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First Home Savings Account – a new way to become a homeowner
May 18 2023 / Insight from Ksenia Lee, CFP ®, Wealth Advisor
The 2022 federal budget announced another way to help Canadians save for their first home, called the First Home Savings Account (FHSA). This savings program combines features of both a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), making it a very appealing way to save for a down payment.
Let’s have a look at some of the basics of the new savings plan. To open your FHSA account, you must be a Canadian resident of 18 years or older, and looking to purchase your first qualifying home, meaning you have not owned a home at anytime in the current calendar year before the account is opened or in the preceding 4 calendar years. The FHSA has an annual contribution limit of $8,000 (beginning the year the account is opened) with a lifetime maximum of $40,000. Contributions are tax deductible (except when transferring money from RRSP), the income earned within the account is tax-free, and withdrawals are non-taxable when the funds are used towards purchasing a qualified property (principal residence).
Unlike a TFSA, the FHSA account must be closed on Dec 31st of the year in which the earliest event occurs: the 15th anniversary of opening your first FHSA, or you turn 71 years of age, or the year following your first qualifying withdrawal. Should you choose not to buy a home with the money in the account, the funds can be withdrawn on a taxable basis or transferred on a tax deferred basis to your RRSP, without affecting your RRSP contribution room.
The First Home Savings Account joins the Home Buyers Plan (HBP) as two federal programs to help Canadians acquire a home; both can be used simultaneously. Moreover, you can also combine your contributions with that of your partner, depending on some eligibility requirements. However, there are significant differences that you need to be aware of when making your decision on which program or programs work for your situation. With a HBP, you can withdraw up to $35,000 from your RRSP towards purchasing a home, but you must repay that amount over the next 15 years. Should you miss repaying the 1/15 portion of the withdrawal in a particular year, that amount will be added to your taxable income for that year.
The below summarizes the key points of both:
First Home Savings Account
The FHSA is a new registered account that provides tax-free savings for first-time home buyers.
- No repayment required
- No withdrawal limit
- Maximum annual contribution of $8,000 and lifetime total of $40,000
- No minimum requirement for the funds to be in the account before the withdrawal is made
- Yearly deadline for contributions is December 31
Home Buyers Plan
The HBP allows you to withdraw funds from your RRSP to buy or build a first home.
- Repayment required (min 1/15th per year)
- Withdrawal limit of $35,000 from RRSP
- Maximum annual RRSP contributions– 18% of previous year’s income or current fixed contribution limit
- Money must be deposited into your RRSP 90 days before you withdraw it under the HBP
- Deadline for RRSP contributions – 60 days after the end of the year
To determine the best mix of saving options for the purchase of your first qualified property, and for further information, contact your Wealth Advisor.
