FHSA: Are You Saving for Your First Home?

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The First Home Savings Account (FHSA), announced in the 2022 federal budget, is a new registered plan that allows investors to save on a tax-free basis for their first homes.

Key Reasons to Invest in an FHSA

1. Contributions are tax deductible.
2. Withdrawals to purchase a first home, including investment income and growth, are non-taxable.
3. Funds from an FHSA and the Home Buyers’ Plan (HBP) can be combined – $75,000 in capital for a down payment, plus any growth in the FHSA
4. Remaining amount can be transferred to an RRSP or RRIF penalty-free and tax-deferred with no impact to RRSP contribution limit
   
   

Who is Eligible

To open an FHSA, you must be:

• An individual resident of Canada
• At least 18^* up to age 71
• A first-time home buyer, which means you, or your spouse or common-law partner ("spouse")^** 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^*** 

Contributions

Deadline

• December 31, 2023
• Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be applied to the previous tax year

Limit

• First-time homebuyers can save up to $40,000 tax-free with an annual contribution limit of $8,000
  • Investors will be allowed to contribute the full $8,000 annual limit in 2023, regardless of when the account is opened that year
• Multiple FHSA accounts can be opened by one person individually, but the combined contributions may not exceed the annual or lifetime contribution limits
• NOTE: Non-qualifying withdrawals or transfers to an RRSP would not re-instate either the annual or lifetime contribution limits of either plan

Carryforward

• Contribution room starts accumulating once the FHSA has been opened. Carryforward amounts accumulate from the year after the year the FHSA was opened.
• Unused contribution room can be carried forward to a maximum of $8,000 - so contribution room is capped at $16,000.
• Like RRSP deductions, contributions don’t have to be claimed for the tax year in which the contribution is made.

Over-Contributions

• Penalty tax of 1% per month (or part month) on the highest amount of th excess in that month
• When the investor’s annual contribution limit resets at the beginning of each calendar year, the over-contributed amount is deducted from that year's contribution limit
• If you inadvertently made excess contributions, you could reduce penalties by:
  • withdrawing the excess as a designated amount
  • making a direct transfer of a designated amount to your RRSP or RRIF
  • making a taxable withdrawal

Qualifying Withdrawals

• Property purchased must be in Canada and used as the principal residence
  • Investor must be a Canadian resident at the time of the withdrawal and when the qualifying home is bought or built – if not, the withdrawal would be subject to withholding tax
• Must have written agreement to buy or build a qualifying home before October 1^st of the year following the withdrawal
• Funds from an FHSA and Home Buyers’ Plan (HBP) can be used together for the same purpose – up to $75,000 in capital for a down payment, plus any growth in the FHSA
  • Provides greater flexibility than HBP withdrawals which are required to be repaid (See "Two less-traditional ways to use RRSPs") 

Tax Features

• Like an RRSP, contributions are tax-deductible.
  • Unlike an RRSP, there isn’t a spousal plan and contributions made within the first 60 days of a calendar year cannot be applied to the previous tax year
  • NOTE: Contributions made to an FHSA following a qualifying withdrawal would not be tax-deductible
• Like a TFSA:
  • The attribution rules do not apply if you gift your spouse funds to invest in their FHSA
  • Withdrawals to purchase a first home will be non-taxable and are not taken into accounts in determining eligibility for income-tested benefits or credits (for example, the Canada Child Benefit, GST Tax Credit)
  • NOTE: Non-qualifying withdrawals would be included in the investor’s income for that year
• Funds can be transferred tax-free from an RRSP to an FHSA or from an FHSA to an RRSP with no impact to the investor's RRSP contribution room
  • NOTE: Non-qualifying withdrawals from an FHSA or transfers to an RRSP would not re-instate either the annual or lifetime contribution limits of either plan

How Long the Plan Can Stay Open

• The FHSA timeframe focuses on the individual and not the account.
• Maximum participation period for a qualifying individual (see "Who is Eligible" above) ends at the earliest of the following events:
  • The end of the 15^th year since the investor’s first FHSA was opened OR
  • The end of the year the investor turns 71 years old OR
  • The end of the year after the year a qualifying withdrawal was made OR
  • The end of the year after the year of the investor’s death
• Once any of these events take place, the individual would not be able to open another FHSA, regardless of whether they otherwise fit the criteria for a qualifying individual

What Happens to Unused FHSA Money

• Any savings not used to buy a home can be transferred tax-free to an RRSP or RRIF or withdrawn on a taxable basis 
• If the FHSA remains open past any of the deadlines mentioned above, the FHSA becomes taxable

Upon Death

What happens to the FHSA after the account holder dies depends on whether or not they’ve designated a successor account holder or beneficiary ahead of time. Here are the options available to each designation.

For more information on the FHSA, contact your financial advisor and visit AGF.com/FHSA.