The federal government’s Bill C-32 (Fall Economic Statement Implementation Act,
2022) received Royal Assent on December 15, 2022. The new Tax-Free First Home
Savings Account (FHSA) amends the Income Tax Act.
What is an FHSA?
In March 2019, the Canadian government introduced a new initiative called the First-Time Home Buyer Incentive (FTHBI) to help make purchasing a home more affordable for first-time home buyers. As part of this initiative, the government also introduced the First Home Savings Account (FHSA). The First Home Savings Account is a type of registered account that allows Canadians to save money for their first home, with the added benefit of earning tax-free interest on their savings. The account is designed to help Canadians save for a down payment on their first home, which can be a significant barrier for many first-time home buyers.
This new registered plan allows Canadian, first-time home buyers the ability to save up to $40,000 (over a lifetime, and a maximum annual contribution of $8,000 over five years) on a tax-free basis towards the purchase of their first home. As confirmed by the new legislation, both the FHSA and the existing Home Buyers’ Plan can be used by first-time home buyers to purchase their first home.
Contributions to an FHSA will be tax deductible, just like an RRSP. However, withdrawals to purchase a first home, including from any investment income or growth earned in the account will be non-taxable like a TFSA.
Openings and Closings
To be eligible for the FHSA, you must be a resident of Canada, 18 years of age or older, and a first-time home buyer. You can open the account at any time and start making contributions, but you can only withdraw the funds when you are ready to purchase your first home. The maximum amount you can contribute to the account is $5,000 per year, and the lifetime maximum contribution limit is $25,000. After the account owner’s 71st birthday, or after the 15th anniversary of the FHSA account being opened, the FHSA will cease.
Qualified and Non-Qualified Investments
An FHSA is permitted to hold the same qualified investments as a TFSA. This includes taxpayers able to hold a broad range of investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. In terms of prohibited and non-qualified investment rules, the same rules apply to an FHSA as they do to other registered plans, including rules intended to disallow investments in entities with which the account holder does not deal at arm’s length. Prohibited rules also apply to investments in certain assets such as land, shares of private corporations, and general partnership units.
One important aspect of the FHSA is the ability to transfer funds into the account from other registered savings accounts. This includes funds from a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). The transferred funds do not count towards the annual contribution limit of $5,000, but they are subject to the same withdrawal and repayment rules as regular FHSA contributions. Additionally, any unused contributions from previous years can be carried forward and used in future years, allowing Canadians to catch up on contributions if they were not able to contribute the maximum amount in previous years. Transfers from other registered accounts can be a useful way for Canadians to boost their FHSA savings and take advantage of the tax credits available through the program.
When Does the FHSA Become Effective?
The FHSA becomes effective on April 1, 2023. For more information on the new legislation or details on your FHSA account, contact your financial institution.
If you’re interested in learning more about the First Home Savings Account program or looking to buy your first home, contact our real estate brokerage. Our team of experienced professionals can help you navigate the complex world of real estate and guide you through the process of buying your first home. Don’t wait any longer – contact us today and start making your dream of homeownership a reality!