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Guest Article by Rhonda Martin, Plan For Wealth
To successfully navigate Canada’s real estate market, first-time buyers need to look beyond the surface level of the First Home Savings Account (FHSA) and the Home Buyers’ Plan (HBP).
Understanding the fine print reveals powerful loopholes, strategic timelines, and distinct technical advantages that can save you thousands of dollars!
In this article, we at Plan For Wealth de-mystify these programs and offer some helpful tips and little-known tricks.
Part One: The Fine Print of the FHSA
The FHSA is more flexible than standard registered accounts, but it operates on strict rules.
- Your annual $8,000 contribution room does not automatically accumulate when you turn 18 – it only activates the year you formally open an FHSA.
- Here’s a helpful tip: Even if you only deposit $10, you should open an account immediately to start locking in your annual room.
- Unlike the HBP, the FHSA has no minimum holding period, an amount of time when money must stay invested. You can deposit money into the account and legally withdraw it tax-free the very next day to purchase a home, instantly securing a tax deduction for that year.
- The $40,000 lifetime limit applies strictly to your contributions. If your investments perform well and grow the account to $70,000, you can withdraw the entire $70,000 completely tax-free.
- The FHSA contribution deadline is December 31 of each calendar year. It does not share the standard 60-day extension window into January and February that applies to RRSPs.
Part Two: The First-time Home Buyer’s Plan (HBP)
The HBP allows you to leverage your retirement savings, but navigating the repayment schedule requires careful attention:
- Great News! The federal government extended the temporary five-year grace period for all HBP withdrawals made between January 1, 2022, and December 31, 2028.
- Here’s a helpful tip: If you leverage the HBP to buy a home, you do not have to begin your 15-year repayment schedule until the fifth year following your withdrawal.
- Funds must be parked inside your RRSP for at least 89 days before they can be withdrawn under the HBP guidelines. If you withdraw them sooner, you will lose the tax-deductibility of those contributions.
- Your annual required HBP repayment is calculated by dividing your remaining balance by the number of years left in your 15-year window. If you miss a repayment, that specific annual amount is permanently added to your taxable income for the year, and you lose that RRSP contribution room forever.
Redefining the definition of ‘First-Time Buyer’
Both programs share a unique definition of a “first-time homebuyer” that opens doors for past homeowners. Did you know that you can qualify for both programs again if you or your spouse have not lived in a home that you owned at any point during the current calendar year or the previous four calendar years?
Part Three: What’s the ‘Rental Property Loophole’?
Did you know that owning an investment property does not disqualify you from using the FHSA or HBP. That’s right! Under CRA guidelines, eligibility for the FHSA and HBP is not determined by whether you have ever owned a piece of real estate. Instead, it is strictly determined by whether you have lived in a home that you owned.
Helpful Tip #3: This loophole provides that you can use both programs provided you have never lived in a property that you owned. If you continue to rent your own living space (e.g., leasing an apartment OR living with family) and never use your investment property as your principal residence, you legally maintain your first-time homebuyer status.
But here is another tip regarding rental property loophole:
You can also leverage this loophole in reverse to buy a multi-unit property (up to four units, like a duplex or triplex) using your FHSA and HBP. How? The CRA requires that, in this case, you do occupy or intend to occupy the qualifying home as your principal residence within one year of purchasing it.
To pull off this strategy legally:
- You must move into one of the units as your primary home.
- You can immediately rent out the remaining units to tenants to help cover your mortgage.
- This allows you to empty your tax shelters completely tax-free to secure a cash-flowing asset right out of the gate.
What’s the catch here?
The CRA monitors this closely, so you must strictly adhere to the following guardrails:
- When withdrawing funds from your FHSA or HBP, you MUST genuinely intend to occupy the property as your principal residence. You cannot buy a single-family home using these tax shelters and immediately rent the entire house out without living there first.
- If you are using the pure rental loophole (owning a property you don’t live in), you must declare all rental income and expenses on your annual tax returns. Failing to do so can trigger an audit, strip away your first-time status, and turn your tax-free withdrawals into heavily taxed penalties.
- Getting your own tax and accounting advice before leaping into the ‘Loophole Land’ is highly recommended so that you are well informed before you buy.
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