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FHSA: A Comprehensive Guide to First Home Savings Accounts

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A First Home Savings Account (FHSA) offers a tax-free way for a Canadian first-time homebuyer to save to purchase their first home. This new tax shelter aims to help first-time home buyers accumulate savings of up to $40,000 toward the downpayment of their home and not pay taxes on their money’s growth. By contributing to an FHSA account, individuals can deduct their contributions from their taxable income, much like an RRSP, potentially reducing their tax bill for the year of contribution.

The FHSA combines the best features of other savings plans, such as the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). Contributions are tax-deductible, like an RRSP. However, withdrawals for a qualifying home purchase are tax-free, similar to a TFSA. As such, this makes it an attractive option for those planning to buy their first home in Canada.

An individual can contribute up to $8,000 annually to an FHSA and carry forward any unused contribution room. Various financial institutions, including banks, credit unions, and insurance companies, offer FHSAs. These accounts can include different investment options, from simple savings to investments like guaranteed investment accounts (GIA) and segregated funds.

Key Takeaways

  • FHSAs offer tax-free savings for first-time home buyers.
  • Contributions can reduce taxable income and grow tax-free.
  • Withdrawals for purchasing a first home are also tax-free.

Understanding the FHSA

The First Home Savings Account (FHSA) is a tax-efficient program for Canadians looking to purchase their first home. This section breaks down the basics, eligibility, and how to open an FHSA.

Fundamentals of FHSA

Withdrawals from the FHSA, when used to buy a first home, are also tax-free. This tax benefit makes the FHSA a valuable resource for purchasing a home.

FHSA Eligibility

To be eligible for an FHSA, you must be a Canadian resident at least 18 years of age and a first-time home buyer, meaning you have not lived in a home you or your common-law partner owned in the previous four years.

Eligible individuals can benefit from the FHSA’s advantages until 15 years after opening the account, or until the end of the year, they turn 71, whichever comes first. Knowing the eligibility criteria helps ensure you can fully benefit from this savings plan.

Account Opening Procedure

Opening an FHSA is straightforward. You can open one at most financial institutions, such as banks and credit unions, or through investment firms like SmartWealth Financial Incorporated. To verify eligibility, you’ll need to provide identification and possibly other documentation.

Once the account is open, you can deposit up to $8,000 per year, keeping in mind the $40,000 lifetime contribution limit. As soon as you open the account, you can start accumulating contributions and carry over any unused contribution room to the following year, providing flexibility in saving.

Contributing to the FHSA

Opening a First Home Savings Account (FHSA) has several important rules and limits. Below are vital aspects, focusing on contribution limits and annual rules.

first home savings account - woman holding a miniature home

Contribution Limits and Rules

The annual contribution limit for an FHSA is $8,000, which means individuals can contribute up to $8,000 annually until they reach the lifetime limit of $40,000.

Suppose an individual contributes less than the annual limit. They can carry the unused contribution room to the following year. For example, if they contribute $6,000 in 2023, they can contribute up to $10,000 in 2024.

Any contributions exceeding these limits incur a monthly tax penalty of 1% on the excess amount. This penalty continues until the excess amount is withdrawn or adjusted by new contribution rules at the end of the year.

Having multiple FHSAs doesn’t change the annual or lifetime limits. Total contributions across all accounts cannot exceed these amounts. Therefore, it’s essential to monitor and manage contributions carefully.

Withdrawals and Tax Implications

Understanding the rules around First Home Savings Account (FHSA) withdrawals and their tax implications is essential for maximizing benefits. There are specific conditions and types of withdrawals, each with different tax outcomes.

Making Qualifying Withdrawals

A qualifying withdrawal from an FHSA is tax-free if used to purchase a home. The home must be your principal place of residence within one year after buying or building it.

Withdrawals for other purposes may be taxed. These are called non-qualifying withdrawals and typically do not benefit from tax-free status.

To make a tax-free qualifying withdrawal, complete the RC725 or the Request to Make a Qualifying Withdrawal from your FHSA form.

Tax Benefits and Considerations

Contributions to an FHSA are tax-deductible, and investment growth within the account, including income from interest, dividends, or capital gains, is also untaxed. When correctly managed, tax-free withdrawals allow full access to your investment growth without additional taxes.

