What is a Tax-Free First Home Savings Account (FHSA) (aka First Time Home Buyer Savings Account)

The Canadian Government has proposed the introduction of the Tax-Free First Home Savings Account (FHSA) in the 2022 budget. This new registered plan would give prospective first-time home buyers the ability to save towards their first home by allowing account holders to contribute up to $40,000 over the lifetime of the plan on a tax-free basis.

An FHSA combines the features of a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Similar to a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home, including from investment income, would be non-taxable, like a Tax-Free Savings Account (TFSA).

In the 2023 tax year, Canadians will be allowed to contribute the full $8,000 annual limit during the year.

What are the FHSA Eligibility Requirements and who is eligible for an FHSA?

Individuals are eligible to open an FHSA First Home Savings Account if they are:

• A Canadian resident;

• 18 years or older (with a valid SIN);

• A First Time Home Buyer

  • An individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home (or what would be a qualifying home if located in Canada) that either

  • (i) they owned or

  • (ii) their spouse or common-law partner owned (if they have a spouse or common-law partner at the time the account is opened).

  • For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.

What are the FHSA Rules?

The account can stay open for 15 years or until the end of the year you turn 71, or at the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.

After these events, whichever comes first, an FHSA would then cease to be an FHSA.

What is a qualifying withdrawal?

Individuals must be a resident of Canada and qualify as a first-time homebuyer at the time of the withdrawal up to the acquisition of the qualifying home (a housing unit located in Canada),

Individuals must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and

Individuals must also intend to occupy the qualifying home as their principal place of residence within one year of buying or building it.

What if I don’t purchase a home?

Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF).

If the funds are not transferred to an RRSP or a RRIF, they will need to be withdrawn on a taxable basis.

Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.

How much can I contribute to a Tax-Free First Home Savings Account (FHSA)?

A Tax-Free Home Savings Account (FHSA) will allow a lifetime limit on contributions of $40,000, with an annual contribution limit of $8,000.

This means individuals will be able to contribute up to $8,000 per year, for 5 years, up to a total of $40,000, starting in 2023.

Can I carry forward contributions?

Yes, an individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000.

For example, if you contribute $4,000 in 2023, the $4,000 balance in 2023 can be rolled over to 2024, in which you will be able to contribute the $4,000 (from 2023) and the $8,000 limit for 2024, totaling $12,000.

Can I have more than one FHSA?

Yes, like a TFSA or RRSP, an individual is permitted to hold more than one FHSA.

However, the total amount that an individual contributes to all of their FHSAs should not exceed their annual and lifetime contribution limits.

Individuals would generally be responsible for ensuring they do not exceed their limit in a given year.

Whats the difference between the FHSA vs Home Buyers Plan (RRSP)?

The current Home Buyers' Plan allows individuals to withdraw up to $35,000 from their RRSP subject to eligibility and conditions, then pay back the funds to their RRSP over 15 years.

The First Home Savings Account does not require the funds withdrawn to purchase a qualifying home to be paid back into the FHSA.

Can I combine a FHSA and Home Buyers Plan (HBP) RRSP withdrawal?

Initially, an individual was not permitted to make both an FHSA withdrawal and an Home Buyers’ Plan (HBP) withdrawal in respect to the same qualifying home.

As of Bill C-32 in November 2022, the Home Buyer’s Plan (HBP) continues to be available under the existing rules and an individual can make both a FHSA and HBP withdrawal for the same qualifying home purchase.

What is the total amount that I can withdraw from a FHSA and Home Buyers’ Plan?

If an individual wanted to withdraw the maximum amount possible, on the basis of all contribution limits being met, the total amount that could be withdrawn from the HBP and FHSA would be $75,000.

• HBP = $35,000; and

• FHSA = $40,000.

However, the lifetime contribution limit for the FHSA would not hit its maximum until 2027. In addition, the HBP would need to be paid back over a series of years, up to 15 years.

This does mean , that a couple could theoretically have $150,000 of pre tax income available for a deposit for a qualifying home purchase at a future date.

If you need further help or assistance. Always feel free to contact Fix My Books as we are here to help!