The Tax-Free First Home Savings Account (FHSA) is a new program available in April 2023 that will help homebuyers in Brampton, Toronto, and the GTA get into their first home faster. It allows you to save up to $40,000, giving you a tax deduction on your contributions like an RRSP, and no tax at withdrawal like a TFSA, with all interest earned and growth accumulating within the account on a tax-free basis.
This new program is a terrific way to help future homebuyers get a head start on saving for their first home and make the dream of homeownership a reality. Let’s break down what this new account offers and how it works.
The benefits of an FHSA
No one wants to say no to tax savings, especially with the excessive cost of living in Brampton, Toronto, and the GTA. And this account has fantastic tax advantages – tax deductions, tax-free investment growth, and a tax-free withdrawal. It allows you to contribute up to $8,000 each year to a maximum of $40,000 towards your future home purchase.
You also get peace of mind that even if you do not use the funds for a home purchase, you can always withdraw the funds on a taxable basis or transfer tax-free to your RRSP.
Another benefit of the FHSA is that it allows couples who are looking to purchase their first home together to combine their contributions up to $8,000 each year and $40,000 in total—for a maximum contribution of $16,000 per couple annually and $80,000 in total—which can make a big difference in your ability to secure your future dream home.
Am I eligible?
You must be 18 years of age or older and a qualified first-time buyer. If you or your spouse/common-law partner have never owned a home in which you lived during the past 5 full calendar years, congratulations – you qualify.
How do contributions work?
Contributing up to $8,000 annually to your FHSA will give you the same tax deduction you get with your RRSP. You can choose which year the deduction will be applied in, allowing you to benefit more when you’re in a higher tax bracket.
Fully funding an account in the shortest amount of time to the maximum of $40,000 takes five years. If you have unused contributions from one year, these amounts – up to a maximum of $8,000 each calendar year – can be saved towards future years’ contribution totals. Here are two examples of how that works:
- If you open an account and only contribute $4,000, you can carry the unused $4,000 and contribute $12,000 the next year. You can only catch up by $8,000 each year.
- If you only contribute $2,000 the first year and $2,000 the next (and not $8,000 each year), you have missed out on $12,000 in contributions. Unfortunately in the 3rd year, you can only contribute $16,000 and not $20,000 since you can only carry forward $8,000 to the next year. In the 4th year, you could contribute $12,000, the $8,000 for that year plus the $4,000 not yet used.
Keep in mind that you always need to make sure that you don’t go over your annual and total contribution limit. If you do, you’ll receive a 1% penalty of the excess each month until withdrawn.
One thing that is different from RRSPs or TFSAs, is that your contribution room doesn’t kick in until you open an account.
How do I withdraw my money?
You can withdraw money from your FHSA at any time, but withdrawals will be taxable if not used to buy a qualifying first home or transferred to an RRSP or RRIF. Here are the criteria for a non-taxable withdrawal:
- You must be a Canadian resident and a first-time home buyer.
- You need to submit an agreement in writing to purchase or build within one year after withdrawing funds – with plans to occupy it as your primary residence.
- Withdrawals may still be made up to 30 days post-home ownership.
Note that any withdrawals or transfers do not replenish your FHSA contribution room as is the case with TFSAs. And once you have used your FHSA to buy your home, you are not able to open another account later.
How long can I have an account?
The account is closed when either 15 years pass since the account opened or by the end of the year of your 71st birthday, so before this, you’ll need to transfer the funds tax-free into an RRSP or RRIF if there is no chance of homeownership. This also applies in the year after using FHSA funds for a qualified home purchase.
Can you use it in conjunction with the RRSP Home Buyers’ Plan?
Yes, you can! You and your spouse can withdraw up to $35,000 each for a total of $70,000 from your RRSPs under the RRSP Home Buyer’s Plan, giving you even more funds for your home purchase. While you don’t need to worry about repaying what was taken out with an FHSA, you do need to make sure any money borrowed from your RRSP is paid back over 15 years, otherwise, the amount withdrawn becomes taxable at a rate of 1/15th each year.
Using this strategy with your spouse gives you up to $80,000 in total from both of your FHSAs and $70,000 from your RRSPs for a total of $150,000!
Are there any unique ways to use this account?
Yes, there are some interesting angles you can take with this account, like –
- Make the most out of your hard-earned money by transferring money from your RRSP to your FHSA. Not only did you get tax deductions when you contributed to your RRSP, but when you transfer funds up to annual or lifetime limits into an FHSA—you can make your withdrawal for your home purchase tax-free. This strategy gives you a tax-free RRSP withdrawal, although you don’t get a tax deduction for the transfer. This transfer does not affect your RRSP contribution room.
- If you don’t have earned income which is not an uncommon scenario, you now have a way to get up to $40,000 of free RRSP contribution room. All without having to buy a home because you are allowed to transfer tax-free to your RRSP.
- If you’re looking to gift money to your adult kids, consider opening and funding an FHSA. They can enjoy the tax deduction at any time when their income is highest. You don’t have to worry about taxes if you contribute to a spousal plan either; there will be no attribution back to you on any taxable withdrawals.
- If a rental property has been your only real estate purchase, then you could qualify as a first-time home buyer.
You really can’t lose with this account, there are so many benefits!
What’s the bottom line?
The Tax-Free First Home Savings Account (FHSA) is an innovative new way for Canadians to save for their first home purchase without having to worry about paying taxes on their contributions, earnings within the account, and withdrawals. By setting aside up to $40,000 towards your future home ($80,000 for a couple), you’ll benefit from these great tax advantages, which may make you more inclined to put that money away.
If you’re looking for a smarter way to save for your dream home in Brampton, Toronto, or the GTA – why not check out the FHSA today? It has so many great advantages!
Yes, it’ll take a minimum of 5 years to fully fund the account, so if you are ready to get going now, please let me know. I can review your situation and give the advice you need for mortgage-qualifying success. You can still use the FHSA if you’d like to gain that extra RRSP contribution room. Let’s talk! Contact me for more information.