Withdrawing funds that do not qualify are subject to withholding tax and are included in your taxable income. You can find details about the penalties for excess contributions and using the funds for purposes outside qualifying here. It’s essential to stay informed on the tax rules to avoid unnecessary penalties.

Investment Options within FHSA

Understanding what is allowed when choosing investments for a First Home Savings Account (FHSA) can help maximize benefits. Different types of investments have various rules and potential returns.

Qualified Investments

The Canada Revenue Agency specifies that an FHSA can only hold qualified investments. Canada’s Finance Department recognizes investments as qualified if they trade on a designated stock exchange. Qualified investments include stocks, bonds, mutual funds or segregated funds, and guaranteed investment certificates (GICs).

Mutual and segregated funds often receive favour due to their diversification and professional management. Similarly, investment certificates, such as Guaranteed Investment Certificates (GICs), offer security and steady returns, albeit typically at lower rates.

Keeping within these approved investment vehicles ensures compliance. It avoids penalties like a tax equal to 50% of the Fair Market Value (FMV) if non-qualified investments are included. Capital gains and other investment earnings within an FHSA are not subject to tax, making it a powerful tool for growing savings toward a first home.

Transitioning from FHSA

Transitioning from an FHSA involves using the funds for a first home purchase or converting them to other savings accounts. Understanding the details of these options ensures that individuals maximize their savings and tax benefits.

From FHSA to Home Ownership

When using an FHSA for a first home purchase, the withdrawal must meet specific conditions to remain tax-free. The home must be a qualifying housing unit in Canada, such as a house, condo, or mobile home. The buyer must have lived in a different home than they owned in the previous five years.

A significant advantage of the FHSA is its combination with the Home Buyers’ Plan (HBP), which allows Canadian homebuyers to withdraw up to $60,000 from their RRSP and up to $40,000 from their FHSA to contribute to their down payment. These combined resources can substantially ease the path to home ownership.

For compliance, you should use the proceeds toward the downpayment within 30 days of purchasing a home. Funds must be transferred to an FHSA or another eligible account if the purchase fails.

Converting to Other Savings Accounts

FHSA funds can be converted to various savings accounts without immediate tax consequences if not used for a first home purchase. One standard option is the Direct Transfer from an FHSA to an RRSP or a Retirement Income Fund (RRIF). This transfer does not affect the taxpayer’s RRSP contribution room, offering flexibility for retirement savings.

FHSAs maintained under these plans continue to grow tax-free while providing various tax advantages. Please keep in mind the Maximum Participation Period, which is typically 15 years. After this period, you must either use the funds to purchase a home or convert them into another form of tax-advantaged savings.

Each conversion or transfer must use the appropriate forms provided by the Canada Revenue Agency to ensure tax compliance and maintain the full benefits of the savings plans.

Alternatively, you can withdraw you FHSA and deposit the funds to a Tax-Free Savings Account (TFSA). Note that the FHSA withdrawal is a taxable withdrawal. While you’re paying taxes on the withdrawal, your funds will continue to grow, tax-free once deposited in a TFSA. 

 

Conclusion

The First Home Savings Account (FHSA) is a powerful financial tool designed to help Canadians achieve their dream of home ownership. By offering tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualifying home purchases, the FHSA combines the best features of other savings plans, making it an attractive option for first-time home buyers. Understanding the eligibility criteria, contribution limits, and investment options within an FHSA allows individuals to maximize their savings and benefit fully from this innovative program. Whether you are just starting to save or looking to supplement your existing home-buying strategy, the FHSA provides a flexible and tax-efficient pathway to owning your first home. Explore this opportunity with your financial institution and take the first step towards securing your future home today.

Open an FHSA Account

We can help you open an FHSA Account! Simply book an appointment with us, and we'll help you get set up to start saving toward your first home in Canada. Click the button below, and select a schedule at your most convenient time.

About the Author/Website

Ramon Desiderio - SmartWealth Financial Incorporated

Ramon Desiderio is the founder and senior financial security advisor of SmartWealth Financial Incorporated (Intergenerational Wealth Inc. in British Columbia). This well-established financial advisory firm specializes in helping Canadians build, preserve, and magnify wealth through well-planned life insurance and financial services solutions. Whether you are just starting your wealth-building journey and want to build wealth risk-free and tax-efficiently, or you’re already financially successful and want to preserve or magnify your wealth for the next generation, we can help! Please feel free to book your initial consultation with us here.

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