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It’s no secret that home ownership has become increasingly unattainable for many Canadians over the last decade. Rising sale prices, combined with rising interest rates, tighter lending rules, and decreased supply have left non-homeowners feeling deeply discouraged, with nearly 63% reporting they’ve ‘given up’ on the idea of ever owning one.
In a bid to bring homeownership within reach of more Canadians, the federal government launched the registered tax-free First Home Savings Account (FHSA).
What is the First Home Savings Account?
A First Home Savings Account is a registered savings account that allows prospective first-time home buyers to save for their first home tax-free (up to $8,000 per year, to a maximum of $40,000).
A ‘registered’ account means the account is registered with the federal government for tax purposes. Registered accounts offer tax incentives and are intended for specific purposes, such as retirement (RRSP), or education savings (RESP).
Contributions to your FHSA are tax-deductible on your income tax return, and you don’t pay taxes on investment income made within the account. Withdrawals from the account are also tax free (unless they are used for something other than a first home.)
How does it work?
When you contribute to your FHSA, you lower your taxable income (like an RRSP). For example, if your annual income is $70,000, and you contribute $5,000 to your FHSA, you will be taxed on $65,000 (providing you had no other tax deductions.)
You can contribute up to $8,000 per year and the lifetime contribution limit is $40,000. You can carry forward unused contribution room to the following year. The maximum amount of unused FHSA participation room that can be carried forward to a subsequent year is $8,000. Any investment gains made within the account do not count towards your contribution room.
You can transfer funds from your RRSP to your FHSA without tax consequence, provided it is a direct transfer and does not exceed your contribution room. There is no minimum number of days that FHSA funds must stay in your account before you can use them for a qualifying withdrawal.
If you contribute more than your annual limit, you will have to pay a tax of 1% per month on the excess until the excess amount is eliminated. You’ll find details about your FHSA, including participation room, on your notice of assessment.
The account can stay open for up to 15 years, or until the account holder turns 71, or until a withdrawal is made for a first-home purchase. Any funds remaining in the FHSA after the participation period has ended can be transferred directly into an RRSP.
Who can open an FHSA?
To be eligible to open an FHSA, you must be:
- At least 18 years old (or your province’s age of majority)
- Less than 71 years old on December 31 of the year
- A Canadian resident
- A first-time home buyer: You’re considered a first-time home buyer if you haven’t lived in a home you or your spouse/common-law partner owned within the last four years.
What investments can I hold in a FHSA?
FHSAs can hold investment vehicles like those held in RRSPs or TFSAs, including cash, GICs, bonds, mutual funds, and stocks.
Can I use the FHSA and the Home Buyers’ Plan (HBP)?
Yes. The Home Buyers Plan (HBP) is still an active incentive and can be used in conjunction with the FHSA. The HBP allows first time home buyers to withdraw up to $35,000 from their RRSPs tax-free. However, the funds must be paid back to your RRSP within 15 years. Funds withdrawn from an FHSA do not need to be repaid.
What happens if I don’t buy a house?
If you decide not to purchase a house with the funds, you can transfer the funds without tax consequence to an RRSP or RRIF. However, if you remove the funds for other purposes, the amount is included as taxable income on your tax return.
What are the pros and cons?
Pros: The FHSA can be a great way to create a structured savings account and plan for a first home, while also reducing your tax bill. A FHSA contribution can be claimed in a future year, so if you put away $8K this year, you can claim a portion of it and carry that contribution claim for another year!
Cons: Please note there is no 60-day rule like an RSP. Your contributions only count for the current year or future year tax deduction, not the previous year. Keep in mind, if you’re in a lower income bracket, you may not see a significant tax savings.
Chat with our advisors to discuss whether a FHSA makes sense for you.
How do I open a FHSA?
You can open an FHSA with us! You will need to provide your social insurance number, date of birth, and documents to support that you qualify to open the account. You can have more than one FHSA (or FHSAs with different issuers), provided the total contribution doesn’t exceed your participation room for that year.
ABCU has partnered with Aviso Wealth to offer our members a range of investment options for the First Home Savings Account. Get in touch with our team to schedule your personalized consultation today.
Ready to go home shopping? Learn more about our mortage options here.
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