What is FHSA?
The First Home Savings Account (FHSA) is an innovative registered plan tailored to assist in tax-free savings for your initial home purchase. Your contributions, similar to a registered retirement savings plan (RRSP), are tax-deductible. Meanwhile, qualifying withdrawals, akin to a tax-free savings account (TFSA), remain non-taxable.
Government Initiative
A Tax-Free First Home Savings Account (FHSA) is a new opportunity to supercharge your savings and edge closer to homeownership. The 2022 federal budget proposed by the Liberal government not only addressed the pressing issue of home affordability but also unveiled this ground-breaking account, allowing individuals to contribute up to $40,000 tax-free towards their first home.
Under this initiative, Canadians aged 18 and above can deposit up to $8,000 annually into the FHSA, accumulating funds towards their dream home. However, there’s a catch: the contributions need to be utilized within 15 years of opening the account or before reaching the age of 71, whichever is closer prompting the closure of the account if not adhered to.
What can be achieved with FSHA?
This innovative account merges the benefits of a Registered Retirement Savings Plan (RRSP), offering tax-deductible advantages, with those of a Tax-Free Savings Account (TFSA), allowing investments to flourish without incurring tax liabilities. Essentially, the funds deposited and accrued in this account contribute directly to your first home’s down payment, making it an ideal savings avenue for aspiring homeowners.
What are the benefits of FHSA?
- This account allows you to save up to $40,000 specifically for your initial home purchase.
- You can contribute funds tax-free for a generous 15-year period.
- Carry over any unused contribution room to the next year, capped at $8,000, ensuring you seize savings opportunities without missing out.
- Potentially lower your tax obligations and keep the option to indefinitely carry forward contributions that haven’t been deducted.
- Your savings grow tax-free, preserving them from erosion due to taxes.
- This account aligns with the Home Buyers’ Plan (HBP), broadening your options and strategies for buying your first home.
- An FHSA shields investment growth from taxes while offering flexibility to transfer funds to your registered RRSP or RRIF.
Eligibility Criteria
- Must be a resident of Canada.
- Be between the ages of 18 and 71
- A first-time home buyer (During the year the account was opened or in the previous four calendar years, neither you nor your spouse can have owned a home where you lived)
Rules
In addition to eligibility requirements, FHSAs have other account rules that you should familiarize yourself with:
- Account holders may have more than one account, though the annual and lifetime contribution limits stay the same.
- Unlike RRSPs, any contributions made in the first 60 days of a calendar year cannot be claimed as income deductions for your prior tax return.
- FHSA holders can carry forward unused contribution amounts to the following year, up to a maximum of $8,000.
- Excess contributions beyond the yearly limit incur a 1% monthly tax until resolved in the new year or withdrawn from the account.
- The account remains active until one of three events: the account reaches 15 years of age, the account holder turns 71, or a qualifying withdrawal is made for a first-home purchase.
Contribution Limit: The annual contribution limit is $8,000 and the lifetime contribution limit is $40,000
Withdrawals
The FHSA shines when it comes to tax-free withdrawals. There are several ways to remove funds from the account.
1. Making Qualifying Withdrawals From Your FHSAs
You can withdraw assets from your FHSA tax-free if you meet these conditions:
- Have a written agreement in place to acquire or build a home by October 1 of the following year.
- Fill out Form R725, Request to Make a Qualifying Withdrawal from your FHSA, and present it to your account issuer.
- Acquire the home no more than 30 days before the withdrawal.
- Occupy or intend to occupy the property as your principal residence within one year.
Remember, you can make a series of withdrawals or one large removal.
2. Making Taxable Withdrawals From Your FHSAs
If you withdraw money without a qualifying purpose, it incurs tax and counts as income on your tax papers. However, the tax is deducted immediately, and you can claim it back when filing your taxes for the year. For instance, withdrawing money for purposes other than buying your first home results in paying tax on that amount.
3. Making Designated Withdrawals From Your FHSAs
If you contribute over $8,000 in a year, resulting in excess FHSA amounts, you can remove the excess amounts as designated withdrawals. These transactions will not be considered a form of income.
Types of FHSAs
There are three types of FHSAs:
- A Depositary FHSA: An account (with a financial institution) that holds money, term deposits, or guaranteed investment certificates (GICs)
- A Trusteed FHSA: A trust (with a trust company as trustee) that holds qualified investments such as money, term deposits, GICs, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange
- An Insured FHSA: An annuity contract (with a licensed annuity provider)
Comparison Between FHSA, TFSA, RRSP
| FHSA | TFSA | RRSP | |
|---|---|---|---|
| Eligibility | Canadian residents, 18 or older, qualify if they haven’t owned a home in the current or previous four years. | Individuals aged 18 or older with a valid Social Insurance Number (SIN) are eligible. | Any Canadian resident or non-resident under the age of 71 |
| Tax-deductible contributions? | Yes | No | Yes |
| Tax-free withdrawals? | Yes | Yes | No |
| Max contribution limit? | $8,000 per year until $40,000 max | Subject to CRA’s regulations | Subject to CRA’s regulations |
| Key Advantages | The account’s tax-free growth could boost savings for a qualifying home purchase. Additionally, tax-free transfers to your RRSP or RRIF may be possible from your FHSA. | The account sees tax-free growth, and its value can be utilized for various purposes, including buying a home. | The funds can go towards a qualifying home purchase through the HBP, and investments within the plan grow tax-deferred. |
| Limitations | You can keep an FHSA until the earliest of these: 15 years after opening it, turning 71, or a year after the first allowed withdrawal. If you take out money for something other than buying a home, that amount is taxable income. | Contributions made to a TFSA are not tax-deductible. | Through the HBP, if you use RRSP money to buy or build a qualifying home, you must return it to your RRSP within 15 years. Repayment starts in the second year after the first withdrawal. If you don’t repay as needed, that amount becomes taxable income in that year. |
| Deadline to close account? | The FHSA closes either on December 31 of its 15th year or when the account holder turns 71, whichever comes first. Additionally, it must be closed within a year of the first qualifying withdrawal. | n/a | December 31 of the year you turn 71 is the last day you can contribute to the account |
FAQ
When can I open an FHSA account?
Ans: Technically the Canada Revenue Agency (CRA) announced FHSAs open to the public as of April 1, 2023, but few institutions are currently offering the savings plan. One institution that has been offering the account since April 1 is Questrade.
When to close an FHSA?
Ans: To avoid any unintended tax consequences, the CRA recommends closing your FHSA before your maximum participation period ends. This occurs on December 31 of the year when one of the following events occurs:
– Your FHSA reaches its 15th anniversary.
– You reach the age of 71.
– You made a withdrawal to purchase a home the year prior.
What Happens if You Don’t Use Your FHSA To Buy a House?
Ans: You have a couple of options if you choose not to purchase a home with the funds. One that allows your funds to remain untaxed until withdrawal is to transfer them to an RRSP or RRIF. This transfer is only tax-deferred if you have no excess amounts in the FHSA.
On the other hand, you can remove the funds as you like—on a taxable basis.
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