What is the Tax-Free first home savings account (FHSA)? The FHSA is a new account that was introduced in the 2022 federal budget and is set to be available to Canadians in 2023. It basically provides first-time home buyers with a savings account that combines the tax benefits of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).
What is the First Home Savings Account?
The First Home Savings Account is an initiative set out by the federal government to help Canadians purchase their first home. Those using the account can save up to a maximum of $40,000 to be used towards the purchase of a single-family home. There is an annual contribution limit of $8,000. Unused contributions carry forward similar to TFSA, and RRSP contribution space. For example, if you contributed $5,000 one year, you’d have $11,000 contribution room available the next year. The carry forward option is a recent announcement, as originally, you could not carry things over.
Since this is a tax-free account, you won’t pay any taxes on capital gains or interest earned. In addition, any contributions you make to the account are tax-deductible. This account basically combines the benefits of an RRSP and TFSA
You don’t need to pay back any funds withdrawn from your Tax-Free First Home Savings Account. However, once you’ve made a withdrawal to purchase a home, you need to close your FHSA within a year from the first withdrawal.
If you don’t use the funds in your FHSA for a first home purchase within 15 years of first opening an account, you would need to close your FHSA or transfer it to your RRSP.
Also note that the FHSA is per person. If you’re purchasing with your spouse or common-law partner, you’d be able to access up to $80,000.
First Home Savings Account eligibility
Right now, eligibility for this tax-free First Time Home Savings account stands as follows:
- You must be a resident of Canada
- You must be at least 18 years of age
- You can not own a home at any time in the year the account is opened or during the preceding four calendar years
Since this incentive is for first time homeowners, the expectation is that the FHSA is also meant for primary residences, not investment properties.
You can have more than one FHSA, but total contributions can not exceed your yearly or total limit.
Is the First-time Homebuyer Savings Account tax-free?
Yes, the FHSA is completely tax-free. This means that the account allows for tax-free growth while being held in the account (similar to both RRSP and TFSA). Plus, like with a TFSA, you will not need to pay any taxes upon withdrawal either.
That said, there are some tax implications that could potentially apply. Any withdrawals that aren’t used to purchase your first home count as taxable income. The odds are the government won’t let you day trade within your FHSA since that would be considered business income. In addition, if you don’t use your FHSA within 15 years, you need to transfer it to your RRSP.
Penalties of 1% per month apply to account holders for any overcontributions.
Qualifying FHSA withdrawals
The FHSA was designed to help home buyers. As a result, you can only withdraw funds without paying taxes for qualifying purchases.
To be eligible for a withdrawal, you must meet the following conditions:
- You must be a first-time home buyer
- Reside in Canada when making the withdrawal
- Have a written agreement to buy or build a home in Canada before October 1 in the year that follows the year of withdrawal.
- Use the home as your primary residence
Once withdrawn, the funds can be used for your down payment, closing costs, or even home expenses such as furniture.
If you withdraw funds for a non-qualifying reason, withholding taxes would apply and it would be treated like taxable income.
Do you need to pay back the First Home Savings Account?
No, unlike with the Home Buyers’ Plan, you do not need to pay back the First Home Savings Account once you have withdrawn it. The FHSA is specifically meant for saving for a down payment on your first home.
However, since it is meant specifically for buying a first home, you would be taxed if you withdrew funds from your FHSA for any reason other than buying a home. For example, if you withdrew $2,000 from your FHSA for a non-home buying reason, your income would increase by $2,000 for the year.
Can you transfer funds out of your FHSA?
You can transfer funds within your FHSA to your RRSP at any time before the year you turn 71. You do not need to have unused RRSP contribution room to make the transfer. Alternatively, if you’re over the age of 71, you can transfer your FHSA to your Registered Retirement Income Fund (RRIF). The amounts transferred do not count as a new RRSP contribution, so there is no additional tax break. Don’t worry if you don’t have any available contribution room in your RRSP, as FHSA transfers wouldn’t count against it.
Funds within your RRSP can also be transferred to your FHSA on a tax-free basis. However, the lifetime contribution limit of $40,000 and the yearly contribution limit of $8,000 would still apply. You also wouldn’t get the contribution tax break since you already got it when you first contributed to your RRSP.
What can I invest in the First Home Savings Account?
The name ‘savings’ account is a bit misleading, because, like with a TFSA, the First Home Savings Account is a lot more than just a savings account. It really should have been named the First Home Investment Account.
The expectation is that you can invest in the following:
While it’s great that you can invest in various products, buying a home is usually a short-term goal for many people. If you plan on buying a home within the next five years, purchasing stocks, ETFs, and mutual funds might not be the best idea since they can be riskier.
To give you some additional context, you could invest your money, and it might go up in value by 20% after five years. However, there’s an equal chance that your investments could drop by the same amount. Not many people want to risk their down payment, so they’d rather stick to safe investments such as bonds or a high-interest savings account.
Is the Home Buyer’s Plan better?
There are pros and cons to both. With the Home Buyer’s Plan (HBP), you can only withdraw up to $35,000. Those funds would also have to be repaid eventually. Under the FHSA, you can contribute up to $40,000, and you don’t need to pay it back.
If your goal is to purchase a single-family residence, it makes the most sense to fill your FHSA first since you get the benefits of an RRSP and TFSA. Once you’ve filled that up, putting your money in your TFSA is likely your next best option.
Recently, the government has proposed that first-time buyers can use both the HBP and FHSA. You can also transfer your RRSP to your FHSA at any time. This could give people that still want to save for retirement options. It would also allow people who have a defined contribution pension the ability to transfer funds to their FHSA as needed.
Does the First Home Savings Account make owning a home more affordable?
The real question here is, does the First Home Savings Account make owning a home more affordable?
The easy answer: No.
Having another tax-free account doesn’t make housing more affordable. It’s not like prices are going to drop. The government will argue that the tax benefits will make it easier to get into the housing market, but how will that work when real estate prices have been going up 20% year over year?
Even if everyone used the FHSA as an investment account and saw huge gains, that would just increase the funds in the overall buying pool. That would likely increase prices further, not lower them.
Many people have also pointed out that most young Canadians haven’t yet maxed out their TFSA and struggle to save for retirement. So, while the First Home Savings Account is a nice idea, in theory, chances are the majority of young Canadians won’t be able to contribute to that on top of other savings and investment vehicles already in place.
Now, that’s not to say that the account is a bad idea, but it would have made more sense for the government to change the rules around the Home Buyers’ Plan.
The reality is that for most individuals, the Tax-Free First Home Savings Account won’t make their dream of homeownership come any sooner. Nor will it make housing more affordable. Any money you invest will likely have limited time to grow, so any gains you make won’t make a difference if prices continue to increase at their current pace. That said, if you’re saving for a home, the FHSA is the ideal account to put your money into.
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