The new First Home Savings Account (FHSA), a registered plan that is to come into force on April 1, 2023, allows prospective first-time home buyers the ability to save funds for the purchase of a home on a tax-free basis. This is great news for prospective first-time home buyers and parents looking to help their kids get into the competitive Canadian housing market.
To help you determine if an FHSA makes sense for you or a family member, we have answered many of the questions you may have about this new incentive.
For more information about the following additional housing-related tax incentives read our previous article on these topics.
- The Multigenerational Home Renovation Tax Credit (MHRTC).
- The Home Buyers’ Tax Credit (HBTC).
- The Home Accessibility Tax Credit (HATC).
- The Residential property flipping rule.
What is an FHSA?
The FHSA is a registered plan that allows certain individuals the ability to save funds for the purchase of a home on a tax-free basis. The lifetime limit on contributions to an FHSA is $40,000, and the annual contribution limit is $8,000. While contributions to an FHSA are tax-deductible, withdrawals to purchase a first home are not taxable. As well, any income, losses, and gains in respect of investments held within an FHSA are not included (or deducted) in computing income for tax purposes.
Can anyone open an FHSA?
The short answer is no. In order to be eligible to open an FHSA, an individual must:
- Be a resident of Canada.
- Be at least 18 years old.
- Be a first-time home buyer (This means you, or your spouse or common-law partner did not own a qualifying home that you lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years).
If you are eligible to open an FHSA, you can contribute up to $8,000 this year, even though the rules do not come into effect until April 1, 2023.
Can you contribute to your child’s FHSA?
You cannot contribute directly to your child’s FHSA, as individuals cannot claim a deduction for contributions made to another individual’s FHSA. However, your child is allowed to contribute to their own FHSA using funds provided by you.
How do you make a withdrawal from an FHSA?
While individuals can make a withdrawal from their FHSA for any purpose, only qualifying withdrawals meeting the following conditions will be considered non-taxable:
- The withdrawal must be made using a prescribed form that sets out the location of the qualifying home that the individual intends to occupy as a principal residence within one year of acquisition of the qualifying home.
- The individual be resident in Canada from the time of the withdrawal to the acquisition of the qualifying home (or the individual's death, if earlier) and that the individual be a first-time home buyer. An individual counts as a first-time home buyer for this purpose if during the four calendar years preceding the year in which the withdrawal was made, and in the period in the year ending 31 days before the withdrawal was made, the individual did not live in a home that they owned.
- The individual entered into a written agreement (before the withdrawal) to buy or build a qualifying home before October 1 of the year following the year of withdrawal.
- The individual did not acquire the qualifying home more than 30 days before the withdrawal is made.
Is an FHSA similar to an RRSP or a TFSA?
FHSAs share some features with Registered Retirement Savings Plan (RRSPs), but not all. For instance, similar to RRSPs, individuals with FHSA can claim an income tax deduction for contributions made in a particular taxation year and can carry forward any undeducted contributions and deduct them in a later taxation year. However, unlike RRSPs, individuals cannot attribute contributions made within the first 60 days of a calendar year to the previous calendar year, nor can they claim a deduction for contributions made to their spouse or common-law partner's FHSA.
FHSAs can hold the same type of investments as Tax Free Savings Account (TFSAs) including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. As well, the same prohibited investment rules and non-qualified investment rules applicable to TFSAs also apply to FHSAs. Similar to TFSAs, an individual who makes a contribution to an FHSA that exceeds their contribution limit is subject to a penalty of 1% per month tax on the excess.
Can I make both an FHSA withdrawal and a Home Buyers' Plan withdrawal?
Yes, you can make both an FHSA withdrawal and a Home Buyers' Plan (HBP) withdrawal in respect of the same qualifying home purchase. The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP as a loan, with no immediate tax consequences, to buy or build a qualifying home. This means that you may have a total of $75,000 (plus accumulated investment income from an FHSA) of tax-free money that can be used toward the purchase of a new qualifying home, if you have contributed the maximum lifetime amount of $40,000 to your FHSA and that you have adequate funds in your RRSP. Remember that while no repayment is required with respect to the funds withdrawn from your FHSA, amounts withdrawn under the Home Buyers' Plan must be repaid to an RRSP over a period not exceeding 15 years, beginning the second year after the year of withdrawal.
If you are a first-time home buyer, an FHSA is a great way to help you save for a down payment and reach your goal of home ownership. Keep in mind that in order to open an FHSA, you are required to confirm your eligibility to an eligible issuer.
Contact your BDO advisor for more information on the FHSA.
Rachel Gervais, Managing Partner, Tax
Greg London, Partner, Domestic Tax Consulting Leader
The information in this publication is current as of March 2.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.