By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, April 13, 2023
The tax-free first-home savings account (FHSA) was first proposed in the federal government budget in 2022. Now the feds have confirmed that as of April 1, 2023, financial institutions may start offering the new FHSA. This means that Canadians have a new registered plan to help them save for their first home.
The FHSA is a new registered plan to help first-time homebuyers save up to $40,000 tax-free over the life of the plan. Similar to a registered retirement savings plan (RRSP), contributions to an FHSA would be tax deductible. Like a tax-free savings account (TFSA), any income or gains inside the FHSA along with the withdrawals would be tax-free.
Who is eligible to open an account?
• You must be a Canadian resident. • 18 years or older and; • First-time homebuyer, which means you or your spouse or common-law partner did not own a qualified home that you lived in as your principal residence at any time in the year the account is opened or the four calendar years that followed.
What are the FHSA parameters?
The account can stay open for 15 years or until the end of the year when you turn 71, or at the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.
How much can you contribute?
You can contribute up to $40,000 over your lifetime and up to $8,000 in any one year, including 2023, (even though you are not able to start contributing until April 1, 2023).
The annual contribution limit applies to contributions made within the calendar year. You can carry forward up to $8,000 of your unused annual contribution amount to use in a later year (as long as you don’t surpass your lifetime contribution limit). As an example, if you open an FHSA in 2023 and contribute $4,000, you can contribute up to $12,000 in 2024. Carry-forward amounts do not start accumulating until after you open an FHSA.
If you wish, you can have more than one FHSA account, but the total amount you can contribute across all of your FHSA accounts cannot exceed your annual and lifetime FHSA contribution limits.
Also, you would be able to claim an income tax deduction for contributions made in a particular taxation year.
What if you don’t purchase a home?
Any savings not used to purchase a qualifying home can be transferred to an RRSP or RRIF (Registered Retirement Income Fund) on a non-taxable basis. In addition, the funds that are transferred to an RRSP or RRIF will be taxed upon withdrawal. If you decide to withdraw the FHSA funds instead of transferring them, they will be subject to taxes.
What is a qualifying withdrawal?
To withdraw the funds tax-free, you must make a qualified home purchase by meeting the following conditions:
• You must be a first-time homebuyer when you make the withdrawal and a Canadian resident. • You must have a written agreement to buy or build a qualified home before Oct. 1 of the year following the year of withdrawal. • You must intend to occupy the home as your principal residence within one year after buying or building it.
How is the FHSA different from the Home Buyers’ Plan?
With the current Home Buyers’ Plan, Canadians can withdraw up to $35,000 from their RRSP, subject to eligibility and conditions, and then pay back the funds to their RRSP over 15 years. If you don’t pay it back, you must pay taxes on those funds. Unlike the Home Buyers’ Plan, with the FHSA, the funds do not need to be paid back.
As a first-time homebuyer, an individual could withdraw up to $40,000 from a FHSA and another $35,000 from their RRSP as tax-free funds to put towards the purchase of their home.
It is recommended that a prospective first-time homebuyer review the details of each plan to determine how to make the most of them to increase their savings.
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