The FHSA is a new tax-free registered plan available to any prospective first-time home buyer. With a FHSA, first-time home buyers have an opportunity to contribute up to $40,000 (annual contribution limit of $8,000 each year) towards their first-home purchase.
Similar to a registered retirement savings plan (RRSP), a FHSA allows individuals to deduct their contributions each year from their income, and similar to a tax-free savings account (TFSA), any income generated in a FHSA and qualifying withdrawals are tax-free.
Eligibility
Starting April 1, 2023, any individual who meets the following requirements can open a FHSA:
- Canadian resident
- At least 18 years of age and under the age of 71
- You or your spouse or common-law partner have not lived in a qualifying home in the year you open the account and up to 4 years before.
How It Works
This account works like your RRSP or TFSA account as you can purchase and hold investments within this account, such as mutual funds, publicly traded securities and GICs. Any prohibited investments for other registered plans will also be prohibited for the FHSA, such as investments in land, shares of private corporations, and general partnership units.
The contributions to this account must be made by December 31st of each year to be deductible for that tax year. As mentioned, withdrawals from this account are tax-free if they are a “qualifying withdrawal”.
Qualifying Withdrawals
Since the FHSA is intended to be for a purchase of a home, the following conditions must be met for it to be a qualifying withdrawal:
- You are a Canadian resident at the time of withdrawal,
- You are a first-time home buyer and have not purchased the qualifying home 30 days prior to withdrawal,
- You must have a written agreement to buy or build a qualifying home with a completion date before October 1 of the year following the date of withdrawal,
- You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after the purchase or building completion.
Once all the above conditions are met, you will need to complete Form RC725 and provide it to your FHSA issuer to process the withdrawal.
If you do not meet the conditions, withdrawals can still be made but they would be subject to income tax.
Time Limits
The FHSA needs to be closed on December 31 of the year in which the earliest of the following events occur:
- The year you turn 71 years old;
- 15 years after the year the FHSA account was opened or;
- The year following the first qualifying withdrawal (i.e. if you made your first qualifying withdrawal in 2023, your account has to be closed by December 31, 2024)
If the time limit has been reached and your account remained opened, you have to transfer the funds to a RRSP/RRIF on a tax-deferred basis or simply withdraw the funds and pay taxes on the withdrawal.
Home Buyer’s Plan (HBP) and FHSA
The HBP is an existing plan that provides support for first-time home buyers by allowing them to withdraw tax-free up to $35,000 from their RRSP to purchase or build a home. However, under the HBP, a repayment is required on the amount of withdrawal, otherwise, the withdrawal will be taxable.
The FHSA can be used in conjunction with a HBP which means a first-time home buyer can save up $75,000 under both plans without triggering any income taxes to purchase their first home.
The best investment options between all of the various registered plans available to individuals will vary based on each individual’s scenario.
If you require further guidance to determine whether or not you qualify for any of these saving plans, please feel free to reach out to SBLR LLP.