How can the First Home Savings Account (FHSA) assist you in funding your home purchase? The FHSA offers a unique combination of benefits from both a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) to help you save for a down payment on your home.
To begin with, contributions made to the FHSA are tax-deductible at the time of filing your taxes. This is similar to how contributions to an RRSP can be used to lower your net income.
Moreover, any qualifying withdrawals made from the FHSA, including investment returns, are tax-free, just like a TFSA. It\’s essential to note that the withdrawal must be considered qualifying, which means it must adhere to the rules laid out by the government, such as being used for a first home purchase.
Contributions:
The FHSA has an annual contribution limit of $8,000, with a lifetime contribution limit of $40,000. In case you have a spouse or common-law partner, both of you can use your respective FHSA accounts when ready to purchase your first home.
Additionally, any unused contribution can be carried forward to the following year, up to a maximum of $8,000 per year, on top of the annual contribution limit of $8,000. Please note that the carry-forward amounts begin accumulating only after you have opened your FHSA. This option could be useful if you are planning to purchase a home in the future but not looking to contribute to the account immediately.
Claiming deduction:
Similar to an RRSP contribution, you can carry forward any unused deductions indefinitely (throughout the account\’s lifespan of 15 years) and use them in subsequent years. For instance, if you make a $8,000 contribution to your FHSA in 2023, you can claim some or all of the deduction to your taxes next year (2024) or in later years.
Over contribution:
If you over contribute, your over contribution amount is subject to a 1% tax on the highest excess amount for each month it is over the limit. This will continue to apply each month until the excess amount is removed from your FHSA, which stops accruing when:
- You withdraw the excess amount from your FHSA
- You receive a new contribution room, which happens January 1 of the following year
You can deduct from your income any over-contributed amount in the year it is no longer considered an over-contribution, but not the year before that.
Eligibility
To be eligible for the FHSA, you must be:
- A Canadian resident
- 18 years or older
- A first-time home buyer
You are considered a first-time home buyer if you have not owned and occupied a home in the current calendar year or any of the preceding four calendar years.
Withdrawals from an FHSA
For you to make a qualifying withdrawal from your FHSA, the following criteria must be met:
- You must be a first-time homebuyer at the time you make the withdrawal. This means that you cannot have owned a home where you lived in any part of the calendar year before the withdrawal or in the past four calendar years. There’s an exception that allows you to make qualifying withdrawals if you withdraw within 30 days of moving into your home.
- You need a written agreement that you’re purchasing a property before October 1 of the year following your withdrawal.
- You intend to live in the qualifying home (a housing unit located in Canada) as your principal residence for one year after purchasing or building it.
Important things to know
Closing the account
The FHSA has to be closed by December 31 in the year in which the earliest of these scenarios occur:
- When it reaches its 15th-year anniversary since the opening of the account
- When you reach 71 years old
Your FHSA will also need to be closed by December 31 of the year following a qualifying withdrawal for a home purchase.
Once it closes, any unused funds in the account can be transferred to an RRSP or a RRIF tax-free. You have the option to withdraw any unused funds but be aware that this withdrawal will be added to your yearly income for tax purposes.
Transfers
You can transfer funds from an FHSA to another FHSA account, RRSP or a RRIF tax free. When you transfer from an FHSA to an RRSP or RRIF, the transfer will not reduce, or limited by, your available RRSP contribution or restore your FHSA annual contribution limit.
Once you transfer from an FHSA, the funds will be subject to the rules for RRSPs and RRIFs, which include paying taxes when you withdraw from the account. In addition, you can transfer funds from RRSP to an FHSA tax-free, but the transfer is not deductible and will not restore your RRSP contribution room.
For more information please visit https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html
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