FHSA: First Home Savings Account

5 things to know about the FHSA Canada’s new tax-free home saving account

The tax-free first home savings account (FHSA), Canada’s newest registered savings plan, has officially launched. As of April 1, financial institutions started offering this new savings plan to first time home buyers.  If you plan on using it, here are five things you need to know.

Tax-free in; tax-free out

The FHSA gives prospective first-time homebuyers the ability to contribute up to $40,000 and save on a tax-free basis towards the purchase of a first home in Canada.

The FHSA combines the best features of both the Registered Retirement Savings Plan (RRSP) and the Tax-free Savings Account (TFSA). The program allows you the tax-free withdrawal of all contributions, investment income and growth earned in the account when used to buy a first home.

Unused portion will be transferred to an RRSP

There is a limit to the length of time you can have an FHSA.  It can remain open for up to 15 years or until the end of the year when you turn 71. Whichever comes first. Any funds that are not used before closing the FHSA can be transferred on a tax-free basis to an RRSP or RRIF. Otherwise they will be included in income.

This means that if you that qualify and don’t end up buying a home, you effectively get another $40,000 of RRSP room.

The Home Buyers’ Plan (HBP) and FHSA can be used together

The HBP program will continue to be available. The HBP allows first-time homebuyers to withdraw up to $35,000 from an RRSP and pay it back, interest free over 15 years.

The government permits you to participate in both the HBP and the FHSA for the same home purchase.

You need to meet a few criteria to qualify to withdraw

In order to qualify to use the funds you must meet the following criteria.

  • You must be a first-time homebuyer and a resident of Canada.
  • You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal.
  • You must intend to occupy the qualifying home as your principal place of residence within one year.

Much like RRSPs there are limits to your contributions

If you qualify, you’re able to contribute as much as $8,000 per year. Up to the $40,000 lifetime contribution limit. The annual limit applies to contributions made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a subsequent year can’t be deducted in the current tax year.

You are permitted to transfer funds from an existing RRSP to an FHSA on a tax-free basis. However, these transfers aren’t tax deductible. They also won’t reinstate your RRSP contribution room.

If you don’t make a maximum yearly contribution you can carry forward any unused portion up to a maximum of $8,000.

Speak Your Mind