Are you dreaming of owning your first home in Canada? If so, the First Home Savings Account (FHSA) could be your key to making that dream a reality. In this post, we will cover the basics of all you need to know about the FHSA, from its purpose, benefits, and eligibility to open an account.
A Guide on Canada’s First Home Savings Account: Benefits, Eligibility and How to Open an Account
What is a First Home Savings Account (FHSA)?
The First Home Savings Account (FHSA) is a specialized savings account, designed to help Canadians save for the down payment of their first home, tax-free (up to a certain limit). Recognizing the challenges that first-time homebuyers face in today’s housing market, the Canadian government has introduced this new registered investment plan to encourage saving and propel more Canadians to achieve homeownership.
Benefits of a FHSA
Some of the major benefits that the FHSA offers are as follows:
- Tax Benefits: The primary advantage of a FHSA is the potential tax benefits. The contribution you make to the account is deductible on your annual income tax return. You can use the deduction in your contributing year or carry it forward to a later year. Interests earned on your saving in the account are tax-free. Additionally, when you are ready to make a qualifying withdrawal, you will not pay any taxes on the withdrawal. The First Home Savings Account gives you the opportunity to save up to the lifetime limit of CA$40,000, with an annual deposit limit of CA$8,000, tax-free.
- Fund Accessibility: You can withdraw funds from the account at any time, for a qualifying home purchase.
- Dedicated Savings: By having a separate account exclusively for your home down payment, it is less likely that you’ll dip into these funds for other expenses.
If you don’t have a cash flow plan, it’s time to consider having one done.
Limitations/Downside of a FHSA
- Limited Withdrawals: As the purpose of an FHSA is to save for your first home, there are restrictions on withdrawing the funds for other purposes. Withdrawals not used for a home purchase are subject to taxation.
- According to the Canada Revenue Agency (CRA), unlike an RRSP account, contributions made during the first 60 days of the year to your FHSA, cannot be deducted on your income tax and benefit return for the previous year.
Types of Investments Offered in a FHSA
Like a Tax-free Savings Account (TFSA), a FHSA offers investment options in mutual funds, exchange-traded funds (ETFs), government and corporate bonds, and guaranteed investment certificates (GICs).
Eligibility Requirements to Open a FHSA
To qualify for a FHSA, you must be:
- A resident of Canada.
- 18 years or older (but not more than 71 years of age on December 31 of that year).
- As the name suggests, a first-time home buyer. This means that you nor your spouse/common-law partner (if applicable) did not live in a qualifying home (a home located in Canada) that you (jointly) owned, or that your spouse/common-law partner, at the time the account is opened, (jointly) owned, any time during the current calendar year before the account is opened, nor the previous four calendar years.
Eligibility Requirement to Withdraw from a FHSA
To qualify for the tax-free benefits of withdrawing from the FHSA, you must:
- Be a first-time home buyer when making the withdrawal (an exception is given to allow persons to make a qualifying tax-free withdrawal, within 30 days of moving into a qualifying home).
- Be purchasing a qualifying home, which is a housing unit located in Canada.
- Have a written agreement to acquire or build a property before October 1 of the year following the withdrawal
How to Open a FHSA
- Choose a Financial Institution: Research banks, credit unions and trust/insurance companies offering FHSA options. Compare interest rates and any additional benefits they may provide.
- Gather Required Documents: Typically, you’ll need to provide identification, proof of Canadian residency, and other supporting documents to certify that you are eligible for an account.
- Fill Out Application: Complete the application form for the FHSA and agree to the terms and conditions.
- Deposit Funds: Make your initial deposit to activate the account. This amount may vary, based on the financial institution.
The First Home Savings Account can be a valuable tool for young Canadians looking to enter the housing market. Its tax benefits make it an attractive option. However, make sure to consider the eligibility criteria and restrictions before opening an account, and as with any investment, it is important to do thorough research and seek professional guidance as needed, to ensure you are taking the best steps suitable for your financial goals.
Note: Information in this blog post is subject to change, and it is important to verify the details with your chosen financial institution or a professional advisor. Further information can be found in the references listed below. Happy home saving!
References
Bruce Ball, CPA Canada (November 21, 2022). Tax-Free First Home Savings Account – your questions answered. https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/blog/2022/november/faqs-tax-free-first-home-savings-account
Canada Revenue Agency (May 24, 2023). First Home Savings Account (FHSA). https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html
Canada Revenue Agency (July 10, 2023). Opening and closing your FHSAs. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/opening-closing-and-fhsa.html
Department of Finance Canada (August 10, 2023). Canadians can save for their first home with new tax-free First Home Savings Account.https://www.canada.ca/en/department-finance/news/2023/08/canadians-can-save-for-their-first-home-with-new-tax-free-first-home-savings-account.html
