How does the FHSA work?
As you know, the cost of owning a home continues to rise. Young adults are struggling as years of savings are becoming more inadequate towards their first home goals.
To address this, Budget 2022 proposed a new Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home.
- Contributions would be tax-deductible and income earned in an FHSA would not be subject to tax
- Withdrawals from an FHSA to purchase a first home would be non-taxable; withdrawals for other purposes would be taxable
- Budget 2023 confirmed that financial institutions can now start offering these accounts.
Eligibility
To be eligible for this account:
- You must be a resident of Canada and age 18 or older
- Must NOT have lived in a home that you (or a spouse or common law partner) owned either
- At any time in the current calendar year before the account is opened, or;
- During the preceding four calendar years
- Once a non-taxable withdrawal is made to purchase a home, the FHSA must be closed within a year of first withdrawal and holder is not eligible to open another FHSA
A qualifying home is a home located in Canada that includes:
- Single-family homes
- Semi-detached homes
- Townhouses
- Mobile homes
- Condominium units
- Apartments in duplexes, triplexes, fourplexes, or apartment buildings
- A share in a co-operative housing corporation that entitles you to own, and gives you an equity interest in, a housing unit
Non-Residents
Only residents of Canada can open an FHSA – non-residents are not permitted to do so. Where, as a Canadian resident, an individual opens and contributes to an FHSA and then emigrates from Canada, subsequent contributions are permitted but qualifying withdrawals are not.
Specifically, to withdraw tax-free funds for the purchase of a home, FHSA rules require FHSA holders to be residents of Canada from the time of withdrawal to the time a qualifying home is acquired. As non-residents would not satisfy this rule, withdrawals would normally be taxable in Canada by way of a withholding tax of up to 25%, unless reduced by a tax treaty between Canada and the FHSA holder’s country of residence.
Contributions
Contributions to an FHSA are subject to available contribution room. There is an annual contribution limit of $8,000 (subject to any carryforward amounts) and a lifetime limit of $40,000. The full $8,000 limit is available for 2023, the year the FHSA first became available. Contribution room begins to accumulate once an FHSA is opened.
- Unused contribution room carries forward but subject to $8,000 annual limit
- You can hold more than one FHSA, but total contributions to all FHSAs should not exceed the annual and lifetime FHSA limit. Holders are responsible for ensuring they do not exceed their contribution limits
- If an individual has an FHSA but does not contribute maximum amounts to their account in a year, unused annual contribution room can be carried forward, up to a maximum of $8,000, for use in the following year. This amount is referred to as an FHSA carryforward and is included in the calculation of FHSA contribution room for the following year
- Carryforward amounts start to accumulate once an individual opens an FHSA for the first time
Withdrawals and Transfers
Withdrawals to purchase a first home are non-taxable however, withdrawals for other purposes are taxable.
- Tax-free RRSP to FHSA transfers allowed, subject to FHSA contribution limits
- If a home is not purchased within 15 years, the FHSA must be closed
- Transfers from FHSA to RRSP (to age 71) or RRIF would be possible; non-taxable on transfer but taxed on withdrawal
Case Study
FHSA and RRSP Home Buyers’ Plan (HBP) can be used together in respect of the same qualifying home purchase. Take this example.
Matthew and Tanya are aspiring homeowners living together. Starting in 2023, they each save $8,000 per year (the annual maximum) in their Tax-Free First Home Savings Account and are able to deduct this from their income. They both make between $50,000 and $100,000, and the Tax-Free First Home Savings Account allows them each to receive an annual federal tax refund of $1,640.
Matthew and Taryn have a combined $90,000 (including tax-free investment income) in their First Home Savings Account at the end of 2027, when they finally find their ideal first home. Plus, they each have $35,000 from their RRSP, under the Home Buyers Plan at the end of 2027. This combined amount equates to $160,000.
By using the Tax-Free First Home Savings Account, Matthew and Taryn are finally able to afford a down payment to buy their first home. They can withdraw their down payment tax-free, saving thousands of dollars that can be put towards their new home.
In addition, they will claim the doubled First-Time Home Buyers’ Tax Credit, providing an additional $1,500 in tax relief.
Which investments qualify?
Under an FHSA, taxpayers can hold a range of investments including:
- Mutual and segregated funds
- Publicly traded securities like stocks
- Government and corporate bonds
- Guaranteed investment certificates
We can help
We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula. To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.
Disclaimers
The case study mentioned in this presentation is provided for illustrative purposes only and does not represent an actual client or an actual client’s experience, but rather is meant to provide an example of our process and methodology. The results portrayed is not representative of all of our clients’ experiences.