An FHSA (First Home Savings Account) can kickstart your journey toward homeownership!

Did you know? An FHSA (First Home Savings Account) can kickstart your journey toward homeownership!

The First Home Savings Account (FHSA), introduced in the 2022 federal budget, is an innovative registered plan designed to help Canadians save for their first home on a tax-free basis. Here's a comprehensive guide to understanding the key features and benefits of the FHSA.

Key Benefits of Investing in an FHSA

1. Tax-Deductible Contributions: Contributions to an FHSA can be deducted from your taxable income, providing immediate tax relief.
2. Tax-Free Withdrawals: When you withdraw funds to buy your first home, including any investment income and growth, it’s completely tax-free.
3. Combination with Home Buyers’ Plan (HBP): You can combine FHSA savings with the HBP, allowing up to $75,000 for a down payment plus any FHSA growth.
4. Flexible Transfers: Any unused FHSA funds can be transferred to an RRSP or RRIF without penalties and without affecting your RRSP contribution limits.

Eligibility Criteria

To open an FHSA, you need to meet the following criteria:

• Be a Canadian resident.
• Be between 18 and 71 years old.
• Be a first-time home buyer, which means neither you nor your spouse owned a home in the current year or the previous four years that you used as your primary residence.

Contribution Limits and Rules

• Annual Limit: $8,000.
• Lifetime Limit: $40,000.
• Contributions can be made up until December 31, 2023, for the current year.
• If you don't contribute the full $8,000 in a year, the unused amount can be carried forward to the next year, up to a maximum of $16,000 per year.
• Multiple FHSAs can be opened, but total contributions across all accounts cannot exceed the annual or lifetime limits.

Over-Contributions

If you contribute more than the allowed limit, you'll face a penalty of 1% per month on the excess amount. You can minimize penalties by withdrawing the excess funds, transferring them to an RRSP or RRIF, or making a taxable withdrawal.

Withdrawal Rules

Qualifying Withdrawals: These are tax-free if used to purchase a qualifying home, and you still meet the first-time home buyer criteria.

Qualifying Homes: The home must be a property in Canada intended to be your primary residence within one year of acquisition.

Non-Qualifying Withdrawals: These are taxable and subject to withholding tax. This includes withdrawals when you are no longer a Canadian resident, no longer a first-time home buyer, or if the funds are not used for a qualifying home purchase.

FHSA and HBP Combined Use

Funds from both an FHSA and the HBP can be used together, providing greater flexibility and a larger pool of money for a down payment. Unlike HBP withdrawals, FHSA funds do not need to be repaid.

Tax Features

• Contributions reduce taxable income.
• Qualifying withdrawals are not counted as income and do not affect income-tested benefits like the Canada Child Benefit or GST Credit.
• Transfers between FHSAs and RRSPs are tax-free and do not impact RRSP contribution limits.

What Happens to Unused FHSA Funds?

• Unused funds can be transferred tax-free to an RRSP or RRIF.
• If the FHSA remains open past its deadline (15 years from opening, age 71, or after a qualifying withdrawal), it becomes taxable.

Upon Death

The handling of the FHSA upon the account holder's death depends on whether a successor or beneficiary is designated:

Successor Account Holder (Qualifying Individual): The account retains its tax-exempt status.

Non-Qualifying Successor: Can transfer the FHSA to their RRSP/RRIF or withdraw the funds (taxable).

Beneficiary: Funds are transferred to the beneficiary’s RRSP/RRIF or withdrawn as taxable income.

The FHSA offers a significant advantage for first-time home buyers by combining tax-deductible contributions with tax-free withdrawals, providing a powerful incentive to save for your first home. Ensure to consult with a financial advisor to maximize the benefits of your FHSA.

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This post provides an overview and is not intended as financial or tax advice. Please consult with a professional advisor for personalized recommendations.