First Home Savings Account (FHSA)
what is the Tax-Free First Home Savings Account?
In Budget 2022, the Government of Canada introduced the concept of a First Home Savings Accounts (FHSA), a registered plan, to assist eligible first-time home buyers save $40,000 on a tax-free basis. Similar to a registered retirement savings plan (RRSP), contributions are tax-deductible, and like a tax-free savings account (TFSA), withdrawals to purchase a first home would be non-taxable. Note that there is an $8,000 annual contribution limit & a $40,000 lifetime contribution limit.
How to open a First Home Savings Account?
Like all government-backed programs, there is eligibility criteria and ‘small print’ that should be reviewed in order for one to understand if they qualify and if the program suits their needs and circumstances. For one to open an account, they must be a Canadian resident at least 18 years of age and considered a first-time home buyer, meaning that they have not owned a home that they’ve lived in during the calendar year before they open account or anytime during the preceding four calendar years. Note that a FHSA of an individual would cease to be an FHSA and would not be able to open an FHSA after December 31 the year in which the earlier of the fifteenth anniversary of the opening of their first FHSA, and the individual turning 71 years old. NOTE: One can transfer, tax-free, savings that weren’t used to purchase a home, to an RRSP or RRIF, until December 31 of the year following the year of their first qualifying withdrawal – otherwise, funds would need to withdrawn on a taxable basis.
How do FHSA contributions work?
It’s important to be mindful of annual and lifetime contributions to ones First Home Savings Account. The FHSA participation room in the year that one opens their first FHSA account is $8,000. Generally, the following year’s contribution room will be $8,000 plus any unused contribution room (one can usually carry forward up to a maximum of $8000 of unused FHSA contributions room) at the end of the current year, subject to the lifetime contribution limit, which is presently $40,000. A general rule of thumb is that contributions made to an FHSA, including transfers from an RRSP to an FHSA will reduce ones lifetime FHSA contribution limit. It is also important to understand that there are potential tax implications if one over-contributes to their FHSA. One must be mindful of their FHSA contribution room, which can often be found on ones Notice of Assessment or Reassessment or by contacting the Canada Revenue Agency. One must remember to communicate with their accountant or tax-filing professional about their FHSA activity, as this must be reported in ones tax filing.
FHSA Withdrawals & Transfers.
It is important for one to obtain advice from their accountant when it comes to all matters FHSA related, particularly around the concept of making withdrawals or transfers in and out of FHSAs. Generally, one can transfer qualified property between ones FHSA or from their RRSP to an FHSA without immediate tax consequences provided the transfer qualifies as a ‘direct transfer’, provided that transfers from an RRSP to an FHSA does not exceed the unused FHSA contribution room at the time of the transfer. If one is wanting to take property out of their FHSA to buy a first home, or for another purpose, including transferring property from an FHSA to an RRSP, RRIF or other FHSAs, it is important to be aware if there are tax implications and it is advisable to consult your accountant.
FHSA Tax Deductions.
Generally speaking, contributions made to ones FHSA are deductible on ones income tax and benefit return for the year of the contribution, or a future year, similar to making contributions to ones RRSP. One should note that making transfers from an RRSP to an FHSA is not deductible. According to the CRA, there are no minimum number of days that contributions made to FHSAs need to stay in an FHSA before they can be deducted on ones income tax and benefit return.
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