A First Home Savings Account (FHSA) is a registered plan by the government that lets first-time homebuyers save money for their first home without having to pay taxes on it, up to a certain amount.
Launched on April 1, 2023, this registered plan has gained significant popularity, with “tens of thousands” of Canadians already opening First Home Savings Accounts.
In this article, we’ll dive into FHSA Canada, its benefits, eligibility, and how to open an account.
The First Home Savings Account (FHSA) is an exciting opportunity for first-time homebuyers in Canada to save tax-free for their dream property. First Home Savings Account is a registered plan that enables first-time homebuyers to save tax-free for up to 15 years.
You can deposit a maximum of $8,000 annually, starting from the year you open the account, with a lifetime cap of $40,000. Unused annual contribution limits can be carried forward for up to $8,000 into the following year.
Any unused savings can be transferred tax-free into an RRSP or Registered Retirement Income Fund.
Benefits of FHSA Canada:
- Tax-Free Investments: Like a Tax-Free Savings Account (TFSA), FHSA investments grow and can be withdrawn tax-free if used for a down payment on your first home.
- Tax Deductions: Similar to a Registered Retirement Savings Plan (RRSP), contributions to First Home Savings Account can be deducted from taxable income, offering potential tax savings.
To qualify for a First Home Savings Account, you must meet the following criteria:
- Be a first-time home purchaser, meaning you or your spouse/partner have not owned a primary residence individually or jointly within the past four to five years.
- Be at least 18 years old but not older than 71 years old on December 31 of the account-opening year.
- Be a Canadian resident, including citizens, permanent residents, and certain temporary residents who meet the residency requirements for income tax purposes.
- Work permit holders and international students must reside in Canada for at least 183 days during the tax year to be considered residents.
Types of FHSA Accounts:
There are three types of First Home Savings Account accounts offered by financial institutions:
- Depositary FHSA: A bank account with cash, term deposits, or guaranteed investment certificates (GICs).
- Trusteed FHSA: Opened with a trusted company and contains qualified investments such as cash, term deposits, GICs, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange.
- Insured FHSA: A contract for an annuity with a licensed annuity provider.
- Gather Required Documentation: You’ll need a Social Insurance Number (SIN), proof of date of birth, and other documents proving your eligibility as a first-time homebuyer and Canadian residency.
- Choose a Financial Institution: You can open a First Home Savings Account at any Canadian government-approved financial institution, including banks, credit unions, trusts, or insurance companies.
- Contact the Bank: Call your preferred financial institution or the one you already have an account with, to initiate the process of opening a First Home Savings Account.
You can withdraw funds from your First Home Savings Account at any time, but the tax implications vary:
- Funds withdrawn for purchasing your first home are non-taxable, provided you meet specific requirements:
- You and your spouse or partner are first-time homebuyers.
- You have a signed agreement to purchase or complete construction before October 1 of the following year.
- The property becomes your primary residence within one year of purchase or construction.
If you withdraw funds for purposes other than buying your first home, the withdrawal amount is taxable.
Your maximum participation period for a First Home Savings Account starts when you open your first one and ends on December 31 of the year in which the earliest of these events happens:
- The 15th anniversary of opening your First Home Savings Account.
- When you turn 71 years old.
- The year after your first qualifying withdrawal from your FHSA.
To avoid unintended tax consequences, it’s best to close all your First Home Savings Accounts before your maximum participation period ends.
Handling Property in First Home Savings Account:
Property in your FHSA at the end of the maximum participation period can be transferred tax-deferred to RRSPs or RRIFs.
Withdrawn property from your FHSA is taxable income for the year.
Excess FHSA Amount:
Learn about handling excess contributions before closing First Home Savings Accounts.
Property After Maximum Participation Period:
If the property remains in your FHSA after the maximum participation period, it’s treated as taxable income.
Closing after Death:
First Home Savings Accounts should be closed after the death of the last holder within the exempt period.
First Home Savings Account Contribution Limit:
You can contribute up to $8,000 annually to your FHSA account, with a lifetime maximum of $40,000.
Exceeding the annual contribution limit incurs a 1 percent penalty per month on the excess deposit.
The First Home Savings Account Canada offers a fantastic opportunity for first-time homebuyers to save for their dream property while enjoying tax-free growth on investments.
By understanding the eligibility criteria, account types, and withdrawal rules, you can make the most of this new savings account. Begin your journey towards homeownership today with the FHSA Canada!
Source: Canada Revenue Agency (CRA)
Frequently Asked Questions
Q1. What is FHSA Canada, and who can open an account?
FHSA Canada is a tax-free savings plan for first-time homebuyers. Any eligible Canadian resident aged 18 to 71, who hasn’t owned a primary residence in the past four to five years, can open an account.
Q2. What are the contribution limits for FHSA Canada?
You can save up to $8,000 annually and a total of $40,000 in your First Home Savings Account.
Q3. Can I withdraw funds from FHSA Canada anytime, and are there any tax implications?
Yes, you can withdraw funds at any time, but if not used for buying your first home, the withdrawals are taxable.
Q4. What happens if I don’t use my FHSA funds to buy a home?
You can transfer the funds to your RRSP or withdraw them, but the latter option will be taxable.
Q5. What happens to my FHSA if I become a non-resident of Canada?
As a non-resident, you can still contribute, but withdrawals for buying a home will be taxable at 25% unless you qualify for a lower tax rate under a tax treaty.