Executive Summary
Canadians have gotten a boost to save for buying a home. The new registered plan, the First Home Savings Account (FHSA), became available on April 1, 2023, and was included in the last budget from the governing Liberals.
What You Need to Know
The FHSA will allow Canadians to contribute up to $40,000, and contributions grow tax-free like an RRSP or TFSA. Eligible taxpayers can contribute up to $8000 a year to the account and this amount can be carried forward into future years, if not used.
An FHSA must be closed within 15 years of opening the account or before the age of 71 (whichever is earliest).
To open an account, you must be:
- 18 years of age or older, and
- a resident of Canada, and
- a first-time home buyer
The inner workings of an FHSA combines the best of the Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). The contributions are tax deductible like an RRSP, and the money grows inside the account tax free like an RRSP or TFSA. Property from an RRSP can be contributed to an FHSA without immediate tax consequences if it is a direct transfer.
The qualifications to open an FHSA are different than the qualifications to make a withdrawal. FHSA funds can then be withdrawn without tax penalty if they are used to purchase a qualifying home.
Any funds that are not used to purchase a home can be transferred to an RRSP or RRIF account on a rollover basis, and the RRSP rules will apply going forward. If funds are withdrawn and not used to purchase a qualifying home, the amount must be included in your taxable income.
Over-contributions are subject to a 1% per month penalty on the overage until it is eliminated.
The Bottom Line
The creation of a new registered account provides Canadians with another tool to avoid or delay income tax while achieving the goal of home ownership. The plan is simple, but the use and administration of it is more complex.
Additionally, integrating a new FHSA with your existing registered plans across your entire family requires careful consideration and planning to maximize the tax and savings advantages.
