Are you a first-time homebuyer in Canada?
Then you’re in luck!
The Canadian government has recently introduced a new savings account that can help you achieve your dream of owning a home.
The First Home Savings Account (FHSA) is a registered plan that allows you to save for your first home tax-free, up to certain limits. In this blog post, we’ll go over the basics of the FHSA, including who is eligible to open an account, what kinds of investments are allowed, and how you can use the account to save for your down payment. So, if you’re ready to take the first step towards homeownership, keep reading!
There are 3 main rules that you need to follow to be able to open and use this account.
First Time Home Buyer for the purpose of opening an FHSA
This one is the same as the HBP (Home Buyer Plan) aka RRSP eligibility. You are a first time homebuyer if you or your spouse/common-law (at the time of opening the account) haven’t owned a personal residence in the last 4 years
First Time Home Buyer for the purpose of withdrawing from your FHSA
First time home buyer if you did not live in a qualifying home as your personal residence that you owned or jointly owned in the last 4 years.
There are 3 types of FHSA accounts that you can open. This section is probably something you won’t need to pay too much attention to in general. The 3 types are:
NOTE: Self-directed FHSA are allowed as long as you are utilizing qualified investments
You can invest in a variety of things with an FHSA, such as money, guaranteed investment certificates, government and corporate bonds, mutual funds, and securities listed on a designated stock exchange. These types of investments are usually similar to the ones allowed with RRSPs.
For more information, either:
You can contribute or transfer up to a certain amount each year to your FHSA, which is known as your “contribution room.”
In the year that you open your first FHSA, your contribution room is $8,000.
The total amount you can save in your FHSA over your lifetime is limited to $40,000.
This means the shortest period of time that you can max out this account is within 5 years.
Now, you may be wondering what happens if you don’t use up your entire contribution limit in the year on your First Home Savings Account.
You can carry forward your unused FHSA participation room UP TO a maximum of $8,000.
So if you don’t use it for 5 years, it would not be 5 x $8,000 = $40,000, it would simply be $8,000.
If you accidentally contribute more than the allowed amount to your FHSA, don’t panic!
You’ll just need to pay a monthly tax of 1% on the highest excess amount until it’s eliminated.
Your excess amount can be reduced or eliminated by your new FHSA participation room on January 1 of the following year, or by removing amounts from your FHSAs.
When it comes to transferring funds between your RRSP and FHSA, it’s important to note that this is considered a transfer and not a loan (unlike the HBP RRSP loan). The good news is that you won’t face any tax consequences as long as you stay within the participation limit.
However, it’s worth keeping in mind that transferring funds from your RRSP to FHSA won’t restore your unused RRSP deduction room.
Another important point to remember is that transferring from a RRIF to FHSA is not permitted.
There are 2 main things to keep in mind to withdraw from the FHSA tax-free:
”First Time Home Buyer for the purpose of withdrawing from your FHSA First time home buyer if you did not live in a qualifying home as your Personal Residence that you owned or jointly owned in the last 4 years.”
“A designated amount cannot exceed your excess FHSA amount at the time of the designation. Your designated withdrawal of the excess cannot be more than (The total amount contributed to your FHSAs) – (Any amounts previously withdrawn as a designated withdrawal)”
If the withdrawal does not meet these two points then it will be deemed income and you will need to pay tax on it.
There are a few steps you’ll need to take to withdraw your funds from the FHSA to buy a new home:
First Time Home Buyer for the purpose of withdrawing from your FHSA – First time home buyer if you did not live in a qualifying home as your Personal Residence that you owned or jointly owned in the last 4 years.
Luckily, yes!
Originally, the rules were going to be designed where you can only use one or the other. Fortunately, when implemented, this was changed so that you can actually use both programs.
That means you can use:
There typically isn’t tax consequences when you transfer funds from your FHSA into your RRSP.
This means that you shouldn’t pay any tax on the funds moved.
It also means that you won’t change your unused RRSP deduction room!
It’s important to note that you will, at some point, need to close out your FHSA account.
You’ll need to close all of the accounts on or before Dec 31 after your first qualifying withdrawal.
If you’re interested, you can read the official CRA documents for this program here.
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