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Gifting to your kids? Consider the new FHSA
By Linda Lamarche, CFP® 17 August 2023 5 min read
Since it was introduced in April 2023, the First Home Savings Account (FHSA) has attracted a lot of attention from Canadians hoping to become homeowners. But this registered product can also play an important role in the intergenerational transfer of wealth.
Wealth transfer is the process of transferring wealth from one generation to another. It is not just limited to the transfer of investments and property, but also includes the transfer of financial knowledge and family values. An effective wealth transfer strategy is essential to the growth and preservation of your family’s wealth.
The Investor Economics 2021 Household Balance Sheet Report estimates that $1.2 billion in personal wealth will be transferred from one generation to the next in Canada within the next decade.1 Although a great deal of this cross-generational wealth transfer will happen through estate planning and inheritances, there is also an increasing trend of gifting to adult children while living. With a living gift, parents are able to witness and appreciate the benefits of their gift during their lifetime while the children have the opportunity to establish a strong financial foundation for their future.
According to a November 2022 report from the charitable organization Generation Squeeze, it takes 17 years of full-time work for the typical young person to save a 20% down payment on an average priced home in Canada. This is 12 years more than when today’s aging population started out as young people.2 With all-time-high real estate prices and interest rates at their highest levels in over 20 years there is more motivation than ever for parents to assist their children with home ownership.
The FHSA provides a tax-efficient opportunity for the next generation to save for the purchase of their first home.
FHSA basics
The FHSA is a registered plan available to Canadian residents aged 18 or older that allows first-time home buyers3 a tax-advantaged option to save for their first home. Similar to a Registered Retirement Savings Plan (RRSP), contributions to an FHSA will be tax deductible, and, similar to a Tax-Free Savings Account (TFSA), withdrawals to purchase a first home would be non-taxable. This includes any investment earnings or growth in the account.
FHSAs have a lifetime contribution limit of $40,000. Beginning in the year you open an FHSA, $8,000 is added to your FHSA participation room. If you contribute less than your FHSA room in a particular year, the unused portion, up to $8,000, is added to your FHSA participation room for the following year.
How an FHSA is an opportunity to transfer wealth
Although you can’t open an FHSA on behalf of your child, once your child opens an FHSA, you can consider giving them up to $8,000 per year to make the annual contributions.
Example: Todd and Valerie
Todd and Valerie are well established and in the late stages of their careers. They have significant savings to ensure their retirement and future goals are funded, have provided for any contingencies, and have enough to leave a substantial legacy. Their daughter Ella is 18 years old and attending university. She does not have any of her own resources to start saving for a down payment on a home.
Todd and Valerie have discussed the considerations of gifting to adult children and have decided they would like to help Ella start saving for a home. Their financial advisor suggests that a tax-efficient way for them to do this is through an FHSA.
Ella’s FHSA participation room of $8,000 per year becomes available the year she opens the FHSA account, up to a lifetime limit of $40,000. Todd and Valerie provide Ella $8,000 per year for five years which is invested in her FHSA. This is the maximum amount that can be invested. Ella is able to claim a tax deduction for the contributions she made to her FHSA. The deductions can be claimed by Ella in the year they are made, or any future year, when she may be in a higher tax bracket.
Ella’s FHSA can stay open, growing tax free, for up to 15 years, and the value is available for her withdrawal on a tax-free basis for the purchase of a home in that time period. If the investment is growing at 5%, at the end of 15 years she would be able to withdraw over $79,000 tax free for her downpayment, as per the following:
|
Year of account |
Age |
Contributions |
Cumulative contributions |
FHSA Value |
|
Account opening |
18 |
$8,000 |
$8,000 |
$8,400 |
|
1 |
19 |
$8,000 |
$16,000 |
$17,220 |
|
2 |
20 |
$8,000 |
$24,000 |
$26,481 |
|
3 |
21 |
$8,000 |
$32,000 |
$36,205 |
|
4 |
22 |
$8,000 |
$40,000 |
$46,415 |
|
5 |
23 |
|
$40,000 |
$48,736 |
|
6 |
24 |
|
$40,000 |
$51,173 |
|
7 |
25 |
|
$40,000 |
$53,732 |
|
8 |
26 |
|
$40,000 |
$56,418 |
|
9 |
27 |
|
$40,000 |
$59,239 |
|
10 |
28 |
|
$40,000 |
$62,201 |
|
11 |
29 |
|
$40,000 |
$65,311 |
|
12 |
30 |
|
$40,000 |
$68,577 |
|
13 |
31 |
|
$40,000 |
$72,005 |
|
14 |
32 |
|
$40,000 |
$75,606 |
|
Account closing |
33 |
|
$40,000 |
$79,386 |
The average age of a first time-time home buyer in Canada is 36 years old.4 As you can see, by age 33 Ella has accrued $79,000 on a tax-free basis towards the purchase of a home.
Alternatively, if Ella no longer qualifies as a first home buyer, or decides she doesn't want to use the funds towards the purchase of a home, she can transfer the value to her RRSP on a tax-deferred basis. This does not require RRSP room, and essentially adds the ability for Ella to shelter an extra $79,000 in her RRSP above her limit. Lastly, Ella can withdraw the proceeds, and they will be included in her income and taxed accordingly.
Either way, the $40,000 Todd and Valerie shared with Ella was eligible as a tax deduction from Ella’s income, reducing her overall tax bill and growing tax efficiently in her FHSA to $79,000.
The FHSA is not the only option available for parents looking to help their children achieve home ownership. The article helping your child with their first home provides additional options and considerations for helping your children become homeowners.
The process of transferring wealth is more than just passing on your financial assets, but also providing your children with knowledge and confidence in their financial journey. No matter how you transfer your wealth, whether it's while living or through an inheritance, sharing financial wisdom and empowering your children with the tools to make informed long-term financial decisions can protect and preserve your legacy. The transfer of financial skills and literacy is not just limited to adult children, and as discussed in Tips for passing on financial sense to the next generation, it’s never too early to build good money habits and behaviours. Speaking with an ATB Wealth advisor can ensure the wealth you’ve built will be efficiently passed on to the next generation.
Learn more about the First Home Savings Account
Ready to see how a First Home Savings Account fits your financial plan?
More about the First Home Savings Account
What's a First Home Savings Account?
The new FHSA helps make the most of your money and build a down payment sooner.
Read articleHelping your child with their first home
When helping your children buy a first home, there are many things to consider.
Read articleTips for passing down financial sense
Here are a few ways to get the conversation started.
Read articleGifting to adult children
When gifting to adult children, there are financial considerations to review.
Read articleAn individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the withdrawal (except the 30 days immediately before the withdrawal), or at any time in the previous four calendar years, they did not live in a home as their principal residence that the individual owned or jointly owned.
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