Taking Advantage of a First Home Savings Account (FHSA) in Canada
Buying your first home can be really hard and has certainly only gotten harder in recent years but prices and interest rates are rising. But there are ways for you to ease your way into home ownership and the Canadian government recently launched a new type of savings account that could be your key resource for becoming a proud homeowner. In this article, we’ll explore what the FHSA is, who offers it, who is eligible, how to fund and participate in the program, tax deductions, and transferring funds.
- The Tax-Free First Home Savings Account (FHSA) is an excellent tool for Canadians who are looking to save for their first home.
- To be eligible to open a First Home Savings Account, you must be a resident of Canada, be at least 18 years of age, and not currently own a home.
- Contributions made to an FHSA are typically tax-deductible, meaning that individuals may be able to reduce their taxable income by the amount contributed.
What is the Tax-Free First Home Savings Account (FHSA)?
In 2022, the Canadian government announced the creation of a new registered savings account, the Tax-Free First Home Savings Account (FHSA). Starting in 2023 eligible Canadians will be able to save for a down payment on their first home. This account permits an annual tax-deductible contribution of up to $8,000 and a lifetime maximum contribution of $40,000 per person. It combines the benefits of both the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA), wherein contributions are tax-deductible, and any qualifying withdrawals made from the account are tax-free.
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Who Offers First Home Savings Accounts?
Various financial institutions in Canada offer FHSA accounts to their clients, including banks and credit unions. It’s important to research and compare different options to find an account that suits your needs and financial goals. Generally speaking financial institutions offering RRSP and TFSA are also offering FHSA from April 2023.
Who is Eligible to Open a First Home Savings Account?
You must meet these 3 conditions in order to open an FHSA account. First, you must be over 18 years of age or older, a resident of Canada and a first-time home buyer. The FHSA is specifically designed for first-time home buyers, meaning that when you withdraw funds for a home purchase, you must not have resided in a home that you owned within the previous four calendar years. This eligibility requirement ensures that the tax-free home savings account is utilized by those who have not yet owned a home and are in need of financial assistance to purchase their first home.
Funding and Participating in Your FHSA
Similar to a TFSA, an FHSA can accommodate both savings and investment options. It allows for qualified investments such as mutual funds, bonds, and GICs to be held within the account. To participate in a first-time home buyer account, you can contribute to your account through various methods, such as automatic transfers or direct deposits. It’s important to monitor your contributions and ensure that you do not exceed the annual and lifetime limits.
Tax Deductions for Your FHSA Contributions
One significant advantage of contributing to a first-time home buyer savings account is the tax benefits. Contributions to your FHSA may be deductible from your income tax and tax return for the year. It’s important to note that RRSP contributions made to your FHSA are not tax-deductible.
Transferring Funds Between Your FHSA and other Registered Plans
In most cases, it is possible to transfer assets from your RRSPs to your FHSA without facing any immediate tax implications, as long as the transfer is made directly and doesn’t exceed your unused FHSA contribution limit at the time of transfer. Similarly, you can transfer property from one FHSA to another or from your FHSA to your RRSPs or RRIFs without incurring immediate tax consequences, provided that the transfer is a direct one and certain other conditions are met as required.
Frequently Asked Questions
Here are some of the commonly asked questions relating to First Home Saving accounts in Canada.
Can you have an FHSA at the same time as a TFSA and RRSP?
The answer is yes – you can hold all three accounts simultaneously. The RRSP Home Buyers’ Plan allows first-time homebuyers to withdraw up to $35,000 from their RRSP towards the purchase of a home, but the withdrawn amount must be repaid within 15 years. It’s worth noting that any other withdrawals from your RRSP will be subject to taxation. On the other hand, TFSA withdrawals are not taxed and can be used for any savings goal.
How does the FHSA compare to the RRSP Homebuyers Plan and the TFSA?
The FHSA, RRSP Home Buyers Plan, and TFSA share several similarities and the main one when it comes to home buying is that you won’t be taxed on withdrawals to purchase your home. The RRSP Home Buyers’ Plan allows first-time homebuyers to withdraw up to $35,000 from their RRSP towards the purchase of a home, but the withdrawn amount must be repaid within 15 years. It’s worth noting that any other withdrawals from your RRSP will be subject to taxation. On the other hand, TFSA withdrawals are not taxed and can be used for any savings goal.
What happens if you eventually don’t buy a home?
In case you choose not to utilize your FHSA contributions toward acquiring a home, you have several options. Either you transfer the savings to an RRSP or a Registered Retirement Income Fund (RRIF) without any tax implications. Or you withdraw the money from your FHSA and you will be taxed on the amount taken out.
What happens if you are or become a non-resident of Canada?
FHSAs are only available to Canadian residents for tax purposes. If your situation ever changes after opening an FHSA, you’ll still be able to contribute to your savings accounts as a non-resident taxpayer however you’ll only be able to make qualifying withdrawals if you’re a Canadian resident. If you have any doubts about your situation, contact your financial institution where your FHSA is held to discuss your particular case.
If you’re willing to save money for a downpayment before buying your first home, it’s important to know that there are several available resources at your disposal. The FHSA is a great new tool, worth considering, along with other savings plans like the TFSA and RRSP Home Buyers’ Plan. They can help you reach your homeownership goals faster. As always, it’s advisable to consult a financial advisor to help you make the best decisions for your individual circumstances.
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