Everything You Need to Know About the First Home Savings Account
The Canadian housing market has experienced a significant surge in recent years, driven by low interest rates, immigration, and increased investment from foreign buyers. In response, the First Home Savings Account (FHSA) was introduced in the 2022 Federal Budget and launched on April 1, 2023. This account aims to help aspiring homeowners save for a down payment, making the dream of homeownership more attainable.
What is the FHSA?
The FHSA is designed to assist Canadians in saving for their first home. With rising housing prices, saving for a down payment has become increasingly challenging. The FHSA provides incentives for first-time homebuyers to save, thereby contributing to the growth of the Canadian economy.
How to Open an FHSA
To qualify for an FHSA, you must meet the following criteria:
Be at least 18 years of age
Be a Canadian resident
Be a first-time homebuyer
According to the Canada Revenue Agency (CRA), you are considered a first-time homebuyer if, at any time in the calendar year before opening the account or in the preceding four calendar years, you did not live in a qualifying home that you or your spouse/common-law partner owned.
The lifetime contribution limit for an FHSA is $40,000, with an annual contribution limit of $8,000. Unused participation room can be carried forward to a maximum of $8,000 per year. Contributions to an FHSA are tax-deductible, similar to RRSPs, but contributions made within the first 60 days of the following year cannot be deducted for the previous year’s taxes.
It’s important to note that not all financial institutions offer FHSAs, and interest rates and fees may vary. Research different options and compare terms and conditions to find the best fit for your financial goals.
Withdrawing from an FHSA
One key benefit of the FHSA is the ability to withdraw funds tax-free when purchasing your first home. To make a withdrawal, you must meet the eligibility criteria, including being a Canadian resident and a qualified first-time homebuyer as defined by the CRA. Once eligible, you can withdraw the funds by filling out a request form and sending it to the bank or financial institution where you hold the account. While there are limits on the withdrawal amount, unused portions can be carried forward to the next year.
For withdrawals, the CRA defines a first-time homebuyer as someone who did not live in a qualifying home they owned or jointly owned in the current year or the preceding four calendar years, except for the 30 days immediately before the withdrawal.
FHSA FAQs
Here are answers to some frequently asked questions about FHSAs:
Q: What happens if you become a non-resident of Canada after opening an FHSA?
A: You can continue to participate in your FHSA, but you cannot make a qualifying withdrawal while you are a non-resident. Any taxable withdrawal will be subject to a 25% withholding tax.
Q: Can a vacation home be purchased using an FHSA?
A: No. Qualifying homes include detached homes, homes under construction, apartments, condominiums, townhouses, and mobile homes. Vacation properties, non-residential properties, and homes where you only own tenancy rights do not qualify.
Q: What if there is money left in the FHSA after I purchase my home?
A: Funds can be withdrawn tax-free for up to 30 days before moving into your home for expenses. If this grace period is missed, you have until December 31 of the following year to transfer the funds to an RRSP or RRIF without penalty or withdraw the funds as taxable income and pay the appropriate withholding tax.
Involve Your Accountant
The FHSA is a valuable savings tool for first-time homebuyers in Canada, allowing them to save for a down payment while benefiting from tax-free investment growth. Consulting with your trusted advisor, your accountant, is essential before taking action. They can help you optimize the FHSA and provide guidance throughout your home ownership journey.
At WealthCo, we are committed to helping you navigate your financial planning with confidence and clarity. Contact us today to learn more about how the FHSA can assist you in achieving your homeownership dreams.
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