What Is The New Tax-Free First Home Savings Account (FHSA)?

Realtor Sean Findlay of Century 21 Millennium Brokerage, reviews what the new tax-free First Home Savings Account (FHSA) is, who is eligible, how to open a new account, and how to contribute to and make withdrawals from an FHSA.

The New Canadian Tax-Free First Home Savings Account

Are you a Canadian looking to buy your first home? Saving up for a home down payment can be challenging, but there’s a program that can help you get there faster: the Tax-Free First Home Savings Account (FHSA).

The Tax-Free First Home Savings Account (FHSA) is a new Federal program designed to assist Canadians in saving to purchase a home for the first time.

WHAT IS A TAX-FREE FIRST HOME SAVINGS ACCOUNT (FHSA)?

An FHSA is a special type of savings account that allows Canadians to save money for their first home while enjoying tax-free growth on their savings. The account is offered by many financial institutions, including banks and credit unions, and the money can be invested in a range of options, such as GICs, mutual funds, and exchange-traded funds (ETFs).

Effective April 1, 2023, the tax-free home savings account will allow first-time home buyers to save up to $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home would be non-taxable, like a Tax-Free Savings Account (FHSA).

Qualified individuals can contribute up to an annual maximum of $8,000 to a FHSA with the lifetime maximum contribution being $40,000. The annual contribution limit counts for contributions made during the calendar year. Unlike a RRSP, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year.

WHO IS ELIGIBLE & HOW TO OPEN A TAX-FREE HOME SAVINGS ACCOUNT (TFHSA)?

To open a FHSA, an individual must be:

• a resident of Canada;
• at least 18 years of age; and
• a first-time home buyer, meaning they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.

An individual can open an FHSA through eligible issuers which include:

• Canadian trust companies,
• life insurance companies,
• banks, and
• credit unions.

What are the benefits of FHSA?

The FHSA offers several benefits to Canadians looking to buy their first home, including:

• Tax-free growth: Any investment income earned within the account is tax-free, which can help you save money faster.
• Flexibility: You can invest your savings in a range of options, including GICs, mutual funds, and ETFs.
• Lifetime contribution limit: The $40,000 lifetime contribution limit means you can save more money tax-free than with a traditional savings account.
• No time limit: Unlike other programs, such as the Home Buyers’ Plan, there’s no time limit on when you need to use the money saved in your FHSA.

HOW DO CONTRIBUTIONS TO YOUR TAX-FREE HOME SAVINGS ACCOUNT WORK?

The annual contribution will be reported on an individual’s personal tax return in the same tax year as the contribution was made. The individual is then eligible for a tax deduction in a similar way as a RRSP deduction. An individual is allowed to determine the tax year they wish to deduct the contribution , also similar to a RRSP. This allows an individual to carry-forward unused TFHSA annual contributions to future tax years.

Any unused annual contribution room will accumulate for individuals to future years. For example, if an individual contributed $4,000 to a TFHSA in 2023, the individual would have a maximum contribution of $12,000 in 2024 (the remaining $4,000 unused in 2023 plus the annual $8,000 maximum). Each individual is responsible for ensuring they do not exceed their annual maximum contribution limits.

HOW WITHDRAWALS WORK

In order for a withdrawal from a TFHSA to be non-taxable, it has to meet certain conditions.

1. A taxpayer must be a first-time home buyer at the time a withdrawal is made.

2. The individual must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal and intend to occupy the qualifying home* as their principal place of residence within one year after buying or building it.

If any of the above conditions are not met, the withdrawal will be considered non-qualifying and will be included in the individual’s personal income in the same tax year as the withdrawal was made. Non-qualifying FHSA withdrawals will be taxed with the same treatment as taxable RRSP withdrawals.

ELIGIBLE INVESTMENT OPTIONS

An FHSA is permitted to hold the same qualified investments that are currently allowed to be held in a TFSA. In particular, individuals can invest in:

• mutual funds,
• publicly traded securities,
• exchange-traded funds (ETFs),
• government and corporate bonds, and
• guaranteed investment certificates (GICs).

Examples of prohibited investments inside a FHSA include:

• land and real estate,
• shares of private corporations, and
• general partnership units.

HOW TO CLOSE A FHSA

An FHSA of an individual would cease to be an FHSA, and the individual would not be permitted to open an FHSA, after December 31 of the year in which the earliest of these events occurs:

1. The fifteenth anniversary of the individual first opening an FHSA

OR

2.The individual turns 71 years old

Any savings not used to purchase a qualifying home can be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF), otherwise the funds would have to be withdrawn on a taxable basis. Individuals who make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.

DOES THE FHSA AFFECT THE HOME BUYERS PLAN

The Home Buyers Plan (HBP) will continue to be available under existing rules. However, an individual would not be permitted to make both a FHSA withdrawal and a HBP withdrawal in respect of the same qualifying home purchase.

Is the First-Time Home Savings Account a smart financial decision for you?

In conclusion, the Tax-Free First Home Savings Account is a great option for Canadians looking to save money for their first home while enjoying tax-free growth on their savings. If you’re eligible, consider opening a TFHSA to help you reach your home ownership goals faster.

Contact an advisor to review your financial plan and how to maximize your saving potential.

*A qualifying home is classified as a housing unit located in Canada. A share in a co-operative housing corporation that entitles the taxpayer to possess, and have an equity interest in a housing unit located in Canada, would also qualify. However, a share that only provides a right to tenancy in the housing unit would not qualify.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Written by Realtor Sean Findlay

Century 21 Millenium Brokerage Inc