Would Canadians have access to different account types such as GICs and self-directed investing when it comes to the new tax-free first home savings account, which is rumoured to be introduced this year?
It seems this would only make sense as it’s the case with other tax-sheltered accounts (i.e. TFSA, RRSP and RESP accounts).
—Rohan
FHSA in Canada: Qualified investments and limitations
Bill C-32, which implemented parts of the 2022 federal budget, became law on December 15, 2022. Among its measures was the creation of the tax-free first home savings account (FHSA), effective April 1, 2023.
In practice, Rohan, Canadians were expected to be able to open FHSAs beginning in April 2023, although some financial institutions might phase the product in throughout the year.
Experience with other registered plans shows that access can vary. For example, the registered disability savings plan (RDSP), introduced in 2008, is still not widely offered by every bank or broker. Only selected banks, trust companies and wealth managers provide RDSPs, and some only offer them through branch services using proprietary funds rather than as self-directed accounts.
What types of investments can you hold in an FHSA?
Registered accounts in Canada are limited to certain qualified investments. Finance Canada has indicated that an FHSA would be allowed to hold essentially the same types of qualified investments permitted in a TFSA. That means a wide range of common investment choices should be permitted.
An FHSA would be permitted to hold the same qualified investments that are currently allowed to be held in a TFSA. In particular, taxpayers would be able to hold a broad range of investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. The prohibited investment rules and non-qualified investment rules applicable to other registered plans would apply and would disallow investments in certain assets such as land, shares of private corporations and general partnership units.
Put simply, FHSAs are likely to allow guaranteed investment certificates (GICs), mutual funds, publicly traded stocks, bonds and exchange-traded funds (ETFs). To hold stocks, ETFs or other publicly traded securities within an FHSA, account holders will need a brokerage that supports FHSAs. Given the broad public interest in homeownership and the large number of younger investors who now use brokerage platforms, it is reasonable to expect that many firms will offer self-directed FHSA options.
What should you hold in an FHSA?
Choosing what to hold in an FHSA depends on your time horizon and tolerance for volatility. The FHSA gives new savers a tax-advantaged way to accumulate a down payment, but stocks and bonds can swing sharply in the short term.
The market behavior of 2022 is a useful reminder: broad Canadian and international equity indices and even bond indexes suffered negative returns that year. If you plan to buy a home within five years, you should be cautious about taking on too much market risk. For short-term saving goals, secure options such as GICs—especially when they offer competitive rates—can be appropriate to preserve capital while still earning interest.
Are FHSA contributions tax deductible?
One important feature of the FHSA is that contributions are tax deductible, which creates planning choices. If you do not expect to purchase a home for several years and anticipate your income will rise, contributing initially to a TFSA could be advantageous. You can grow money tax-free inside a TFSA and later withdraw funds to contribute to an FHSA, claiming the FHSA deduction in years when your income (and marginal tax rate) is higher.
The FHSA includes contribution limits: an annual cap of $8,000 and a lifetime contribution limit of $40,000 over the 15-year period after the account is opened.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products.
Read more from Jason Heath:
- A strategy for non-registered and TFSA accounts in retirement
- Estate planning and trusts for a beneficiary with a disability
- Is now the time for retirees to sell stocks and buy GICs?
- Can an estate contribute to an RESP account?