The federal government's 2022 budget caused quite a stir in the real estate industry with the announcement of a new measure to facilitate access to homeownership: the FHSA. And for good reason!
Since its introduction, this new tax-free savings account for first-time homebuyers has been a hit. It combines the features and benefits of the TFSA, RRSP and HBP.
Are you a first-time homebuyer? Buying your first home in Canada? The FHSA is a great savings vehicle to use. Here's everything you need to know.
What is the FHSA?
The First Home Savings Account (FHSA) is a registered investment account designed for first-time homebuyers in Canada. It helps prospective purchasers of a qualifying home save tax-free to accumulate the down payment required for their property purchase.
What are the eligibility requirements for opening a FHSA?
You are eligible to open a FHSA if you meet the following requirements:
- You are a Canadian resident;
- You are 18 years of age or older;
- You or your spouse or common-law partner have not owned your principal residence for the four years before opening the account.
FHSA accounts must be opened between the ages of 18 and 71. The account must be closed by December 31 of the year in which you reach the age limit.
Although these eligibility criteria apply to a large portion of the population, this new financial tool will be more relevant to holders whose income is high enough to have a tax liability.
How much can I contribute to a FHSA?
Owners can contribute up to $8,000 per year to their account, up to a lifetime maximum of $40,000.
If you don't reach the annual contribution limit, the unused portion will be added to your eligibility for future years. For example, if you contribute $6,000 of the $8,000 you're eligible to contribute the first year, you can contribute $10,000 the following year.
You should also be aware that, as with an RRSP, your contributions are tax-deductible, allowing you to reduce your taxable income. Eligible withdrawals for home purchases and investment income are also tax-free.
What are its features?
The FHSA has a maximum term of 15 years. In other words, the funds must be used to purchase a property within 15 years of opening the account. If no purchase is made, the account must be closed.
But rest assured, the funds invested will not be lost. They can be transferred to an RRSP or RRIF, for example, without affecting your ability to contribute to this account. However, if you decide to simply withdraw the money you've accumulated, you'll have to pay income tax on it.
Unlike RRSPs, FHSA contributions made within the first 60 days of the calendar year cannot be carried forward to the previous tax year.
Unlike the HBP (Home Buyer’s Plan), there is no minimum holding period for contributions to be deductible and withdrawable. In addition, there is no limit on the amount that can be withdrawn and no repayment is required.
What are the benefits of a FHSA?
There's a lot of talk about this savings account because of its many advantages. The FHSA allows you to:
- Save up to $40,000 for the purchase of a first home;
- Make tax-free contributions for up to 15 years;
- Carry over unused contributions from previous years;
- Reduce your tax burden.
What about the disadvantages of a FHSA? We might almost say there aren't any!
FHSA or HBP: which should you choose?
The good news is that both programs can be combined, so you don't have to choose one over the other!
However, if you don't have enough savings to contribute to both, don't hesitate to ask your financial advisor which program is best for you.
Is this tax savings account available in Canada?
It was officially introduced on April 1, 2023. However, most financial institutions introduced it a little later due to the complexity of setting it up.
What financial institutions offer the FHSA?
To open a FHSA, you must go through an authorized financial institution. The issuer must be approved by the Canada Revenue Agency to offer this type of financial product.
The FHSA is available from the same institutions that offer TFSAs, such as banks and even some life insurance companies and trust companies. These include:
- Royal Bank of Canada (RBC);
- National Bank;
- Desjardins;
- Etc.
Don't hesitate to contact your financial institution directly to find out if they offer this savings account.
FHSA frequently asked questions
What's the difference between a TFSA and a FHSA account?
They are both registered savings accounts. While the FHSA is specifically designed to help first-time homebuyers purchase a home, the TFSA can be used for a variety of savings purposes.
Can I combine the HBP and the FHSA for my first home purchase?
Yes, the two programs can be used together to help you achieve home ownership.
Is there a penalty if I exceed the contribution limit?
Yes, there is a 1% tax on excess contributions. To avoid this penalty, simply withdraw the excess amount.
Can I withdraw more than $40,000 from my FHSA?
Yes, although the total contribution limit is $40,000, the account can earn investment earnings that can be withdrawn.
Can I contribute to my spouse's FHSA?
No. Only the FHSA owner can claim deductions for contributions made. However, you may be able to make a gift or loan to your spouse to contribute to his or her account.
Can I combine funds from my FHSA with my spouse's FHSA to purchase a first home?
Yes, funds contributed individually by each future homeowner can be combined.
Will my annual contribution limit be reinstated after a withdrawal?
No, unlike the TFSA, your contribution limit will not be restored the following year.
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