Securing a place to call your own is a dream that’s becoming more attainable, even in the face of rising housing costs, inflation, and higher interest rates. The First Home Savings Account (FHSA) has emerged as a beacon of hope for prospective first-time homebuyers. This innovative tax-free registered plan empowers you to accumulate a substantial nest egg of up to $40,000 over your lifetime, paving the way for your journey toward owning your very first home.
In our commitment to assist you, we’ve provided answers to some of the most commonly asked questions to help you navigate the FHSA with confidence.
What Does the FHSA Entail?
The FHSA is a newly established registered plan designed to assist Canadians in entering the housing market. It offers a means to save for a qualifying first home, which can be any housing unit located in Canada, including existing homes and those under construction. This encompasses various types of residences, such as single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings.
Do I Qualify for the FHSA?
To be eligible for the FHSA, you must:
- Be a Canadian resident.
- Be at least 18 years of age, or meet the age of majority requirements in your province or territory of residence, depending on the specific type of FHSA.
- Be a first-time homebuyer.
Who Qualifies as a First-Time Homebuyer When Opening an FHSA?
You are considered a first-time homebuyer when opening an FHSA if, at any point in the calendar year prior to the account’s creation or during the preceding four calendar years, you did not reside in a qualifying home as your principal place of residence. This applies to homes that you or your spouse or common-law partner owned or jointly owned.
What Are the Contribution Limits for an FHSA?
Eligible Canadians can contribute up to $8,000 per year to their FHSA, either as contributions or transfers from their registered retirement savings plan (RRSP). The maximum lifetime contribution is $40,000. If you do not fully utilize your annual contribution limit, any unused portion can be carried forward to the following year, but this carryforward cannot exceed $8,000. Consequently, the maximum annual contribution and transfer limit from RRSPs will not surpass $16,000.
For example, if you contribute $4,000 to your FHSA in 2023, you can contribute up to $12,000 in 2024 ($8,000 for that year plus the remaining $4,000 from 2023).
Three Key Advantages of an FHSA
- Tax Deductions: When you contribute to your FHSA, you can claim a tax deduction on your tax return. This means potential tax savings based on your contribution and tax rate. You can claim this deduction in the year of contribution or in a future year.
- Tax-Free Investment Growth: Similar to other registered plans, you can retain your FHSA contributions as cash or invest them in various financial instruments like GICs, bonds, stocks, mutual funds, and ETFs. The income and gains from these investments remain tax-free.
- Tax-Free Withdrawals: When you’re ready to purchase a qualifying first home, you can withdraw money from your FHSA, including your initial contributions and investment earnings, without incurring any tax liability.
Can I Use Both the FHSA and the RRSP Home Buyer’s Plan?
You don’t have to choose between these two savings methods. When you’re prepared to buy a qualifying first home, you can use funds withdrawn from your RRSP through the Home Buyers’ Plan (HBP) as well as funds from your FHSA. The advantage of the FHSA is that contributions are tax-deductible, and withdrawals for a qualifying first home purchase are tax-free. In contrast, the RRSP HBP permits tax-free withdrawals of up to $35,000 from your RRSP to facilitate your first home purchase, but you must repay the withdrawn amount to your RRSP within 15 years. Any RRSP withdrawals for home purchases outside of the HBP are considered taxable income.
What if I have a change of heart and opt not to proceed with a home purchase?
In such a scenario, you have the flexibility to maintain your FHSA for a duration of up to 15 years or until the year when you reach the age of 71, whichever comes first. Should you decide not to utilize your FHSA for the acquisition of a qualifying first home, you have two alternatives:
- You can transfer the account’s balance to your RRSP or Registered Retirement Income Fund (RRIF) on a tax-deferred basis, without affecting your contribution room.
- Alternatively, you may choose to withdraw the funds, but this would necessitate paying the requisite taxes.
Contact Claystone Mortgage Team for all of your questions, we are award-winning mortgage experts, we have helped 1000s of clients just like you! Experience matters when you are making the largest purchase of your life! Hello@ClaystoneMortgageTeam.com, we are here to help!