For Canadians looking to purchase a home, starting on April 1, 2023, you will be able to tap into a new way to save while also receiving a tax break. The First Home Savings Account (FHSA) will provide an opportunity for Canadians to save up to $40,000 on a tax-free basis to put towards purchasing a home in Canada.
What is the First Home Savings Account?
The new FHSA is a registered account that Canadians can use to save up to $40,000 on a tax-free basis so that they can use the funds to purchase their first home. Similar to an RRSP, contributions made to an FHSA will be tax deductible, but withdrawals to purchase a first home, including any investment income or growth generated inside of the FHA, would be non-taxable – similar to a TFSA.
The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old. Any funds in the FHSA not used for a home by this time can be transferred on a tax-free basis into your RRSP or your RRIF account, or you can simply withdraw the funds on a taxable basis.
Who is Eligible to Open an First Home Savings Account?
Before rushing to open an FHSA, make sure you’re eligible! Here are the qualifications to open an FHSA:
- Must be a resident of Canada;
- Must be 18 years of age; and
- Must be a first-time home buyer (for this program, a first-time home buyer is someone that has not lived in a home that they owned at any time in the calendar year the FHSA is opened or in the prior four calendar years).
How to Contribute to the FHSA
Eligible Canadian residents will be able to contribute $8,000 annually, up to a total lifetime contribution limit of $40,000. If you overcontribute by mistake, there is a 1% penalty tax charged for any overcontributions.
The annual contribution limit will apply on a calendar basis and, unlike RRSPs, contributions made within the first 60 days of the subsequent calendar will count towards that current tax year.
Like RRSP contributions, you’re not required to claim the FHSA deduction in the tax year that the contribution is made. Rather, the contribution amount can be carried forward indefinitely and deducted in a later tax year, which may make sense if you expect to be in a higher tax bracket in a future year.
Investing in the FHSA
Once your account is set up and you’ve made some contributions, you can purchase and hold the same types of qualified investments are you would typically hold in your TFSA and RRSP. For example, you can hold mutual funds, publicly traded securities, government and corporate bonds and GICs.
Withdrawing Funds from Your FHSA for Your Home Purchase
If you want to withdraw funds from your First Home Savings Account on a non-taxable basis, certain conditions must be met. First, you must be a first-time homebuyer at the time of the withdrawal and the home you’re seeking to purchase must be in Canada. You must also have a written agreement to buy or build a qualifying home before October 1st of the year following the year of withdrawal. Additionally, you must intend to occupy that home as your primary residence (so you can’t do this on a rental property unless it’s a house hack!).
If you meet the above-noted conditions, the entire FHSA balance can be withdrawn on a tax-free basis in a single withdrawal or series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not permitted to have another FHSA in your lifetime.