The tax-free FHSA, a new tool to help first-time buyers save for a down payment
In this article
- How does the FHSA work?
- FHSA vs. HBP
- FHSA withdrawals
- A new practical tool
Prospective buyers will soon be able to rely on a new tool to help them save for a down payment. Although we do not yet know all of the rules surrounding the 2022 Federal budget’s flagship measure, here’s what we currently know about the tax-free First Home Savings Account (FHSA), which will be available as of April 1st, 2023.
What is the FHSA?
Created to help first-time home buyers who must navigate a difficult real estate market, the FHSA is a tax-efficient account that combines certain benefits of the registered retirement savings plan (RRSP), the Home Buyers’ Plan (HBP) and the tax-free savings account (TFSA).
How does the FHSA work?
Just like RRSP contributions, FHSA contributions will be tax deductible. Like in a TFSA, your investment income and capital gains will grow tax-free—as long as you use them to purchase your first home. Keep in mind that with an RRSP, the money you earn is taxed whenever you take it out.
Canadians between the ages of 18 and 71 will be able to open an FHSA and contribute $8,000 per year, up to a lifetime maximum of $40,000.
Unlike RRSPs and TFSAs, however, you won’t be able to accumulate your unused annual contribution room and carry it over to the next year. For example, if you only contribute $4,000 in 2023, your contribution limit for the following year will still be $8,000.
However, after five years, a prospective home buyer who maximizes their FHSA every year will be able to withdraw up to $40,000 plus any investment income earned and put it towards a down payment on a home.
Meanwhile, a couple could contribute up to $80,000 with the FHSA, whereas this amount is capped at $70,000, or $35,000 per person, under the HBP.
Canadians over the age of 18 will be able to open an FHSA as long as they haven’t lived in a property that they owned in the current year or the previous four calendar years.
FHSA vs. HBP
Another irrefutable advantage of the FHSA is likely to affect how often people use the HBP. Under the HBP, you must repay any amount you withdraw from your RRSP within 15 years, or that money will be taxed. However, the money you withdraw from your FHSA to purchase your first home will not need to be repaid, which is probably the most significant advantage. That being said, you’ll need to close the account within 12 months of the money being withdrawn, since it can only be used once in your lifetime.
Keep in mind that you will be able to combine the amounts you saved in an FHSA with the HBP to buy a single property.
Pour ne pas être imposées, les sommes détenues dans le CELIAPP doivent être impérativement utilisées pour l’achat d’une première propriété. Dans le cas où l’argent ne sert pas à constituer une mise de fonds dans les 15 ans suivant l’ouverture du compte, celui-ci pourra tout de même être transféré dans un REER ou un fonds enregistré de revenu de retraite (FERR), auquel cas il sera imposé de façon différée, selon le taux
In order to not be taxed, it’s imperative that the amounts you save in your FHSA be used to buy your first home. If the money isn’t used for a down payment within 15 years of opening the account, you’ll still be able to transfer it to an RRSP or Registered Retirement Income Fund (RRIF). In this case, it will be tax-deferred according to your marginal tax rate at the time of the withdrawal. Another tax advantage is that the savings you transfer will not reduce your available RRSP contribution room.
Any other amounts you withdraw from your FHSA for purposes other than purchasing a first home will simply be taxed.
A new tool to implement into your savings strategy
Although we still don’t know everything about the FHSA, namely, what happens if your spouse already owns a home, the rules in the event of a separation, contributions made during the first 60 days of the year, and eligible investments, one thing is for sure—the FHSA is a tool that everyone should incorporate into their savings strategy, whether or not they’re saving for their first home.
Talk to your mortgage broker to find out more!
- The FHSA is designed to help you buy your first home
- It combines certain benefits of the RRSP, HBP, and TFSA
- Any unused amounts can be transferred to your RRSP