FHSA Canada: A Step-by-Step First Home Savings Account Guide
Buying your first home is an exciting milestone, but it can also be financially daunting. Fortunately, Canadian first-time homebuyers now have access to a powerful savings and investment tool to ease the journey: the First Home Savings Account (FHSA). In this blog, we’ll explore the ins and outs of the FHSA, its advantages, disadvantages, and how it compares to the Tax-Free Savings Account (TFSA).
What Is the First Home Savings Account?
The FHSA is a registered savings account designed to help Canadians save for their first home. It combines elements of both TFSA and RRSP accounts, offering unique benefits for aspiring homeowners.
Key Features of FHSA:
- You can contribute up to $8,000 annually, with a maximum lifetime contribution limit of $40,000.
- Unused contribution room rolls over to the next year, capped at $8,000.
- Contributions are tax-deductible, reducing your taxable income for the year.
- Investments within the FHSA, such as mutual funds, stocks, bonds, and GICs, grow tax-free.
How does the FHSA work?
Opening and using an FHSA is straightforward:
- Where to Open: Eligible Canadians can set up an FHSA at financial institutions offering TFSAs and RRSPs, including banks, credit unions, life insurance companies, and trust companies.
- Contributions: You can deposit funds up to the annual contribution limit of $8,000. Unused room carries forward.
- Investment Options: Your FHSA funds can be invested in various products, and all gains are tax-free.
- Home Purchase: When buying your first home, submit a qualifying withdrawal request to access your savings tax-free.
- Initial Contribution: Deposit your money into the FHSA bucket. For instance, if you contribute $1,000, the bucket now holds $1,000.
- Tax Deduction: You can deduct this contribution from your current year’s taxable income, reducing your income tax liability.
- Investing Within the Bucket: You can invest the cash within the FHSA bucket in various investment types, such as Guaranteed Investment Certificates (GICs).
- Tax-Free Growth: Any income earned on these investments remains within the FHSA bucket, growing tax-free.
- Tax-Free Withdrawal: When you’re ready to buy your first home, you can withdraw the funds tax-free.
- Non-Home Purchase Withdrawal: If you withdraw without purchasing a home, you’ll be subject to taxes, as the account is intended for home buying.
How do the FHSA withdrawls work?
Only withdrawals used for a home purchase qualify for tax-free treatment. To make a qualifying withdrawal, you must:
- Be a first-time homebuyer.
- Reside in Canada during the withdrawal.
- Have a written agreement to buy or build a home in Canada.
- Intend to use the home as your principal residence within a year.
Non-qualifying withdrawals are taxable and subject to withholding tax.
What are the FHSA contruibution rules?
Besides annual and lifetime contribution limits, consider these rules:
- Annual contribution limits apply to a calendar year.
- You can hold multiple FHSAs but adhere to a single limit.
- Over-contributions face a 1% monthly tax.
- You can help your spouse/partner contribute, but it’s not tax-deductible.
What are the FHSA contruibution limits?
Similar to the TFSA and RRSP, the FHSA has contribution limits:
- Annual Contribution Limit: $8,000.
- Lifetime Contribution Limit: $40,000.
These limits were designed to align with the average home price in Canada, which represents about 5-6% of the minimum down payment for a home under a million dollars.
Do FHSA contruibution carry forward?
The FHSA allows you to carry forward unused contribution room:
- Example 1: If you contribute the maximum $8,000 annually from 2023 to 2027, you’ll reach the $40,000 lifetime limit.
- Example 2: If you contribute $2,000 in 2023, leaving $6,000 in carry-forward room, you can contribute $14,000 in 2024 ($8,000 annual limit + $6,000 carry-forward).
Who is eligible for FHSA ?
To open an FHSA, you must:
- Age: You must be between 18 and 71 years old.
- Residency: You should be a Canadian resident.
- First-Time Home Buyer: The term “first-time home buyer” doesn’t mean you’ve never bought a home. It means you haven’t lived in a house you or your spouse/common-law partner owns in the past five calendar years. Rental properties you own but haven’t lived in do not disqualify you.
Is the FHSA Right for You?
Now, the big question: Will the FHSA help you buy a house? Let’s weigh its benefits and drawbacks.
Advantages of the FHSA:
- Tax Deductibility: Contributions reduce your taxable income.
- Tax-Free Growth: Investments grow without tax implications.
- No Repayment Requirement: Unlike the Home Buyers’ Plan (HBP), you’re not obligated to repay withdrawn funds.
Disadvantages of the FHSA:
- Limited Flexibility: Withdrawals must go toward your first home; otherwise, they’re taxable.
- Lifetime Maximum: Contributions are capped at $40,000, with an $8,000 annual limit.
- Contribution Limitations: Only you, your spouse, or partner can contribute directly.
How Does the FHSA Compare to the TFSA?
To help you decide, here’s a brief comparison with the Tax-Free Savings Account (TFSA):
TFSA Advantages:
- Tax-Free Growth: Contributions and withdrawals are tax-free.
- Contribution Room: Unused room carries forward indefinitely.
- Withdrawal Flexibility: Funds can be used for various purposes.
TFSA Disadvantages:
- No Tax Deductions: Contributions are made with after-tax dollars.
- Annual Contribution Limits: Exceeding them results in penalties.
In Conclusion
The First Home Savings Account (FHSA) offers valuable advantages for first-time homebuyers. It combines tax benefits with the potential for tax-free growth, making it a compelling option. However, its limited flexibility and contribution restrictions should be considered.
When comparing the FHSA to the TFSA, weigh the benefits and drawbacks carefully to determine which best suits your financial goals. Both accounts offer unique advantages, and your choice should align with your specific needs and plans.
As you embark on your journey toward homeownership, the FHSA could prove to be a valuable tool in realizing your dream.
A great way to get started on buying your very first home is to book a FREE first-time home buyer consultation with us.
During this tailored success strategy session, we’ll delve into crucial market insights customized for your needs. Our aim is to empower you with the knowledge and guidance necessary to make a smart and informed home buying decision.
Click here to book a FREE first-time home buyer consultation!
Happy saving!
