In Budget 2022, the Canadian government introduced measures to make housing more affordable. Among these initiatives is a new savings account called the Tax-Free First Home Savings Account. This account is designed specifically to help first-time homebuyers save for a down payment on a home. If you’re dreaming of owning your own home, keep reading to find out how this account works and how it can help you achieve your goals.
What is the Tax-Free First Home Savings Account?
The Tax-Free First Home Savings Account (FHSA) is a registered savings account that would allow prospective Canadian first-time homebuyers over the age of 18 the ability to save a maximum of $40,000 tax-free, with a contribution limit of $8,000 per year. The account will become available to Canadians April 1st, 2023. An FHSA has similarities to existing registered accounts like the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) – it’s almost like getting the best of both account types without any of the drawbacks. For example, like an RRSP, contributions to an FHSA would be tax-deductible, and like a TFSA, qualifying withdrawals from the FHSA would be non-taxable. As the government describes it, “tax-free in, tax-free out”.
Who can open a Tax-Free First Home Savings Account?
To be eligible for the FHSA, you would need to meet these criteria:
- Canadian resident
- 18 years of age or older
- Must be a first-time home buyer
Who is considered a “first-time homebuyer”?
To be eligible for this account, the Canadian government defines a first-time homebuyer as someone who has not owned a home they lived in during the previous calendar year or the four calendar years before opening the account.
Contributing to a Tax-Free First Home Savings Account
As we mentioned before, the Tax-Free First Home Savings Account has an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. You can open multiple FHSAs in different account types such as high-interest savings accounts, guaranteed investment certificates (GICs), mutual funds, or bonds, but remember that the total amount contributed cannot exceed the annual or lifetime contribution limits. Any overcontributions to an FHSA will be subject to a monthly tax rate of 1% on the highest amount of the overcontribution for the month.
Withdrawing Funds from a Tax-Free First Home Savings Account
To potential homeowners who have been saving for years, withdrawing from a Tax-Free First Home Savings Account is an eagerly awaited moment. To ensure that your FHSA withdrawal is not subject to taxes, it must meet the following criteria:
- You must be a first-time home buyer at the time the withdrawal is made or have moved into your first home in the last 30 days
- The home must be in Canada
- You must have a written agreement to buy or build a qualifying home before October 1st of the year following the withdrawal
- The qualifying home must be your principal place of residence within one year of buying or building it
Is withdrawing from an FHSA the same as a Home Buyers’ Plan (HBP) withdrawal from an RRSP?
While both withdrawals can be used for your first home, there are also some differences. If you’re already contributing to an RRSP, you can withdraw up to $35,000 under the Home Buyers’ Plan. Since the primary goal of an RRSP is to help Canadians save for their retirement, you will have to repay the withdrawal amount within 15 years, otherwise, the withdrawal amount will be added to your taxable income. An FHSA withdrawal, on the other hand, does not need to be paid back.
Tax-Free First Home Savings Account Guidelines and Timelines
One unique trait of the FHSA is that it can only be open for a maximum of 15 years or up until the account holder turns 71 years old. After that point, if the funds haven’t been used, account holders will have two options:
- Tax-free option: transfer money to an RRSP or Registered Retirement Income Fund (RRIF)
- Taxable option: withdraw funds to a non-registered account
Maximize Your Homebuying Potential
In addition to improving your credit, and creating a practical budget, saving a solid down payment is an integral step on the way to buying your first home. The introduction of the Tax-Free First Home Savings Account is a great asset that future homeowners can use alongside existing registered savings accounts like an RRSP and TFSA and government programs such as the First Time Home Buyers’ Plan or the First-Time Home Buyer Incentive.
