Canadians looking to buy their very first home in the future received some good news in April, 2023. A new program was offered by the federal government, creating a new tax-advantaged account that aims at helping Canadians save for a down payment for that first home.
New Tax-Free First Home Savings Account (FHSA) will make home ownership more feasible for many Canadians.
What Is the First Home Savings Account (FHSA)?
This is a new program offered by the Canadian government that lets an individual make contributions to a FHSA account; the contributions are tax deductible and withdrawals that are used for a qualifying first home purchase are tax-free. This means you have an excellent tax advantage while you are trying to save for your first home purchase.
Saved money needs to be used for a home purchase within 15 years of first opening the FHSA or before you turn 71, whichever comes first.
Who Is Eligible?
You need to be between 18 and 71, and a current tax resident of Canada. The account needs to be for the purposes of saving for a qualifying home within Canada.
You do not qualify to open an account if you, or your spouse or common law partner, already own a home as a principal place of residence.
However, you do qualify if both of you did not own a home as principal place of residence in the current and previous four years.
The new home you are buying needs to be your principal residence.
What Are the Contribution Limits?
After you have opened up your account, you can contribute up to $8,000 every year, up to a lifetime maximum of $40,000.
For example, at a marginal tax rate of 43%, an annual contribution of $8,000 can help you save approximately $3,440 in taxes. The contribution is claimed when you file your personal income tax return.
Unused contributions for your annual limit will carry forward, so if you do not contribute the maximum one year, you can make up for it the next year. There is a maximum carry forward of $8,000, however.
Once you have reached the $40,000 lifetime contribution limit maximum, or after 15 years, you can’t contribute any more, and you have to use the funds for a qualifying home purchase.
How Is It Different From a Tax Free Savings Account and the Registered Retirement Savings Plan Home Buyers Plan?
While the First Home Savings Account program draws on some of the same advantages that TFSAs and RRSPs offer, it is a different and complementary program aimed at helping first time homebuyers.
It offers some of the benefits of TFSAs and RRSPs, making it a worthwhile investment. The FHSA has tax deductible contributions like an RRSP, and tax free withdrawals like a TFSA or the RRSP Home Buyers’ Plan program.
The FHSA gives you more tax-protected contribution room and more tax savings to help you with your savings goals and investment growth.
Unlike the Registered Retirement Savings Plan Home Buyers Plan, where you borrow money from your RRSP and have to pay that borrowed money back into your savings account over 15 years, you do not need to pay back the First Home Savings Account contributions.
Also unlike RRSPs, FHSA accounts do not come in spousal plans. Therefore, if you want to fund your spouse’s FHSA account, you must first gift them the funds, or else you face attribution rules where any income and capital gains gets taxed in your hands instead.
Unlike a TFSA, contributions can be deducted from your income.
At the end of the day, using all three accounts together will help you purchase your first home faster, while saving money in taxes along the way.
What Flexibility Do You Have to Grow the Savings Account?
Not only do savings accounts grow tax free, but there is a great deal of flexibility in how you can invest within the FHSA program.
First Home Savings Accounts can be used to invest in mutual funds, guaranteed investment certificates, stocks, ETFs, and other options, similar to a TFSA or RRSP. Your investments will grow tax-free within your First Home Savings Account so you can avoid capital gains or increasing your taxable income on the investment while you save up for your home.
How Can You Combine the FHSA When Buying a Home?
One of the biggest benefits of the FHSA is that you can combine it.
You can withdraw funds from your FHSA account and from your RRSP Home Buyers’ Plan for your down payment for the same qualifying home purchase, when you are ready to become a homeowner.
If you are married or have a common law partner, you both can open an FHSA savings account, to double your maximum to $80,000 to go towards your new home.
Combine that with up to $35,000 that each of you can withdraw from the RRSP Home Buyers’ Plan, for an extra $70,000.
That is $150,000 in tax free withdrawals to go towards the purchase of your home.
When Can I Withdraw To Buy a Home?
To qualify for a tax free withdrawal, the following conditions need to be met:
- Must be a resident of Canada
- Must be a first time home buyer, or have not owned a home in the current or last 4 years
- Must have entered into a written agreement to buy or build a qualifying home before October 1 of the year following the withdrawal
- No more than 30 days have past since moving into the qualifying home
- Must intend to occupy the home as your principal residence
- The qualifying home must be in Canada
Withdrawals do not replenish FHSA contribution limits, like TFSA accounts do.
Non-qualifying withdrawals will be included in your income for the year of withdrawal and taxes will be withheld.
What If I Don’t Buy a Home Within 15 Years?
If you don’t use your First Home Savings Account you can still transfer funds to your RRSP or RRIF as a tax-deferred transfer, so you don’t lose all of the tax-protected benefits. This won’t affect your RRSP contribution limit. If you simply withdraw the money and don’t use it towards a first home, the withdrawal is subject to tax.
In our opinion, every Canadian who has yet to purchase a home should open this FHSA and contribute up to the maximum of $40,000. Even if you do not plan on using the funds for a home purchase, you have effectively given yourself an extra $40,000 of RRSP contribution room which helps you save money in taxes and can be withdrawn at retirement, hopefully at a lower tax rate than you currently are.
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