First Home Savings Account (FHSA)
The dream of owning a home is often front and center in the minds of many Canadians. However, given the recent housing affordability crisis, it has become increasingly difficult for many Canadians, especially first-time homebuyers, to enter the housing market. In response to these challenges, the Canadian government has unveiled a series of innovative measures, one of the most prominent being the First Home Savings Account (FHSA). In this blog post, we delve into the intricacies of Canada’s FHSA, exploring its features, benefits, and the potential impact it holds for aspiring homeowners across the nation.
What is the FHSA?
Designed to empower individuals on their journey towards homeownership, this initiative brings forth a new avenue for Canadians to save strategically while enjoying advantageous tax benefits. The FHSA, initially proposed in the 2022 Budget and enacted through Bill C-32, received Royal Assent on December 15, 2022. It is a savings plan that allows you to hold investments to use towards the purchase of your first home. Income earned in an FHSA is not subject to taxation, and contributions to an FHSA are tax deductible. As such, it bears similarities to both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).
Qualifying Criteria
In order to open an FHSA, you must meet the following eligibility requirements:
- Over the Age of 18: At the time you open an FHSA, you must be at least 18 years of age and cannot be older than 71 years of age during that calendar year.
- Canadian Resident: You must be a resident of Canada. If you become a non-resident of Canada after opening an FHSA, you can continue to contribute and transfer amounts to your FHSA, however, you cannot make qualifying withdrawals (i.e., non-taxable withdrawals to purchase your first home) during the time you are considered to be a non-resident of Canada.
- First Time Home Buyer: You must not live in a home as your principal place of residence that you own or jointly own in the calendar year you are opening the account or the previous four calendar years. In addition, you must not live in a home as your principal place of residence that your spouse or common-law partner owns or jointly owns in the calendar year you are opening the account or the previous four calendar years.
Contribution Limits
You can contribute up to $8,000 into your FHSA in the year you open the account. There is a lifetime contribution limit of $40,000.
In you contribute less than $8,000 in a year, you can contribute the unused amount in addition to the $8,000 annual contribution. The maximum unused amount you can carry forward into a single calendar year is $8,000. You may also transfer amounts from your RRSP to your FHSA.
Overcontribution
There are consequences for overcontributing to your FHSA. If you contribute more to your FHSA than the limit (including the unused amount), you have to pay a 1% tax per month on the highest amount in that month until the excess is eliminated. One of the ways the excess may be eliminated is by making a designated withdrawal (i.e., a withdrawal of a designated amount that is limited to the excess FHSA contribution).
Withdrawals from an FHSA
Withdrawals from an FHSA that are used to purchase a qualifying home (qualifying withdrawals) are not taxable.
There are various conditions that must be met in order for a withdrawal to be considered a qualifying withdrawal, including but not limited to, the following:
- First Time Home Buyer: You must not have lived in a qualifying home as your principal place of residence that you owned or jointly owned in the current calendar year before the withdrawal or the four calendar years prior to the withdrawal.
- Written Agreement: There must be a written agreement to buy or build a qualifying home. The agreement must include certain information relating to the acquisition or construction of the qualifying home.
- Occupation: You must occupy the qualifying home as your principal place of residence or intend to occupy it as your principal place of residence within a year after the home is purchased or built.
- Acquisition: You must not have acquired the qualifying home more than 30 days before making the withdrawal
- Form RC725: You must complete Form RC725 and provide it to your FHSA issuer.
Conclusion
The FHSA represents a valuable tool for individuals seeking to enter the housing market while enjoying favorable tax benefits. Individuals who meet the eligibility requirements to open an FHSA can use this plan to save for and eventually purchase their first home on a tax-free basis. By combining the advantages of tax-deductible contributions and tax-deferred growth, the FHSA offers a compelling avenue for strategic savings towards the purchase of a first home. Many financial institutions that offer RRSPs and TFSAs, such as banks, credit unions, and insurance companies now offer FHSAs. Aspiring homeowners across Canada stand to benefit from this initiative, ultimately aiding in the enhancement of housing affordability throughout the country.
**Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.