Welcome to this article on the Tax-Free First Home Savings Account (FHSA), a new registered plan introduced by the Government of Canada in 2022 to help Canadians save for their first home.
A first home savings account (FHSA) is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits). You will be able to open an FHSA starting April 1, 2023.
This article will provide valuable information about FHSA, including its benefits, eligibility criteria, contribution limits, and tax implications. So, let’s dive in and explore everything you need to know about FHSA.
What is a Tax-Free First Home Savings Account (FHSA)?
The Tax-Free First Home Savings Account (FHSA) is a savings plan that merges some of the features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).
It operates similarly to an RRSP, where contributions are generally tax-deductible. However, like a TFSA, when a qualifying withdrawal is made to buy an eligible home, the withdrawn amount, including any income or gains, is tax-free.
| Summary Features of an FHSA | – Do not restore the RRSP contribution room |
| Eligibility | – Canadian resident |
| – 18 years or older | |
| – First-time home buyer | |
| Types of Investments in an FHSA | – Cash |
| – Mutual funds | |
| – Publicly traded securities | |
| – Government and corporate bonds | |
| – Guaranteed investment certificates | |
| Account duration | – Maximum 15 years |
| – Until the end of the year you turn 71 | |
| – Or until the end of the year following the year in which you make a qualifying withdrawal for the first home purchase | |
| Annual contribution limit | – $8,000 |
| Lifetime contribution limit | – $40,000 |
| Unused contribution room | – Maximum of $8,000 can carry forward to the following year |
| Tax implications for non-home purchase | – Withdrawn funds subject to tax |
| – Balance can be transferred to an RRSP or RRIF on a non-taxable transfer basis | |
| Transfers from FHSA to RRSP/RRIF | – Not deductible from income |
| – Not impact available RRSP contribution room | |
| – Transfers subject to FHSA annual and lifetime contribution limits | |
| Qualifying withdrawal requirements | – First-time homebuyer and resident of Canada at the time of withdrawal |
| – Acquisition of a qualifying home located in Canada | |
| – Written agreement to buy or build a qualifying home located in Canada before October 1 of the year following the year of withdrawal | |
| – Intend to occupy the qualifying home as the principal place of residence within one year of buying or building it | |
| – Do not restore the RRSP contribution room | – Tax-free basis |
| – Transfers subject to FHSA annual and lifetime contribution limits | |
| – Do not restore RRSP contribution room |
How is the FHSA different from the Home Buyers Plan?
The Home Buyers’ Plan currently allows eligible Canadians to withdraw up to $35,000 from their RRSP, which must be paid back to their RRSP within 15 years, subject to specific conditions.
In contrast, the FHSA does not require repayment of the funds withdrawn for a first home purchase.
Our advisors can assist you in determining the most suitable investment option, or a combination of options, to help you achieve your goal of homeownership.
What happens to the funds in a First Home Savings Account (FHSA) if you don’t purchase a home?
If you have a First Home Savings Account (FHSA) but do not use the funds to purchase a qualifying home, the funds withdrawn from the account will be subject to tax.
This means you will have to pay tax on the interest earned on the account and the original contributions made. However, there is an alternative option.
The balance in your FHSA not used to purchase a qualifying home could be transferred to an RRSP or RRIF (Registered Retirement Income Fund) on a non-taxable transfer basis, subject to applicable rules.
This transfer allows you to save for your retirement instead of using the funds for a home purchase. It’s important to note that transfers from your FHSA to your RRSP or RRIF do not impact your available RRSP contribution room, and the funds transferred to an RRSP or RRIF will be taxed upon withdrawal.
What are the benefits of a First Home Savings Account (FHSA) compared to other savings options?
- Tax advantages
- No repayment necessary
- Eligibility
- Investment options
- Contribution limits
- Unused contribution room
- Transfer options
- No impact on RRSP contribution room
What Are Other Canadian Home Buyer Incentives?
The First Home Savings Account (FHSA) offers other Canadian home buyers incentives to help make homeownership more affordable. One such incentive is the Home Buyers’ Plan (HBP), which allows first-time home buyers to withdraw up to $35,000 from their RRSPs towards a down payment on a home.
The funds must be repaid to the RRSP within 15 years, but the HBP can provide a valuable source of funding for those who have been saving for retirement.
Another incentive is the First-Time Home Buyer Incentive (FTHBI), a shared-equity program that allows eligible first-time home buyers to apply for a portion of the purchase price of a home.
This can help lower the money needed for a down payment and reduce monthly mortgage payments. The program is available in select cities across Canada, and there are certain eligibility requirements to qualify.
Some provinces offer their home buyers incentives, such as the Land Transfer Tax Rebate in Ontario and the Property Transfer Tax (PTT) Rebate in British Columbia. These rebates can help reduce the taxes owed when purchasing a home.