The 2022 Budget introduced a new Tax-Free First Home Savings Account (FHSA). The FHSA program will begin in 2023 and give prospective first-time home buyers the ability to contribute a maximum of $40,000. Contributions to the plan will be tax-deductible and withdrawals (including investment income) to purchase a first-time home would be non-taxable.
The FSHA account will be subject to an $8,000 annual contribution limit and $40,000 lifetime contribution limit. Individuals would be able to claim a deduction for contributions made in a particular taxation year (unlike RRSPs, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year). Unused contributions are carried forward and can be contributed as a catch-up contribution in future years. For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023).
Important Notes:
Carry-forward amounts will only start accumulating after an individual opens an FHSA account for the first time. Therefore, it would be beneficial for any individual 18 year of age or older that intends to purchase a house by the end of the 15th year after opening the FHSA account to open an FHSA to accumulate carry-forward amounts. For example, if a thirty year-old individual first opens an FHSA during 2023, their maximum participation period will end at the end of 2038.
A taxpayer can now access both the FHSA and Home Buyers’ Plan (HBP) in respect of the same qualifying home. The August 9, 2022, Backgrounder legislation on FHSAs disallowed an individual from making both an FHSA withdrawal and HBP withdrawal for the same qualifying home purchase, however the November legislation removed this restriction.
To open an FHSA account, an individuals must be 18 years of age and must be a first-time home buyer meaning they did not live in as a principal place of residence a qualifying home that they or their spouse/common-law partner owned, in the part of the calendar year before opening the account and the preceding four calendar year.
The government expects that Canadians will be able to open and contribute to an FHSA at some point in 2023 (after March 31, 2023). No matter when this happens in 2023, Canadians would be allowed to contribute the full $8,000 annual limit in that year.
Here are some key details and benefits of the FHSA and HBP.
In general, it makes sense to contribute to an FHSA first, withdrawals under both plans are tax-free but repayment is required for an HBP withdrawal. If savings are available after FHSA contributions, then making contributions to an RRSP where there are insufficient funds to make the full HBP withdrawal.
Overview of the HBP
- The HBP allows eligible individuals to withdraw up to $35,000 from their RRSP tax-free to buy their first home.
- Money withdrawn from the RRSP must be repaid within 15 years of the second year following enrolment in the HBP without being eligible for a deduction.
Overview of the FHSA
- There is no limit on the amount that can be withdrawn, depending on the return obtained.
- The money you withdraw doesn’t have to be repaid.
- The lifetime limit on contributions will be $40,000, with an annual contribution limit of $8,000. So it takes at least 5 years to reach the full contribution limit, which means that the FHSA is a more long-term savings vehicle.
Read more about the Tax-Free First Home Savings Account here: Design of the Tax-Free First Home Savings Account
Please get in touch with us at [email protected] for further details. Elliott Stone, CPA, CA, is the founder of MD Tax Physician Services in Toronto.