Tax-Free First Home Savings Account (FHSA)
The Canadian Government has introduced a new product to help first-time home buyers save for a down payment. The Tax-Free First Home Savings Account (FHSA) is a savings account for eligible Canadians, and it works like a mix between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Contributions made to the account are generally tax-deductible, similar to RRSPs, while withdrawals made to purchase a qualifying home are tax-free, similar to TFSAs.
To be eligible for an FHSA, you must be a Canadian resident, at least 18 years old, and a first-time homebuyer. This means that you haven’t owned a qualifying home in the past four years or at any time in the year before you open the account. You can hold different types of investments in an FHSA, including cash, mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.
There is an annual contribution limit of $8,000, with a lifetime contribution limit of $40,000. Unused contribution room can be carried forward to the following year. If you withdraw funds from your FHSA and do not use them to purchase a qualifying home, they will be taxed. Alternatively, you can transfer the balance to an RRSP or a Registered Retirement Income Fund (RRIF) on a non-taxable transfer basis, subject to applicable rules. However, the funds transferred to an RRSP or RRIF will be taxed upon withdrawal.
To make a qualifying withdrawal, you must be a first-time homebuyer and a resident of Canada. The home must be located in Canada, and you must have a written agreement to buy or build it before October 1 of the year following the year of withdrawal. You must also intend to occupy the home as your principal place of residence within one year of buying or building it.
You can transfer funds from your RRSP to your FHSA on a tax-free basis, subject to FHSA annual and lifetime contribution limits. These transfers are not deductible from income, and they do not restore your RRSP contribution room.
If you are a first-time homebuyer and interested in opening a Tax-Free First Home Savings Account (FHSA), I recommend that you contact your bank or financial advisor. They can provide guidance on the account’s features, contribution limits, and investment options. They can also assist you in opening the account and making contributions.
Of course, when you are ready to buy a home or condo, I’ll be here to assist you.
Good luck and happy saving!