Tax-Free First Home Savings Account
Canada’s newest tax-free savings account for first-time home buyers.
What is a First Home Savings Account (FHSA)?
This will be a new type of registered account, proposed in the 2022 federal budget. This type of account, a unique savings vehicle, can hold cash or investments for first-time homebuyers that are Canadian residents, aged 18 or older (to 71 years old) for getting a tax-advantaged option to save for a down payment.
This product isn’t yet available, but we want you to have the information in advance. The earliest this product can be offered by financial institutions is April 1, 2023. That doesn’t mean you can’t start planning and saving now.
Benefits of a First Home Savings Account
- Contributions to an FHSA are deductible from income, like an RRSP.
- Withdrawals, as well as income and gains are tax-free, like a TFSA, if they are used towards the purchase of a qualifying home. Read more on qualifying withdrawals.
- Any amounts in the FHSA that are not used to purchase a qualifying home can be transferred to your RRSP or RRIF on a tax-free basis. Otherwise, the amounts can be withdrawn on a taxable basis.
An FHSA is available to individuals who meet all the following requirements:
- Is a resident of Canada at the time of purchase
- Is between the ages of 18 to 71
- Has a valid SIN, and
- Is a first-time home buyer
What is a first-time home buyer?
A first-time home buyer means that you have not owned a home, in which you lived in, any time during the year the account is opened or at any time in the preceding four calendar years. As holder and owner of the FHSA, you can have as many accounts as you wish if you do not exceed the annual and lifetime limits as provided by the Canada Revenue Agency (CRA).
It is important that you keep track of your FHSA contributions to avoid any over-contribution penalties imposed by the CRA.
Starting in 2023, qualifying individuals can contribute $8,000 per year to their FHSA. Unused contributions, up to $8,000, can be carried forward to future tax years subject to a maximum lifetime limit of $40,000. Carry forward room starts to accumulate after the FHSA is opened.
The holder is responsible for ensuring their maximum contribution room limit is not exceeded. An over contribution will result in a penalty tax on the over contributed amount at a rate of 1% per month for each month the over contribution remains in the FHSA. A withdrawal to correct over contributions does not increase unused contribution room.
An FHSA can only be open for 15 years and must be closed by the end of the year when the holder reaches age 71. Additionally, the FHSA must be closed within one year of making a qualifying withdrawal to purchase your first home. You cannot open another FHSA after any one of these events occurs.
Unused FHSA Funds
Any amounts in the FHSA that are not used to purchase a qualifying home can be transferred to your RRSP or RRIF on a tax-free basis. Otherwise, the amounts can be withdrawn on a taxable basis.
A qualifying withdrawal is non-taxable to the holder. Certain conditions must be met for the holder to receive the withdrawal tax-free. The conditions are similar to the home-buyers withdrawal from an RRSP and must be made in prescribed form, provided by the CRA, and include the holder meeting the following terms:
- First-time home buyer
- Resident of Canada
- The withdrawal is made within 30 days of moving into the home
- Has written agreement to buy or build a qualifying home before October 1st of the year following the withdrawal
- The qualifying home is in Canada
When these conditions are met, a holder may withdraw funds at any time, unless restricted by investment terms (e.g., 3-year fixed deposit).
A qualifying withdrawal does not generate taxable income and does not affect any income tested benefits or credits of the holder.
A qualifying withdrawal does not generate taxable income and does not affect any income tested benefits or credits of the holder. If you don’t use the full amount of your FHSA towards a qualifying withdrawal, amounts remaining after making a qualified withdrawal can be transferred, tax-free, to an RRSP or RRIF in the holder’s name. The transfer must take place by the end of the year following the qualifying withdrawal.
Any unused amounts transferred to an RRSP or RRIF will be subject to the rules of those accounts. Qualifying FHSA withdrawals do not impact eligibility for income-tested benefits and credits (e.g., OAS, GIS, Age Credit, HST/GST, EI, Canada Child Benefit, or the Canada Worker’s Benefit (CWB), formerly known as the Working Income Tax Benefit).
Maximizing Your Benefits
You can maximize your down payment by using the FHSA in conjunction with your RRSPs Home Buyers Plan (HBP) for the same qualifying home.
We recommend talking to a Coach about your life and circumstances to find the best options suited to you.
Example First Home Savings Account Scenarios
“Jayden and Kiara want to save up to buy their first home in the next 15 years. They hope they can both maximize the full $40,000 over 15 years in an FHSA, but they’re not sure today. They’re questioning if they should open an FHSA or use the Home Buyers Plan in an RRSP?
In this case, the FHSA offers an upfront contribution benefit like an RRSP, plus the tax-free benefits of qualifying withdrawals like a TFSA. As an added benefit they would not have to pay those withdrawals back (as they would with the Home Buyer’s Plan from their RRSP) so they’ll most likely want to go with an FHSA under these circumstances. If they never buy the house in the future, they may be able to redirect the funds to an appropriate RRSP account. Jayden and Kiara make an appointment to talk with a Libro Coach to make sure they get the right investments and accounts suited to their life. And who knows, 15 years is a long time! Their Libro Coach is going to follow up with them to make sure they continue to get good advice for their personal situation along the way!”
“Omar has been working at his first job out of university for several years and has been saving money in a TFSA. He’s realizing that now would be a good time to start saving for a house, but because of a recent promotion and being taxed in a higher bracket, wants to utilize FHSA contributions for tax savings purposes on his income, while saving for his goal. It sounds like Omar’s on the right track!
After meeting with a Libro Coach he set up a pre-authorized contribution to automatically save money into his FHSA, plus they determined how to best balance his TFSA and FHSA savings goals.”
“Jelisa has been well on her way with investments in an RRSP for years. She wants to shift focus and start saving for a home. She’s not sure she’s ready to give up renting her current apartment, as it really has some handy amenities and is in the perfect location for her.
After meeting with a Libro Coach, together they determined that an FHSA would be a good option for her because she seems to want to save for her first home within the next 15 years. If she does decide to stay in her apartment for good and not buy her first home, she could later move her money from the FHSA to an RRSP. She would be taxed on withdrawals from the RRSP, but hopefully she’ll be withdrawing that much later in life when she’s in a lower tax bracket. Jelisa and her Libro Coach set up a review for a year from now, to ensure this advice continues to be correct for her personal goals and financial situation.”
The information contained in this webpage is based on draft legislation published in November and approved December 2022. The FHSA comes into effect April 1, 2023. Please visit Libro to determine when the product will be available and how an FHSA can enhance your financial plan. Before making any investment decisions, it is advised that you ask Libro about deposit insurance protection.
© 2023 CENTRAL 1 CREDIT UNION