Demystifying the First Home Savings Account: A Guide for Canadian First-Time Homebuyers
It’s no secret the housing market in Canada has been overheating for years. With real estate prices remaining stubbornly high, many prospective first-time homebuyers are finding the entry way into the market very narrow, if possible, at all.
While there are no instant fixes for the challenges created by insufficient affordable housing, the Canadian government introduced a new program that aims to help first-timers save money to purchase a home.
What is the FHSA?
The FHSA is a registered account for Canadians 18 years of age or older who have never owned a home or haven’t owned one in the past four calendar years. The FHSA allows eligible Canadians to contribute up to a lifetime limit of $40,000.
The annual contribution limit is $8,000 and unused room can be carried forward to a future year.
For example, if you contribute $4,000 in 2023 your limit for 2024 will be $12,000 instead of $8,000.
The new account combines the two main tax perks of the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA).
As with an RRSP, deposits into the account would be tax deductible. At the same time, as with a TFSA, eligible withdrawals would be tax-free. Any investment growth within the account would also be tax-free.
With the FHSA, you will be able to withdraw as much money as you’re able to earn in your account for the purchase of your first home. The lifetime maximum contribution is $40,000 however if you are able to earn growth of an additional $40,000 in that account, a total of $80,000 can be withdrawn from the account tax free.
If you don’t use your FHSA to buy a home within 15 years, you must close the account. You can move the assets to an RRSP or RRIF tax free or simply withdraw the funds, but in the latter case the amount will be fully taxable as income.
FHSA, HBP, or Both?
The FHSA is not the only option the government has provided for first time home buyers. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP on a tax-free basis to purchase your first home. You’re given 15 years to repay that amount to your RRSP.
You can utilize both programs for the purchase of your first home. As explained in the above example, if your FHSA has grown to $80,000 and you also have $35,000 saved in your RRSP both accounts can be used to fund the purchase of your first home for a total of $115,000.
Although the FHSA account is approved, each institution might have different timelines where it becomes fully implemented. We are expected to be able to offer this program in early fall. In the meantime, saving into your RRSP account for a first home purchase is still an option, a tax-free transfer into the FHSA account can be processed when the account becomes available.