Saving For Your First Home? Learn More About Tax-Free First Home Savings Account (FHSA)
In the 2022 budget, the government proposed the introduction of the Tax-Free First Home Savings Account (FHSA). This new registered plan would give prospective first-time home buyers the ability to save $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home—including from investment income—would be non-taxable, like a Tax-Free Savings Account (TFSA).
The purpose of FHSA is to make it easy for the first-time home buyers to get into the housing market. This account could help prospective homebuyers save up a down payment on their first home in light of Canada’s exceedingly high real estate prices and competitive market.
How is the FHSA different from the HBP?
Now the question arise, how is it different from existing Home Buyers’ Plan (HBP).
The existing Home Buyers’ Plan (HBP) lets you withdraw up to $35,000 from your RRSP to buy or build your first home in Canada – either for yourself or a relative with a disability. Couples (legally married or common-law) can withdraw up to $35,000 each, for a total of $70,000 towards the same home purchase. When you withdraw this amount, it’s like you’re borrowing from your RRSP. You’re expected to repay the withdrawn funds to their RRSP over 15 years. Otherwise, you will need to pay taxes on the funds withdrawn.
Unlike the HBP, with an FHSA the funds do not need to be paid back. With an FHSA, your contributions are tax-deductible and your qualifying withdrawals are tax-free when you buy a qualifying home. You’re not borrowing any money, so there’s nothing to pay back.
Who is eligible to open FHSA?
To open a First Home Savings Account (FHSA) once it’s available, you must be:
- At least 18 years of age and no less than the age of majority in the province where you live
- A Canadian resident
- A first-time homebuyer (meaning, you and/or your spouse or common-law partner have not owned a home where you lived in the calendar year in which you open the account or at any time in the preceding four calendar years)
How does the FHSA work?
You can contribute up to $8,000 a year to the FHSA, up to a lifetime maximum of $40,000. The contributions are tax deductible just like the RRSP. Unused annual contributions do not rollover to subsequent years. If the funds are not spent on a home within 15 years, the account must be closed but the money can be transferred to an RRSP or RRIF regardless of available room.
You can also use FHSA and HBP together to buy the same house. The government initially said you couldn’t combine the FHSA and HBP on the purchase of the same qualifying home. However, revised legislation allows you to use both the FHSA and HBP for the same qualifying home. Keep in mind that with a HBP withdrawal, you’ll have to repay any funds you withdraw from your RRSP. There is no repayment requirement for withdrawals from an FHSA.
Final Thoughts
If you are a first-time home buyer, an FHSA is a great way to help you save for a down payment and reach your goal of home ownership. However, careful planning is required as it comes with specific timelines that can impact your savings strategy.
If you or someone close to you is thinking of buying their first home, we can help. Schedule a consultation with DM Tax today.
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