tax return to establish RRSP contribution room — for example, if a student has income from a part-time or summer job. RRSP room is typically equal to 18% of the prior year’s earned income. Based on reported earned income, the Canada Revenue Agency will automatically keep track of your RRSP contribution room, which can be used up until age 71. A tax deduction can be claimed for contributions made in the year that do not exceed your available contribution room. Alternatively, just like with the FHSA, the tax deduction can be claimed in a future year.
For example, let’s say Anika is a student who works part time, earning $10,000 of employment income in 2023. This is well below the 2023 basic personal amount of $15,000, so she won’t owe any tax on this income. By filing a 2023 tax return, she will generate RRSP contribution room of $1,800 (18% × $10,000) for 2024. Anika could choose to make an RRSP contribution in 2024 and defer claiming the tax deduction until she’s in a higher tax bracket, perhaps when she starts working full time after graduation.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.