Canada’s newest registered savings plan, the tax-free first home savings account (FHSA), officially launched on April 1st, 2023. The FHSA allows prospective first-time homebuyers to contribute up to $40,000 and save on a tax-free basis towards the purchase of their first home in Canada. This plan combines the best features of both the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA), making it an attractive option for those looking to buy their first home.
Here are five things you need to know to take full advantage of the FHSA:
The FHSA allows tax-free contributions and withdrawals for the purpose of buying a first home in Canada. The 2023 federal budget describes the FHSA as “tax-free in; tax-free out.”
The FHSA can remain open for up to 15 years or until the end of the year you turn 71. Any funds in the FHSA not used to buy a qualifying home by this time can then be transferred on a tax-deferred basis into an RRSP or registered retirement income fund (RRIF), or withdrawn on a taxable basis.
To be eligible for the FHSA, you must be a first-time homebuyer, meaning you and your spouse or partner haven’t owned a principal residence where you lived during the calendar year before the account is opened or in the preceding four calendar years.
The annual contribution limit for the FHSA is $8,000, and the lifetime contribution limit is $40,000. There’s a penalty tax of one per cent per month for any overcontributions. The annual limit applies to contributions made within a particular calendar year since, unlike RRSPs, contributions made within the first 60 days of a subsequent year can’t be deducted in the current tax year.
If you don’t have the cash to contribute $8,000 per year to a FHSA, the rules permit you to transfer funds from an existing RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers aren’t tax deductible, and the transfers won’t reinstate your RRSP contribution room. The rules also permit you to carry forward any unused portion of the year’s annual contribution limit, up to a maximum of $8,000.
If you fail to contribute anything further in a given year, you would be limited in the following year to $16,000, comprising the $8,000 for that year and $8,000 of carry-forward room from the previous year.
It’s important to note that if you don’t buy a home, your FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old, whichever comes first. Any funds left in the FHSA that are not used to buy a qualifying home before closing the FHSA can be transferred on a tax-free basis to an RRSP (without impacting your RRSP room) or RRIF, or will be included in income.
Another good news is that the HBP, which lets first-time homebuyers withdraw up to $35,000 from an RRSP to buy a first home and pay it back, interest-free over 15 years, will continue to be available. Under the final FHSA rules, the government now permits you to participate in both the HBP and the FHSA for the same home purchase, something that wasn’t originally allowed when the rules were first released.
In conclusion, the FHSA is an attractive option for prospective first-time homebuyers in Canada. It offers tax-free contributions and withdrawals, and the ability to transfer any unused funds on a tax-deferred basis. If you’re a first