TAX-FREE FIRST HOME SAVINGS ACCOUNT
The Tax-Free First Home Savings Account (FHSA) was first introduced in the 2022 budget, with additional information released as part of the Fall Economic Statement on November 4, 2022. This program aims to help first-time home buyers save the necessary funds to purchase their first home.
Tax Free First Home Savings Account – What is it?
The FHSA allows eligible individuals to save up to $40,000 pre-tax dollars to use towards the purchase of their first home. Any contributions made to this account can be deducted from the individual’s tax return, and any eligible withdrawals would be made so tax-free.
Individuals can contribute $8,000 annually, up to a lifetime maximum of $40,000. Any contribution room not used in the current year may be carried forward to future years. For example, if you contribute $6,000 in 2023, you can contribute up to $10,000 in 2024 ($2,000 remainder from 2023 plus the $8,000 limit for 2024). Similar to Registered Retirement Savings Plan (RRSP) and Tax Free Savings Accounts (TFSA), any overcontributions may be subject to a 1% penalty per month; the overcontribution remains in the account.
Opening / Closing an FHSA
To open an FHSA, you must:
Be a resident of Canada
Be at least 18 years of age; and
Be considered a first-time home buyer *
* A first-time home buyer is an individual who does not own a qualifying home that is considered their principal residence at any time in the current year or the preceding four calendar years.
The account would cease to be an FHSA account after December 31, the year the earliest of the following occurs:
The fifteenth anniversary of its opening date; or
The individual turns 71 years old.
Should the account lose its FHSA status, any funds remaining in the account can be transferred tax-free to a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF).
Withdrawals
In order for the withdrawal to be considered eligible and not taxable to the individual, the withdrawal must meet the following criteria:
The individual must be a first-time home buyer (as described above); and
There must be a written agreement to buy or build a qualifying home ** as your principal residence before October 1 of the year the withdrawal is being made
** A qualifying home is defined as a housing unit located in Canada or a share in a co-operative housing corporation that entitles the individual to possess and have an equity interest in a housing unit located in Canada.
Any withdrawals made that do not meet the above criteria would be included as income on the individual’s income tax return and taxed at their marginal tax rate. Financial institutions would be required to collect and remit any applicable withholding tax on the withdrawal.
It is important to note that only the FHSA account or the Home Buyer’s Plan (HBP) may be used with respect to the purchase of a qualifying property. Both programs cannot be used for the same property.
*The contents of this article are intended to provide general, broad guidance only. This article should not be relied upon to cover specific situations, and you should not act upon the information contained herein without obtaining relevant professional advice. Please feel free to contact our office to discuss the information presented herein in the context of your specific circumstances. Lekadir LLP, its principals, 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 article or for any decision based on it.
