Buying a home is a dream for many Canadians, but it can also be a challenge. Saving for a down payment, which can be up to 20% of the total cost of the property, can take years of hard work and discipline. That’s why the federal government introduced the First Home Savings Account (FHSA) in 2022. The FHSA is a new type of registered account designed to help Canadians save for their first home.
What is an FHSA?
The FHSA is similar to both the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Like an RRSP, contributions to an FHSA are tax-deductible, meaning you can lower your taxable income by the amount you contribute. Like a TFSA, withdrawals from an FHSA are tax-free, meaning you don’t have to pay any tax on the money you take out, including any investment income earned within the account but only if you use it to buy a qualifying home.
You can withdraw money from your FHSA to buy a qualifying home in Canada, which must be your principal residence within one year of purchase.
What investments can I hold in an FHSA?
You can hold various investments within an FHSA, such as mutual funds, stocks, bonds, GIC, etc.
Eligibility
To be eligible for the FHSA, you must be:
- A Canadian resident
- 18 years or older
- A first-time home buyer
That means you have not owned a home in which you lived in the last five years
How much can I contribute to an FHSA?
You can contribute up to $8,000 per year into an FHSA, up to a lifetime limit of $40,000.
How is the FHSA different from an HBP?
You can use the FHSA and the Home Buyers’ Plan (HBP) together for the same qualifying home purchase. The HBP allows you to withdraw up to $35,000 from your RRSP to buy or build your first home.
For example, let’s say you want to buy a home that costs $400,000 and you need a 10% down payment ($40,000). You have $20,000 in your RRSP and $20,000 in your FHSA. Here’s what you could do:
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- Withdraw $20,000 from your RRSP under the HBP. You don’t pay any taxes on this amount and you have 15 years to repay it.
- Withdraw $20,000 from your FHSA. You don’t pay any taxes on this amount and you don’t have to repay it.
- Use the $40,000 as your down payment for your home.
By using both plans, you can save more money and pay less taxes than if you used only one plan.
When does the FHSA start?
The FHSA is expected to be available for Canadians starting April 1, 2023. If you are interested in opening an FHSA, you should consult with your financial advisor or visit the Canada Revenue Agency website for more information.
What happens if I don’t use the money in my FHSA?
You have 15 years to use your FHSA savings to buy a home, or until you turn 71 years old. If you don’t use your savings for this purpose, you can transfer them to your RRSP or Registered Retirement Income Fund (RRIF) on a tax-free basis, or withdraw them on a taxable basis.
Conclusion
The FHSA is a great opportunity for Canadians who want to achieve their homeownership goals. By saving in an FHSA, you can benefit from tax advantages and grow your money faster. Whether you are planning to buy a house, a condo, or a cottage, the FHSA can help you get there sooner.