What is a First Home Savings Account (FHSA)?
In the 2022 Federal Budget, a new type of account, the tax-free First Home Savings Account (FHSA), was introduced. The FHSA, which Canadians can start contributing to in 2023, offers so many benefits:
Contributions are tax-deductible.
You do not pay taxes on capital gains and income from the account.
Qualifying withdrawals for a first home purchase are also tax-free!
We’ll explain all the details you need about this great new savings option.
Who can open an FHSA?
To open an FHSA, you must be a Canadian resident who is 18 or over. You can’t currently own a home or have owned one in the past four years, and you must be planning to buy a primary residence – not an investment property or a leisure property, such as a cottage.
What are the contribution rules for an FHSA?
The annual contribution limit for an FHSA is $8,000, with a lifetime maximum of $40,000. The unused contribution room can’t be carried over. You can have more than one FHSA, but you can’t exceed the annual or lifetime contribution limit when all your FHSAs are combined.
How do I withdraw money from my FHSA?
Once you are ready to purchase your first home, you can withdraw all the money in your account tax-free.
You must close your account within a year of your first withdrawal and are not eligible to open another FHSA.
Why is the FHSA better than the Home Buyer’s Plan?
When you withdraw money from the Home Buyer’s Plan, you must pay the money back within fifteen years, and any missed repayments count as income. With an FHSA, you don’t have to repay your contributions. As well, the FHSA has a higher limit – the lifetime limit for an FHSA is $40,000, whereas, for the Home Buyer’s Plan, it’s $35,000.
What will happen if I don’t use my FHSA to buy my first home?
If you don’t use your FHSA to buy a home within 15 years of opening it, you have two choices on how to withdraw the money:
You can withdraw it directly, but all funds you take out will be considered taxable income.
You can transfer the funds to an RRSP or RRIF, and regular contribution room rules will not apply. The funds will be tax-deferred – you will pay taxes on them when you withdraw them from your RRSP or RRIF.
How can I get started?
Since FHSAs are brand new, the details of getting started with this new account are still being worked out. But we’re available to discuss if an FHSA is a good choice for you and what kind of investment setup would work best.
Give us a call to set up a meeting to discuss FHSAs today!