Key points:
- Starting April 1st, new home buyers will be able to use the First Home Savings Account tool to help save for their first home purchase.
- This tool has certain criteria in terms of age, citizenship/residency, and home buyer status.
- The FHSA allows you to contribute up to $40,000 for the purchase of a first home.
The First Home Savings Account in Canada
In this video, I go into detail about the government’s new tool to help first-time Canadian home buyers enter the market.
What the FHSA allows you to do
- Contribute up to $40,000 over your lifetime
- Beginning Apr 1, 2023 you can contribute up to $8,000 per year
- Unused contributions can only be carried forward to the next year. For example, if you contribute only $5k in 2023 you’ll be able to contribute up to $11k in 2024 ($8k + $3k unused)
Who is eligible for the FHSA?
- You have to be a resident of Canada (either Canadian citizen of permanent resident)
- You have to be at least 18 years of age and under the age of 71
- You must be considered a first time home buyer. The definition of first time home buyer can sometimes get a bit confusing. The definition extends beyond you to include that your spouse or common law partner did not own a home that you lived in during the year and preceding 4 years that you opened your FSHA
The tax benefits
- Mixes the best of both worlds
- Like an RRSP, the FHSA allows you to deduct the contributions for your income taxes for the calendar year that the contribution is made. For example, if you contribute the maximum $8k you can deduct $8k from your taxable income
- However, unlike the FTHB plan withdrawal through your RRSP, you are NOT required to repay anything into the account over the next 15 years
- Like a TFSA the returns earned in the FSHA account are tax-free. Withdrawals from FSHA are also NOT taxable
- It’s worth noting that the FHSA can be used in combination with the RRSP FTHB withdrawal and TFSAs
What investments can you hold in your FHSA?
- Similar qualifying investments that you can also hold in your TFSA or RRSP which include: mutual funds, publicly traded securities, some qualified private investments, government and corporate bonds, and GIC
- Prohibited investment and non-qualified investment rules apply which prevent you from investing in non-arm’s length investments
Withdrawals from your FHSA
- You MUST be a first time home buyer when you make the withdrawal within 30 days of moving into the home
- In the case where you are using the FHSA to buy a pre-construction house or condo you must have a firm agreement of purchase and sale in place by October 1st of the next year. So for example, if you draw from your FHSA for the deposit on a condo purchase December 2023, you must have entered into a purchase agreement with the builder by October 1st 2024
- The property MUST be occupied as your principal residence within 1 year of you taking possession
- If you withdraw funds from your FHSA for any reason other than to buy a qualifying home, then that withdrawal has to be added to your income for the year
- If you don’t make a qualifying purchase within 15 years from opening the account or you reach the age of 71 then you have two options:
- Transfer balance to an RRSP or RRIF (Not able to transfer to a TFSA)
- Withdraw funds from the account and include the withdrawal as income for that year
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] Beginning April 1st, 2023 aspiring Canadian homeowners are being given an excellent new tool to help them save. It’s called the First Home Savings Account. And in this video, I’m going to cover with you exactly what the account does, who’s eligible, what the tax benefits are, how to make withdrawals, and what investments can be held within the First Home Savings Account. Let’s dive right in.
What is the FHSA?
Chris: [00:00:30] First off, let’s cover exactly what the First Home Savings Account actually is. It is a an account at a designated financial institution. You can do it at your bank or any other place where you hold your investments. And it allows you to contribute up to $40,000 into this account for the purchase of your first home. Per year, you are able to contribute up to $8000 on an annual basis, and any unused amount can only be carried forward to the next year. So for example, if in 2023 you contribute $5000 instead of your maximum $8000, the $3000 that you did not use in 2023 can be carried forward into 2024. So in total, in 2024, you could make a contribution of $11,000.
Chris: [00:01:29] You have to meet three criteria to be eligible for the First Home Savings Account. Number one, you have to be a Canadian citizen or permanent resident. Number two, you have to be between the ages of 18 and 71. Number three, you have to be considered a first time homebuyer at the time that you open the account. Now, the definition of first time homebuyer is a little bit confusing, especially when it involves spouses or common law. So in general, you are not considered a first time homebuyer if you are living with your spouse or common law in the year that you open your account or for the preceding four years up until that point.
