The First Home Savings Account (FHSA)

The First Home Savings Account (FHSA)

What is an FHSA?

The proposed Tax-Free First Home Savings Account, also known as the First Home Savings Account, is a government-registered investment savings account that allows individuals to save up to a lifetime maximum of $40,000 tax-free for the purpose of purchasing their first home. The plan is expected to become available to Canadians in 2023 once it receives royal assent.

The FHSA is designed to encourage first-time buyers to save toward buying their first home. Account holders will have 15 years from account opening to use the funds in the FHSA toward the purchase. If two people are purchasing a home together, both may use their own FHSA funds toward the purchase, giving them a maximum of $80,000 if both contribute the full amount. After making a tax-free withdrawal toward the purchase of a home, the account must be closed within one year, and another FHSA cannot be opened in the future.

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To be eligible to open an FHSA, a contributor must meet specific criteria.

1. Be a resident of Canada.
2. Be at least 18 years old, but not have reached age 71.
3. Not lived in a home owned by the contributor in the year that the account is opened, or the previous four years.
4. Not have had a previous FHSA used to buy a home.

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Making contributions to the account:

Starting in 2023, eligible contributors will be able to contribute up to $8,000 per calendar year and up to a lifetime maximum of
$40,000 over a 15-year period.

Carrying forward contributions

The draft legislation includes a new provision that allows individuals to carry forward any unused contribution room from their FHSA to future years. To illustrate, if you contribute $4,000 in 2023 and $5,000 in 2024, you can carry forward the remaining contribution room of $4,000 from 2023 and $3,000 from 2024 to 2025. This means that in 2025, your contribution room will be $15,000, which includes the full $8,000 contribution for that year.

It's important to note that the ability to carry forward contribution room is only applicable once an individual has opened an FHSA. While account holders can hold multiple FHSA accounts, the annual and lifetime contribution limits apply on a per-person basis, rather than per account.

Over-contributions

There will be a 1% tax penalty per month for contributions over the set contribution room limit.

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Spousal contributions and attribution rules

Contributions to an FHSA can only be made by the account holder themselves. It is not possible to make contributions to a spouse or partner's FHSA. However, an account holder may receive funds as a gift from their spouse or partner and contribute those funds to their own FHSA without any attribution rules applying.

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Withdrawal rules

The Canadian government has established specific rules to withdraw funds from an FHSA and avoid paying taxes.

• The funds must be used toward the purchase of a qualifying first home, such as:
• A housing unit in Canada.
• A share in a co-operative housing corporation that affords the individual an equity interest in a housing unit in Canada.
• The qualifying home must be used as the individual’s principal home.

If an account holder withdraws the funds with the intent to buy or build a home, the individual must have a written agreement to do so by October 1 of the following year and be living in it as the primary residence within one year of purchase.

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Transfers

In the event that funds contributed to an FHSA remain unused for 15 years after the account is opened, the account holder will have the choice to transfer the accumulated funds into their RRSP/RRIF without incurring any tax, even if they don't have contribution room available. It's important to note that this transfer will not restore the individual's contribution room for their FHSA.

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Taxes

Contributions to the FHSA will be eligible for tax deductions. However, individuals have the option to defer their deduction to a later tax year, if desired.

Withdrawals from the FHSA will not be subject to taxes, as long as the funds are used for the purchase of a qualifying first home, as defined by the Canadian government.

The investment income, losses, and gains in the FHSA will not be considered when determining an individual's income for tax purposes or to assess eligibility for income-tested benefits and credits.

Transfers from the FHSA to another FHSA, RRSP, or RRIF will not be subject to taxes. However, withdrawals from these plans will be taxable as income, unless the funds are used towards the purchase of a qualifying home.