Canada’s *New* First Home Savings Account

Have you been thinking about buying your first home, or have a friend or family member who is? Then you'll want to know more about Canada's *new* First Home Savings Account or FHSA, which officially came into effect on April 1.

This new registered plan will give prospective first-time home buyers the ability to start saving for up to 15 years, once they open an account, with an annual $8,000 deposit cap and a lifetime contribution limit of $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions are tax-deductible, and withdrawals to purchase a first home—including from investment income—would be non-taxable, like a Tax-Free Savings Account (TFSA).

Canadians who start an FHSA but do not contribute the full amount each year are allowed to carry forward a maximum of $8,000 to use the following year. In addition, income earned on FHSA savings does not reduce the participation room for the subsequent year.

The FHSA, can be combined with other first-time buyer programs like the Home Buyers' Plan (HBP) which allows you to withdraw up to $35,000 from your RRSP to buy or build a home.

Something to note: unlike RRSPs, contributions that you make to your FHSAs during the first 60 days of the year are not deductible on your previous year’s income tax and benefit return. You also cannot claim a tax deduction for any FHSA contributions that you make after your first qualifying withdrawal.

Who Can Qualify to Open an Account?

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning that they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years.

How Can You Withdraw Your Funds?

You can withdraw money from your FHSA to use towards the purchase of your first home, tax-free.

There are some caveats:

• Using the savings towards an investment property would not qualify for a tax-free withdrawal; the home must be a principal residence and homebuyers must move in within one year of purchase.

• FHSA holders can also make a tax-free withdrawal if they contributed more than their FHSA participation room of $8,000 (plus any additional carry-over amount). The excess amount, which is taxed while in the account, can be withdrawn without being taxed as income.

• All other withdrawals — such as if you need to tap into the savings for a personal expense — must be declared as income during tax season.

Should You Open an FHSA?

If you're seriously considering buying a home in the next few years, it's a no brainer. However, this plan might not right for you if you find yourself dipping into your savings often. In that case, you'd be better off with a TFSA, which generally allows you to withdraw funds tax-free for any purpose. (Just a note: I am not a financial advisor, so please take these recommendations to your trusted advisor to discuss.)

Though the new federal rules governing the FHSA came into effect on April 1, you may not be able to open your account until later this year:

"Eight large Canadian financial institutions, including all Big Six banks, EQ Bank and Desjardins said they would not be ready to offer the FHSA by April 1. Some banks said they aim to launch the program in the summer, while others said they plan to start offering the plan “later in 2023,” citing a complex process that requires technological development and co-ordination with the Canada Revenue Agency."

If you have any questions about the new FHSA or buying your first home, please do not hesitate to contact me.
Buying your first home is the biggest purchase you can make, and I'd love to help you with this process.