Canada’s New First Home Savings Account For First-Time Homebuyers
Buying your first home can be one of the most exciting moments of your life. With Canada’s new first home savings account (FHSA), that dream can become a reality sooner than you think.
Starting in spring 2023, the Canadian government introduced a new savings mechanism designed with first-time homebuyers in mind. The FHSA is essentially a cross between a TFSA, which provides for the tax-free growth of your investments, and an RRSP, which allows for tax-deductible contributions.
Who is eligible to open an FHSA account?
You must be:
- A Canadian resident
- 18 years or older
- A first-time homebuyer. You are considered a first-time buyer if you have not owned a home in Canada in the preceding four years before opening an account.
Now, the FHSA may not be ideal for you if you do not plan on buying a home within the 15-year limit or if you are planning on buying a home in the immediate future. It is also not ideal for those who need cash on hand for things like emergencies or post-secondary schooling, so that is something to keep in mind. The FHSA has an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Your unused contribution limit carries forward year-to-year. So if you do not contribute the full amount one year, you can still do so the following year.
For most eligible Canadians, it would be advantageous to open an account as soon as possible, so that any contributions can grow tax-free for as long as possible within the 15-year maximum lifespan. One thing to note is if you do not buy a home within the 15-year timeframe, the account must be closed. However, any funds can be transferred to your RRSP with no penalty and without affecting your contribution room.
You may also be wondering how an FHSA is different from the Home Buyers’ Plan (HBP). One key advantage of the FHSA, compared to the HBP, is that you can withdraw your money tax-free, similar to a TFSA withdrawal. But unlike the HBP, the funds do not need to be repaid. The only restriction is that the money must be used to purchase your first home.
Overall, the FHSA is an amazing new initiative – especially for young Canadians looking ahead to achieve their home ownership goals.
SUMMARY
A first home savings account (FHSA) is a registered plan allowing the client, as a prospective first-time homebuyer, to save for their first home tax-free (up to certain limits).
Below is a summary of FHSA’s features, and additional information can be found here on the CRA website.
FHSA summary of features include:
- A contribution maximum of $40,000, with a limit of $8,000 annually (noting that irrespective of when an account is opened in 2023 the full annual limit will apply).
- Contribution room accumulates only after the account is opened, and any unused amounts up to a maximum of $8,000 can be carried forward for use in the following year.
- Qualified contributions are tax-deductible and qualifying withdrawals – which include capital growth and all investment income accumulated within the account – are non-taxable.
- Investments that can be held are identical to those currently permitted in TFSAs.
- Unlike the existing Home Buyers' Plan option currently in place today through RRSPs, qualified FHSA withdrawals don't need to be paid back.
- An account can only be held for a maximum of 15 years or until the account holder turns 71.
- Unused FHSA savings can transfer, on a tax-free basis, to an RRSP/RRIF or can be withdrawn as taxable income.
- Minimum age 18 years old, in certain provinces and territories, the legal age at which an individual can enter into a contract (which includes opening an FHSA) is 19 years old.
ARE YOU INTERESTED IN OPENING AN FHSA?
We recommend speaking with a member of our team. Schedule a 30-minute introductory meeting and find out if we can help you.
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