Introduced in 2023, the First Home Savings Account (FHSA) is a valuable tool for Canadians planning to purchase their first home. It combines the tax-deductibility of RRSP contributions with the tax-free withdrawal benefits of a TFSA, offering a powerful incentive to save.
What Is the FHSA?
The FHSA allows eligible Canadians to contribute up to $8,000 per year, with a lifetime maximum of $40,000, toward the purchase of a first home. Contributions are tax-deductible, and qualifying withdrawals (including investment growth) are completely tax-free.
Key Features
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Eligibility: Canadian residents aged 18 to 71 who have not owned and lived in a home in the current or previous four calendar years.
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Contribution Room: Unused annual contribution room (up to $8,000) can be carried forward, but only after the account is opened.
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Multiple Accounts: Individuals may open multiple FHSAs, but the contribution limits apply across all accounts.
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Tax Benefits:
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Contributions are deductible from taxable income.
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Withdrawals for qualifying home purchases are tax-free.
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Withdrawals for non-qualifying purposes are fully taxable and do not restore contribution room.
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Over-Contribution Penalty: A 1 percent monthly tax applies excess contributions.
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Account Closure: The FHSA must be closed within 15 years of opening, by the end of the year following a qualifying withdrawal, or by the end of the year the account holder turns 71.
Strategic Planning Considerations
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The FHSA can be combined with the RRSP’s Home Buyers' Plan to maximize down payment.
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This results in up to $75,000 per individual ($40,000 from FHSA and $35,000 from HBP), or $150,000 as a couple toward a first home purchase!
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Transfers from an RRSP to an FHSA are allowed but are not tax-deductible and do not restore RRSP contribution room.
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Unused FHSA savings may be transferred tax-deferred to an RRSP or RRIF, ensuring the funds continue to grow in a tax-advantaged account.
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After making a qualifying withdrawal, the account holder must occupy the purchased home as their principal residence within one year and provide a signed purchase agreement.
Other Considerations
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U.S. citizens and residents should be cautious. The FHSA may be considered a foreign trust or taxable account by the IRS.
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Only qualified investments are permitted in the FHSA. Excessive trading or holding non-qualified assets may result in tax penalties.
Reporting and Compliance
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Contributions, withdrawals, and transfers must be reported annually using CRA Form Schedule 15.
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Over-contributions must be reported using Form RC728 and any tax owing must be paid by June 30 of the following year to avoid penalties and interest.
The above information is of a general nature only and should not be relied upon for specific situations. Call Marlies Y Hendricks, CPA at 416-766-3941 to discuss your best options and set up an appointment.