Tax benefits of the FHSA
Chris: [00:02:14] The First Home Savings Account has a couple of great tax benefits. Like an RRSP, contributions made into the savings account are tax deductible. So as a reminder, you’re allowed to contribute $8000 per year. So that $8000 contribution would then lower your taxable income for the year that the contribution is made by $8,000 saving you income taxes. Unlike an RRSP though, when you make a withdrawal for the purchase of your first home, there’s no requirement to repay the First Home Savings Account over a 15 year period. Because when you make a withdrawal from your RRSP under the first time homebuyers plan, you are required to repay that over the next 15 years, like a TFSA. There are some great benefits as well. Once money is in a First Home Savings Account, any investments that earn you a return are tax exempt, and any withdrawal for the purchase of your first home is also tax exempt. So again, you get that benefit of both worlds which make this First Home Savings Account an awesome tool for first time homebuyers. Now, it’s worth noting that the First Home Savings Account is not exclusive. What I mean by that is that it doesn’t preclude you from also taking advantage of the first time homebuyer withdrawal from your RRSP and or using a TFSA for the savings as well. So just keep that in mind.
Eligible investments
Chris: [00:03:56] Investments that are eligible for the First Home Savings Account pretty much mirror what would be considered to be eligible for an RRSP or TFSA. They include such things as publicly traded securities, some exempt market securities, corporate and government bonds, mutual funds and GICs. Also similar to RRSPs and TFSAs, the non-qualified types of investments which include investments like non arm’s length investments, still apply. So you want to get some guidance. For most people, you won’t run into trouble, but if you are looking at some more exotic or very unique ways of taking advantage of the investments within the First Home Savings Account, you’ll want to pay attention to those restrictions.
FHSA Withdrawals
Chris: [00:04:48] Making withdrawals from your First Home Savings Account. There are a couple of different permutations and scenarios to discuss here. When you buy your first home, you have up until 30 days after closing to withdraw the funds from your account. But what about if you buy pre-construction? You might buy pre-construction home, detached home, a condominium, or maybe you are building a home as a first time home buyer. So in that scenario, the rules around this account require that when you withdraw funds to purchase pre-construction, you must be entered into a firm agreement of purchase and sale prior to October of the following year. So that’s a big mouthful. If you were to buy a pre-construction home or condo in 2023, let’s say you have to be entered into a purchase and sale agreement with a builder before October 1st of 2024. Another critical point. The property that you are buying must be occupied as your principal residence. You have up until 12 months after getting possession, getting the keys to demonstrate that you are living in the property. Otherwise it will be deemed non eligible and there will be tax consequences. If you’ve relied on the First Home Savings Account for the purchase of what would then be deemed to be an investment property.
Chris: [00:06:20] There might be a scenario that comes up where you’ve set aside money in your First Home Savings Account and then you need to access the funds for whatever life throws at you. And or maybe there’s a scenario where you don’t actually buy your first home. So what happens in those two instances? Any withdrawal from your First Home Savings Account into your personal account would be deemed to be income for the year that that withdrawal happens. So there will be a tax consequence. Alternatively, you can transfer from the First Home Savings Account directly into your RRSP or RIF account. Now, in the scenario where you do not buy a home and keep in mind there’s one one important detail that once you open up a first home savings account, you must purchase a home within 15 years. So let’s say the 15th year arrives, you haven’t managed to purchase a home. Then one of two things happens. Either the account becomes disqualified and the money that’s in the account gets added to your income for that 15th year. And there are tax consequences. Or you can be proactive and transfer the money from the First Home Savings Account into a registered account such as an RRSP or RIF account, depending on your age.
Chris: [00:07:45] Overall, I believe that the First Home Savings Account is an excellent excellent tool that the government has come up with to aid first time homebuyers who are struggling as it is to get into the market. So this is an excellent tool to assist with that and I think it’s going to have a lot of traction. I also believe that it’s going to supersede the RRSP first time homebuyers plan and should probably probably be utilized first. And then once the room is maxed out, then you would take advantage of the first time homebuyers plan in your RRSP. So that would essentially be $40,000 home savings account, $35,000 in your RRSPs for a total of $75,000 for the assisting of the purchase of your first home.
Need more help or information?
Chris: [00:08:35] My name is Chris Molder. I am a Toronto mortgage broker. If you have any questions about the First Home Savings Account or what it takes to get qualified for your first mortgage, I’m just a phone call or an email away. Till next time. Bye for now.
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