What is the FHSA?
The federal government has introduced the First Home Savings Account (FHSA) as a savings tool to help future home buyers with the purchase of their first home. The FHSA is similar to a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Like a TFSA, withdrawals made are on a tax-free basis as long as they are used to purchase your first home. Like an RRSP, contributions made within a calendar year can be used as a deduction to taxable income, or if chosen, carried forward to a future year for tax planning purposes.
Who can qualify? (must meet all of the following conditions)
- You are 18 years of age or older, or you are 71 years or younger as of December 31 of the year you open the account.
- You are tax resident of Canada
- You are a first-time home buyer for the purpose of opening an FHSA if, when you open the account:
- You did not live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned in this calendar year or in the previous four calendar years, and
- One of the following is true:
- You did not live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that your spouse or common-law partner owned or jointly owned in this calendar year or in the previous four calendar years, or
- You do not have a spouse or common-law partner at the time you open the account
How much you can contribute?
- Contributions to the FHSA are limited to $8,000 annually, up to a total of $40,000.
- Unused contribution room can be carried forward and used in future years. Carry-forward amounts only start accumulating after you open a FHSA. As such, if you’re a first-time home buyer, you should consider opening a FHSA immediately, even if you don’t have the funds to contribute.
- If your contributions and transfers to your FHSAs in the year exceed your FHSA participation room for the year, you may have an excess FHSA amount. If you over-contribute, you must pay a tax of 1% per month on the highest excess FHSA amount in that month. You will continue to pay the monthly 1% tax until the excess FHSA amount is eliminated.
What can you invest the contributions in?
FHSAs are permitted to hold the same qualified investments that a TFSA holds which include mutual funds, publicly traded securities, government bonds and GIC’s.
Can you participate in the Home Buyers Plan under the RRSP?
The FHSA can be used in conjunction with a Home Buyers Plan (a tool that allows you to withdraw funds, up to $35,000, from your RRSP to purchase your first home). If you maximize withdrawals from both programs, you should be able to access $75,000 in capital plus any growth in your FHSA to use towards your home purchase. Another helpful feature of the FHSA is that contributions made do not impact your contribution room/limits on other TFSA’s or RRSP’s you may hold.
When can you deduct the contributions?
The contributions that you make to your FHSAs may be deductible on your income tax and benefit return for the year of the contribution or a future year.
Contributions you make to your FHSAs during the first 60 days of the year cannot be deducted on your income tax and benefit return for the previous year, unlike contributions to an RRSP.
Over your lifetime, the most you can deduct from your income as an FHSA deduction is $40,000. Transfers that you make from your RRSPs to your FHSAs will reduce the amount that can be deducted over your lifetime.
Any other considerations to note?
Similar to other registered accounts, you cannot deduct any investment losses, amounts paid for administration services, or brokerage fees incurred within an FHSA. Furthermore, the interest you paid on money you borrowed to contribute to your FHSA cannot be deducted.
Before opening an FHSA, it’s important to get informed on the relevant tax rules, and the above-noted conditions may not be relevant to your fact pattern.
For more information on the FHSA and whether it may be right for you or a family member, please feel free to reach out to the team here at McGovern Hurley LLP.
John Mendis, Tax Advisory and Compliance Partner, firstname.lastname@example.org
Greg Furyk, Business Advisory and Compliance Partner, email@example.com