Canadians are breathing a sigh of relief as inflation falls and interest rates are expected to stay at 4.5 percent. First-time homebuyers in Canada still believe property is expensive in 2023, and most have given up on the concept. As part of their budget for 2022, the federal government introduced the tax-free First Home Savings Account (FHSA) to help first-time homeowners. The account will be available to Canadians on April 1, 2023, allowing them to start saving tax-free for a first home (up to a lifetime value of $40,000) and incurring extra advantages.
The First Home Savings Account: How Does It Work?
First-time homebuyers may save aside up to $40,000 ($8,000 annually) tax-free in an FHSA, since it is a tax-advantaged savings account. Contributions to an FHSA are tax deductible like RRSP contributions are in the year they are made.
When used for a first-time home purchase or construction, withdrawals from the account are exempt from federal income tax. Any leftover money transfers tax-free into a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF).
In essence, the FHSA borrows features from both Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) to provide first-time homeowners a leg up during economically trying times.
What Are the FHSA Regulations?
The FHSA comes with significant advantages, but it also has strict prerequisites. When the FHSA option becomes available at most major banks, which might be as late as spring or later, you’ll need to fulfill certain requirements before establishing one.
- Must be a Canadian citizen or permanent resident.
- You must be 18 or older to participate.
- You or your spouse/common-law partner has held real estate (such as a condo, duplex, or single-family home) in the preceding four years.
- Your husband or common-law partner cannot own the home where you presently reside.
FHSAs have extra account regulations besides qualifying criteria that you should be aware of:
- The maximum amount you may put in is $40,000 over the course of your life, or $8,000 every year.
- The yearly and lifetime contribution limitations do not change despite the number of accounts an account user may have.
- Unlike RRSPs, the first 60 days of the calendar year are not eligible for a tax deduction for contributions.
- Up to $8,000 in unused FHSA contributions carries over to the next year.
- Until the excess amount is gone (either at the start of a new year or by withdrawing funds from the account), it will be taxed at 1% each month.
- The account remains active until the account holder becomes 71 or until the first-home purchase withdrawal requirement is met, whichever comes first.
Is It Necessary to Pay Back the FHSA?
Money saved in an FHSA is tax-free and not subject to repayment like the Home Buyer’s Plan (HBP).
How to Start and End Your FHSA
The first, and easiest, step in opening an FHSA is figuring out whether you qualify. It’s important to think things through before opening an account or closing one down.
Is it Worth It to Open an FHSA?
Contributions to an FHSA are tax deductible, and withdrawals is tax-free if they are used to fund the purchase of a primary residence. An FHSA may help you get a foot in the door if you’re a first-time homeowner.
Who Can Open an FHSA Account?
Any Canadian citizen or permanent resident over the age of 18 who does not own their principal home jointly with their spouse or common-law partner is eligible to register an account. Remember that prospective account holders can’t be older than 71.
How to Open an FHSA
Get in touch with an issuer (such a bank, trust business, or insurance company to set up the FHSA. However, on April 1, 2023, Questrade became the first major financial institution to provide the FHSA.