The Canadian First Home Savings Account will soon be available to Canadians looking to buy a home and we have a breakdown of what it is for you. Don’t worry, it’s not another useless bank account. If you’re a first-time homebuyer in Canada, you may want to consider opening a First Home Savings Account (FHSA). This registered account allows you to save for a down payment on your first home on a tax-free basis and can be used together with your Registered Retirement Savings Plan (RRSP) and your Tax-Free Savings Account (TFSA). In this article, we’ll help you understand the key things you need to know about an FHSA.
These accounts can be used together, experts say.
Money in a TFSA can be put towards any savings goal, as mentioned, while the RRSP and FHSA can specifically be used in tandem to fund a home purchase. source: Global News
What is the Canadian First Home Savings Account (FHSA)?
How does an FHSA work?
An FHSA is a new registered plan that lets you save for your first home on a tax-free basis. You can contribute up to $5,000 per year and any investment income earned in the account will not be taxed. Once you’re ready to purchase a qualifying home, you can withdraw the funds and use them towards your down payment.
FHSA vs other registered plans
An FHSA is similar to a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) in that any investment income earned within the plan is tax-free. However, the main difference is that an FHSA is specifically designed to help Canadians save for their first home.
How do you open an FHSA?
To open an FHSA, you must be a Canadian citizen or resident and have reached the age of majority in your province. You must also be a first-time homebuyer, meaning you have not owned a home in Canada in the four years preceding the opening of the account. You can open an account at a financial institution that offers FHSA products, such as a bank or credit union.
How do you save for your first home with an FHSA?
What is a qualifying home?
A qualifying home is a housing unit located in Canada that you intend to occupy as your principal place of residence no later than one year after the home is acquired. It can be an existing home or a home that you plan to build.
Can you use your RRSP for a first-time home purchase as well?
Yes, you can use your RRSP to participate in the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 tax-free from your RRSP to buy or build a qualifying home. However, keep in mind that you will have to pay back the withdrawn amount to your RRSP over a period of up to 15 years.
Can multiple people contribute to one FHSA?
No, an FHSA is an individual account, so only one person can contribute to it. However, you and your spouse or common-law partner can each open an FHSA and combine your savings towards the purchase of a qualifying home.
What are the tax benefits of an FHSA?
What is a tax-free first home savings account?
An FHSA is a tax-free savings account that lets you save for your first home on a tax-free basis. Any investment income earned in the account is not taxable, and withdrawals made from the account for the purpose of a qualifying home purchase are also not taxable.
What is the contribution limit for an FHSA?
The annual contribution limit for an FHSA is $5,000, and any unused contribution room can be carried forward to future years. However, keep in mind that the contribution limit is per individual, not per account. So, if you and your spouse or common-law partner both have an FHSA, your total combined contributions cannot exceed $5,000 per year.
Can you carry forward the unused contribution room?
Yes, any unused contribution room can be carried forward for use in future years. However, keep in mind that the contribution room can only be carried forward for a maximum of 10 years, after which it will expire.
Who is eligible to open an FHSA?
Are there age restrictions for opening an FHSA?
Yes, you must have reached the age of majority in your province to open an FHSA. The age of majority is 18 or 19, depending on the province or territory in which you reside.
Are there any restrictions on the type of home you can buy or build?
The home must be a qualifying home as defined by the Canada Revenue Agency (CRA). This means that it must be a housing unit located in Canada that you intend to occupy as your principal place of residence no later than one year after the home is acquired.
Is an FHSA right for you?
What are the advantages of opening an FHSA?
The main advantage of opening an FHSA is the ability to save for your first home on a tax-free basis. This can be an attractive option for young Canadians who are just starting to save for a down payment on their first home.
What are the disadvantages of opening an FHSA?
The main disadvantage of opening an FHSA is the relatively low annual contribution limit of $5,000. This may not be enough for some Canadians to save for a down payment, especially in expensive housing markets. Additionally, if you do not end up using the funds in your FHSA for the purpose of a qualifying home purchase, you will not be able to access the funds without paying tax on the investment income earned in the account.
How do you decide if an FHSA is right for you?
Whether or not an FHSA is right for you will depend on your individual financial situation and goals. If you are a first-time homebuyer and have a relatively short-term goal of saving for a down payment, an FHSA may be a good option for you. However, if you are planning to save for a longer period of time, or if you require a higher annual contribution limit, you may want to consider other investment options such as a TFSA or RRSP.
Does this all sound overwhelming, don’t worry – Richardson Miller LLP is in your corner. Give us a call and we can help you get set up.
We’re happy to answer your questions, clear up any confusion and get you on the right path. Having clean, up-to-date books will make tax time so much easier for you!
Richardson Miller LLP is here to keep you on track and ensure that your taxes and accounting needs are met. Contact us today!
Angela Richardson is a Chartered Professional Accountant (CPA, CGA) with more than 17 years experience working in public practice with small to medium sized businesses. While financial statements and tax returns are part of the occupation, consulting and assisting clients to achieve their entrepreneurial dreams is her true passion.