Update: The First-Home Savings Account is now in effect. According to the Toronto Star, “Eight large Canadian financial institutions, including all Big Six banks, EQ Bank and Desjardins said they would not be ready to offer the FHSA by April 1.” Please stay tuned for updates regarding releases by this Summer or later in 2023. However, Questrade has made the FHSA available on April 1 (for more info click here).
In 2023, the Government of Canada is planning to launch a new savings account to help first-time home buyers, called the Tax-Free First Home Savings Account.
Although the bill is still being revised, it is proposed to take effect on April 1, 2023.
Here is everything you need to know about the Tax-Free First Home Savings Account (FHSA) so you can maximize your savings.
1. What is the FHSA? How is it different from the First-Time Home Buyer’s Incentive?
The FHSA offers prospective first-time home buyers the ability to save $40,000 tax free. Like registered retirement savings plans (RRSP), contributions to an FHSA would be tax deductible. Like tax-free savings accounts (TFSA), income and gains inside an FHSA as well as withdrawals would be tax free.
This is not to be confused with the First-Time Home Buyer Incentive (FTHBI), which was enacted in 2019. The FTHBI is a shared-equity mortgage with the Government of Canada, which offers 5% or 10% for a first-time buyer’s purchase of a newly constructed home or 5% for a first-time buyer’s purchase of the resale of an existing home.
If you’d like to learn more about the FTHBI, check out our blog post here.
2. Who qualifies for the FHSA?
To open an FHSA, you must be:
- an individual resident of Canada,
- at least 18 years of age, and
- a first time home buyer.
To be a qualified first-time home buyer, you, your spouse, or your common-law partner do not own a qualifying home that you lived in as a principal place of residence at any time in the year the account was initially opened.
However, living in a home owned by your spouse during the relevant period would exclude you from eligibility if that person is still your spouse at the time of your first home purchase.
3. How much can you contribute?
You can contribute a maximum of $40,000 over your lifetime and up to $8,000 in any one year, including 2023.
The annual contribution limit follows the calendar year, and resets annually on January 1st. You may carry forward up to $8,000 of your unused annual contribution amount to use in a later year (depending on your remaining lifetime contribution limit).
Similarly to a TFSA, you can hold more than one FHSA, but the total amount you can contribute to all of your FHSAs cannot exceed your annual and lifetime contribution limits.
4. What types of investments can an FHSA hold?
The permitted investments for FHSAs are the same as for TFSAs.
Any prohibited investment rules and non-qualified investment rules applicable to other registered plans will also apply to FHSAs.
5. How do I withdraw from my FHSA?
The benefit of the FHSA is that withdrawals to buy a qualifying home purchase are not taxable.
In order to take advantage, you must be a first-time home buyer when you make the withdrawal (based on the eligibility requirements outlined above) and meet these requirements:
- Have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and
- You must intend to occupy the home as a principal place of residence within one year after buying or building it.
There is an exception that individuals are allowed to make withdrawals within 30 days of moving into a qualifying home.
6. What if I don’t use any or all the funds in my FHSA?
Any remaining funds can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax deferred. Since the plan would be omitted as an FHSA after the purchase, you must transfer the remaining funds by the end of the following calendar year.
If you’re interested in learning more about the FHSA, feel free to check out this article by the Government of Canada here.
Does the Tax-Free First Home Savings Account fit into your home buying plan? Let us know in the comments below or send us an email at email@example.com if you have questions about applying this as part of your strategy.
Please note: This article speaks to the current information available regarding the proposed FHSA. As previously stated, this bill is still being revised and it is proposed to take effect on April 1, 2023. This means it may not pass or the specifics surrounding the bill, who qualifies, and what it ultimately looks like could still change.
Disclaimer: We are not financial advisors and the above should only be taken as loose information. Please contact a financial specialist or bank for formal advice. This information is not formal advice or instructions. The primary focus of this content is to provide basic education. Any information used for a real estate purchase should first be consulted on a one-on-one basis with myself or another licensed professional.