As of April 1st, 2023, Canadian residents that are first-time home buyers and who are at least 18 years old (19 in some provinces and territories) are able to open up a tax-free First Home Savings Account (FHSA). This registered plan allows you to save up for your first home tax-free up to a limit of $40,000. In this blog, we will dive into the nitty gritty to see what it’s all about.
It might seem obvious, but there are a few guidelines to follow and you might be surprised to know that if you previously owned or lived in a home, you could still qualify. You’re considered a first-time home buyer if you and/or your spouse or common-law partner have not owned a home where you lived in the calendar year in which you open the account or anytime in the preceding 4 calendar years. This also means you cannot have lived with a common-law partner in a home that just the partner owned within those years either. Although, if you own a rental property, but it isn’t your primary residence, this doesn’t apply and you could still be eligible for the FHSA.
You’ll need to be 18 years of age (in Ontario) on the day you open the account as well as a Canadian resident. If you become a non-resident after opening the account, you can still contribute, but you won’t be able to make a withdrawal during that time.
Your FHSA has a yearly and lifetime contribution limit. For the year, you can contribute up to a maximum of $8,000 and up to a maximum of $40,000 in a lifetime. If you don’t fully contribute up to your maximum in the year, the unused amount will carry over into the next year, up to a maximum of $8,000 of carry-over. So the max you can contribute in a year with your carry-over would be $16,000. That means if you don’t pay in for 2 years, you’ll be losing out on $8,000.
I’d like to mention too that you can certainly open multiple FHSA accounts at different banks. Let’s say you do open multiple accounts, remember that the amounts you contribute to them still cannot exceed the original limits of $8,000 a year and $40,000 in a lifetime.
You can also transfer funds from your TFSA and RRSPs to your FHSA, but with those transfers and contributions, the combined amount cannot exceed the maximum contribution of $8,000 for the year. Additionally, the amount earned in your FHSA doesn’t count toward your participation room for the year. Let’s say in 2023 you contributed $8,000, and at the end of the year your FMV (fair market value) increased to $8,600, this will not lower your participation room for 2024 to $7,400, you’ll still be able to contribute your full amount of $8,000.
If you maximized your contributions each year, you’ll hit the account limit in 5 years. So $8,000 X 5 years = $40,000. But you have up to 15 years to contribute to this account tax-free. You also have up until the end of the year you turn 71 as well since this account is geared towards people ages 18 to 71.
The contributions you make to this account are tax-free going in and tax-free coming out. Which is great news! Anything you contribute to this account through the year will be deducted from your earnings for the year thus you will not be taxed on it.
There are a few conditions to meet to be able to make a qualifying withdrawal from your FHSA. To find these, please refer to the official
Canada Revenue Agency website. Remember that if any of those conditions aren’t met, your withdrawal will be treated as a taxable withdrawal that you’ll need to include as income on your income tax and benefit return for the year received. Otherwise, you can make withdrawals when needed as long as the conditions are met as one single withdrawal or a series of withdrawals.
There are 3 reasons you’ll be forced to close your account, which will always be on December 31st of the year you need to close it. Firstly, the 15th anniversary of opening your first FHSA, secondly, the year you turn 71 years old, and lastly, the year following your first qualifying withdrawal from your FHSA. You’ll want to close your account on that day or before to ensure you avoid unintended tax consequences.
Thank you so much for reading up about the First Home Savings Account. We truly hope this can benefit you in the near future and you take full advantage of the tax-free savings you can do! Talk to your financial advisor today to see if you qualify. But don’t forget to go to the Canada Revenue Agency website to get more detailed information if this is something you’re interested in. You can find a quick summary below that you might find useful!
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