For Canadians dreaming of homeownership, the journey to saving for a down payment can feel challenging. Thankfully, the First Home Savings Account (FHSA), launched in 2023, is here to make it easier. This new savings vehicle combines the best features of an RRSP and a TFSA to help first-time homebuyers save with tax advantages.
What is an FHSA?
The First Home Savings Account (FHSA) is a registered plan that allows first-time homebuyers in Canada to save up to $40,000 tax-free for a down payment on their first home. The FHSA offers unique tax benefits similar to those of an RRSP (Registered Retirement Savings Plan) and a TFSA (Tax-Free Savings Account), providing tax-deductible contributions and tax-free withdrawals when used for a home purchase.
Key Benefits of the FHSA
Tax-Deductible Contributions: Contributions to an FHSA are tax-deductible, which means they reduce your taxable income in the same way as RRSP contributions. For example, if you contribute $8,000 to your FHSA, your taxable income for the year decreases by that amount, potentially lowering your tax bill.
Tax-Free Growth and Withdrawals: Like a TFSA, any investment growth, interest, or dividends earned within an FHSA is tax-free. When you’re ready to buy your first home, withdrawals from your FHSA are also tax-free, as long as they’re used toward purchasing a qualifying home.
High Contribution Limits: The FHSA allows for contributions of up to $8,000 per year, with a lifetime maximum of $40,000. If you don’t use the full $8,000 in one year, you can carry forward up to $8,000 of unused contribution room to the next year.
Flexibility in Use: The FHSA can be held for up to 15 years, giving you time to build your savings until you’re ready to buy. If you decide not to purchase a home, you can transfer the funds to an RRSP or RRIF (Registered Retirement Income Fund) without tax consequences.
Who Qualifies for an FHSA?
To open an FHSA, you must:
Be a Canadian resident,
Be at least 18 years old (or the age of majority in your province), and
Be a first-time homebuyer (meaning you or your spouse haven’t owned a home as a principal residence in the current calendar year or the previous four calendar years).
How the FHSA Works with the Home Buyers’ Plan (HBP)
The FHSA can be used in combination with the Home Buyers’ Plan (HBP), which allows Canadians to withdraw up to $35,000 from their RRSP tax-free to buy their first home. Together, these programs could give you access to a maximum of $75,000 in tax-advantaged savings toward a down payment.
What Happens if You Don’t Use the FHSA for a Home Purchase?
If your plans change and you don’t end up buying a home, the FHSA still offers flexibility. You can roll the unused funds into your RRSP or RRIF without affecting your RRSP contribution room. However, unlike withdrawals for a home purchase, these transfers are taxed as income if withdrawn later.
Why Consider an FHSA for Your First Home?
The FHSA is designed to make homeownership a more achievable goal. It provides tax savings upfront and grows tax-free, allowing your savings to stretch further toward your down payment. Given rising home prices, every dollar counts, and the FHSA can help maximize your purchasing power.
Getting Started with an FHSA
If you’re planning to buy your first home in the next few years, an FHSA is worth considering. Even if you’re unsure of your timeline, opening an account now gives you the opportunity to start building your down payment tax-free.
Comments