In the 2022 Budget, the Government of Canada proposed the introduction of the Tax-Free First Home Savings Account (FHSA), a new registered plan to help Canadians save towards their first home by allowing account holders to contribute up to $40,000 over the lifetime of the plan.
What is a First Home Savings Account (FHSA)?
An FHSA combines the features of a Registered Retirement Savings Plan (RRSP) and Tax- Free Savings Account (TFSA) . Like an RRSP, contributions would be tax-deductible and qualifying withdrawals to purchase a first home would be non-taxable, like a TFSA.
However, with an FHSA and unlike the Home Buyers’ Plan, the funds do not need to be paid back.
Summary Features of an FHSA
To be eligible to open an FHSA you must be:
- A Canadian resident
- 18 years or older and
- A first-time home buyer
FHSA parameters:
The account can stay open for 15 years or until the end of the year you turn 71, or at the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.
Contributions and Deductions:
Individuals would be able to claim an income tax deduction for contributions made in a particular taxation year.
Annual contributions are capped at $8,000, up to a $40,000 during the lifetime contribution limit.
Unused contribution room can carry forward to the following year up to a maximum of $8,000.
What if you don’t purchase a home?
Any savings not used to purchase a qualifying home could be transferred to an RRSP or RRIF
(Registered Retirement Income Fund) on a non-taxable transfer basis, subject to applicable rules.
The funds transferred to an RRSP or RRIF will be taxed upon ultimate withdrawal.
If not transferred but instead withdrawn, FHSA funds would be subject to taxes.
What is a qualifying withdrawal?
Must be a first-time homebuyer and a resident of Canada at the time of the withdrawal to the acquisition of the qualifying home.
You must have a written agreement to buy or build a qualifying home located in Canada before October 1 of the year following the year of withdrawal, and you must also intend to occupy the qualifying home as your principal place of residence within one year of buying or building it.
How is the FHSA different from the Home Buyers Plan?
With the current Home Buyers’ Plan, Canadians can withdraw up to $35,000 from their RRSP subject to eligibility and conditions, then pay back the funds to their RRSP over 15 years.
Unlike the Home Buyers’ Plan, with an FHSA the funds do not need to be paid back.
How is the FHSA different from the Home Buyers Plan?
Jamal – 28 years old, marketing associate
Jamal wants to buy his first home and has great budgeting and saving skills. But he’s also concerned he might change his mind and want to invest his money elsewhere.
Why an FHSA?
If Jamal thinks he’ll buy his first home within the next 15 years, the FHSA might be an excellent option. He can take advantage of income tax deductions as well as investing and growing his money, tax-free.
If Jamal does change his mind he can transfer the money saved in his FHSA to an RRSP. Once withdrawn from the RRSP, however, funds would be subject to taxes.
