The 2022 Federal Budget proposed a new registered account that is intended to help Canadians save for their first home. It is set to be made available in 2023. The new Tax-Free First Home Savings Account (FHSA) combines the benefits of an RRSP and a TFSA into one account. As with an RRSP, contributions are tax-deductible, thereby reducing one’s taxable income. Similar to a TFSA, the capital gains and income earned within the account are not taxable. Withdrawals made for the purchase of a qualifying first home are also tax-free.
Let’s dig in to some questions that may come up when considering this type of account.
Who is eligible to open an FHSA?
- Account holders must be Canadian residents, at least 18 years of age.
- You cannot own a home in the year that the account is opened or have owned one in the preceding four years.
- The FHSA account will be for primary residences, not investment or leisure properties.
What are the contribution rules for this account?
- The yearly tax-deductible contribution limits are $8,000 per year for a lifetime contribution maximum of $40,000.
- Individuals can carry forward unused portions of the annual contribution limit up to a maximum of $8,000. For example, if you contributed $3,000 to the FHSA in 2023, you would be allow to contribute $13,000 in 2024 ($8,000 of annual contribution + $5,000 carry forward from 2023). Investors are elgibile for carryforward amounts when a FHSA has already been opened.
- Multiple FHSAs can be opened but combined cannot exceed the annual or lifetime contribution amounts.
How can I withdraw funds and what are the tax consequences?
- If the withdrawal is for the purchase of a first home, there are no tax consequences. The FHSA must be closed within a year from the first withdrawal, and the account holder is not eligible to open another FHSA.
- Any withdrawals not related to a first-home purchase are treated as taxable income.
- Unlike with the Home Buyer’s Plan (from an RRSP), withdrawals from the FHSA do not need to be paid back
- Home buyers may use both the Home Buyer’s Plan (from the RRSP) and an FHSA for the same home purchase.
- Unlike a TFSA, withdrawals and transfers cannot count towards the contribution room.
What happens if I do not use the FHSA account to purchase a first home?
- As mentioned above, any withdrawals other than purchasing a first home will be considered taxable income.
- If the funds in the FHSA are not used within 15 years of opening the account, the account will need to be closed or funds can be transferred to an RRSP.
- Account holders can transfer the funds from an FHSA to an RRSP or RRIF. The transfer would be tax-deferred. Taxes will be paid as normal when the amount is withdrawn from the RRSP or RRIF. The transfer to an RRSP or RRIF will not be limited by your RRSP contribution room.
Further details will be announced by the government and banks as they work to make this account available next year. Overall, the FHSA appears to be a useful tool when saving for a first home. Your advisor can help you determine the most strategic asset allocation within the account to balance the return/risk objectives and help you achieve your goal of home ownership.